The FULL Guide

I've noticed that people in this sub are getting more and more interested in DeFi (Decentralized Finance) applications. With this guide I would like to help you getting started with learning the basic fundamentals of DeFi and setting up your wallet and tools. I tried to make this guide as complete as possible.

Fundamentals

Let's start with some fundamentals first.

What is Decentralized Finance

Decentralized Finance (DeFi) is a movement that uses decentralized networks and blockchains to transform traditional financial products into trustless and transparent protocols that work without intermediaries.

Currently, almost all DeFi applications are built on the Ethereum blockchain and Binance Smart Chain (EDIT: Binance Smart Chain is NOT as decentralized as Ethereum and is therefore often labeled as CeDeFi). Like Bitcoin, Ethereum and Binance have a blockchain that acts as a shared ledger in which digital value is tracked. Rather than a central authority, the participants making up the network control the issuance of ether, the network's cryptocurrency, in a decentralized way.

Developers can program applications that can create, store and manage digital assets, also known as tokens, on the blockchain. For this to work, smart contracts and decentralized applications (DApps) are written and built. The expiration of these contracts and agreements is automatically enforced if the blockchain receives the correct data. You can make complex, irreversible agreements without the need for an intermediary.

Anyone is able to create, adapt, mix, link or build on an existing DeFi product without permission. DeFi protocols are modular, so they can be stacked on top of each other to build an increasingly dense system of interacting parts.

Wallets

You can download a wallet on a PC, tablet or telephone. With this you can store, send or receive Bitcoin or other cryptocurrencies. Three related concepts determine whether someone has ownership of a certain wallet, these are your digital keys (also called public & private keys), your wallet address and your digital signature.

The most important aspect of a wallet are your digital keys, as they give you access to your wallet. It is important to know that these keys are not stored online on the blockchain but are instead stored independently within the digital wallet itself. Each key consists of both a public key and a private key.

Consider your public key the same as the bank account, which also consists of an address. Your public key works more or less the same. The pin code with which you subsequently gain access to this bank account is then referred to as your private key.

It is very important that you ALWAYS keep your private key to yourself. If someone else has the private key, he / she can send and steal all coins, so keep it safe. With the public key, people can only send coins, so that can't hurt.

Every wallet has a unique code, which we also call the wallet address, which consists of a random letter and number combination that is different for everyone. This address is in fact the name of your wallet and makes it possible for others to transfer cryptocurrencies to you.

Example of just any bitcoin address: 14J5Q7ageKhM3miKd94DX44Kf6b7ko4BZe

Some people assume that your public key is the same as your wallet address. This is not entirely true, but the two are mathematically related.

In order for you to start using DeFi platforms, a browser wallet is needed.

Coins vs Tokens

A coin runs on its own blockchain, on its own system. It is therefore completely independent. A coin could be compared to a contemporary currency, such as the Dollar. Bitcoin is a coin and has been developed with the aim of serving as a digital payment method and store of value.

Then there are tokens. Tokens by definition do not run on their own blockchain, unlike a coin. They have been added to an already existing blockchain. Tokens can have the same functionality as a coin, although this is not common.

Tokens that are created on the Ethereum network are typically ERC-20 tokens. When we talk about ERC20, we mean the standard that is implemented in certain tokens. ERC20 stands for 'Ethereum Request for Comment 20'. The Binance Smart Chain uses a similar standard, which is the BEP-20 standard.

These standards contains numerous functions that allow any token that has implemented this set of functions to be traded. Examples of those functions are:

• Sending tokens.
• Request balance information from any address.
• List the number of available tokens.

Layer 2 solutions

Because of high demand, the Ethereum network is getting overloaded. This resulted in very high transaction fees, making it to expensive for small investors to use it's dapps.

This is the main reason why many investors moved to the Binance Smart Chain, which has much lower fees, untill Ethereum 2.0 has been implemented, which is an update that will drastically lower the transaction fees for the network.

However, in order for the Binance Smart Chain to maintain such low transaction fees, it had to sacrifice it's decentralized properties. This resulted in that the Binance Smart Chain is much more centralized and less safe compared to Ethereum.

Fortunately, there are various projects working on Layer 2 solutions to improve both the scalability and speed of the Ethereum network. Layer 2 refers to a secondary framework, chain or protocol that is built on top of an existing blockchain system. By doing so, the mainchain can be unloaded and can solely focus on the safety of the network.

In the case of Ethereum, there are currently 2 sidechains that are pegged to it. These chains are the xDai chain and the Polygon chain. The latter of the sidechains is the most promising Layer 2 solution so far.

By bridging your assets from the Ethereum mainchain to the sidechains, you are able to interact with various dapps that work on these sidechains for almost an negligible amount transaction fees.

Getting started

Now that you're aware of the fundamentals of DeFi, let's dive into how you can move your assets into the various DeFi protocols.

Setting up your wallet

In order to move your assets from your wallet on the exchange that you're using to either the Ethereum network, Binance Smart Chain, or Sidechains, you will need a browser wallet that can interact with these DeFi protocols.

I'm currently using MetaMask, so I will use this browser wallet in this guide:

1. Go to the official MetaMask website in your browser (https://metamask.io/)
2. Press “Get Chrome extension”, “Chrome Firefox Opera” or “Get Brave Browser”. This of course depends on the browser you want to use at that time.
3. You will now be taken to a page where you can add the extension. With Chrome, for example, there is a button with: + ADD. TO CHROME. Click on the button.
4. A popup appears to confirm this
5. You will now see a MetaMask logo at the top right of the browser. Click this to set up MetaMask.
6. Accept the terms and conditions
7. Create and confirm a new password. Please remember this password.
8. You will now see 12 words. With these words you can always recover your wallet - in combination with the password. Write these words down and keep them safe. Preferably offline - just on paper.
9. Congratulations! You have now installed and configured a MetaMask extension. You can now use the buttons “Buy” and “Send” to buy or send Ether to your wallet. You can now also send Ethereum to the address under “Account 1”.

Your MetaMask wallet will be automatically connected to the Ethereum network. In order to connect your MetaMask to the Binance Smart Chain, Polygon or xDai, follow these steps:

1. Click on the network in the top right corner.
2. Go to settings.
3. Click "Add network"

In order to setup your wallet for the Binance Smart Chain, enter the following parameters:

Network Name: Smart Chain

New RPC URL: https://bsc-dataseed.binance.org/

ChainID: 56

Symbol: BNB

Block Explorer URL: https://bscscan.com

​

In order to setup your wallet for the Polygon sidechain, enter the following parameters:

Network Name: Matic Mainnet

New RPC URL: https://rpc-mainnet.maticvigil.com/

ChainID: 137

Symbol: MATIC

Block Explorer URL: https://explorer.matic.network/

​

In order to setup your wallet for the xDai sidechain, enter the following parameters:

Network Name: xDai

New RPC URL: https://rpc.xdaichain.com/

Chain ID: 0x64

Symbol: xDai

Block Explorer URL: https://blockscout.com/xdai/mainnet

Faucets

In order to be able to perform transactions on these chains, you need to have some of their coins/tokens in your wallet in order to pay for the transaction fees.

• In order to use Ethereum you need Ether
• In order to use Binance Smart Chain you need BNB
• In order to use xDai you need xDai
• In order to use Polygon you need Matic

Luckily you can get small amounts of the currencies for free from so called faucets.

A faucet is an app or a website that distributes small amounts of cryptocurrencies. They’re given the name “faucets'' because the rewards are small, just like small drops of water dripping from a leaky faucet.

However, in the case of crypto faucets, tiny amounts of free or earned cryptocurrency are sent to a user’s wallet. In order to get free crypto, users need to complete tasks as simple as viewing ads, watching product videos, completing quizzes, clicking links (be careful!) or completing a captcha.

You can use the following faucets to receive small amounts of crypto:

• xDai: https://blockscout.com/xdai/mainnet/faucet
• Matic: https://matic.supply

Unfortunately. I wasn't able to find any faucets for Ether or BNB.

Sending crypto from the exchange to MetaMask

In order to receive send your assets to MetaMask wallet, you need to fill in the correct address. This is probably straight forward for most of you, but please make sure to quadruple check you're MetaMask wallet address before sending your tokens from the exchange to your address.

When you're sending tokens from Binance, it will ask if you want to send them as BEP20 or ERC20 tokens. Please choose the correct one! Sending BEP20 tokens to your Ethereum address can result in a loss or they end up in your Binance Smart Chain wallet.

Bridging: An important step!

Please notice that you can't send your tokens directly from the exchange to sidechains such as xDai or Polygon! You need to send them first to the Ethereum network (as they are both sidechains pegged to the Ethereum blockchain). Once received, you can bridge them to xDai or Polygon by using the following links:

• https://bridge.xdaichain.com/
• https://wallet.matic.network/bridge/

Keep in mind that for during the bridging, Ethereum transactions fees have to be paid. After the bridging, you play by the rules of the sidechain (which means cheap transactions).

I can't find my tokens in my wallet!

If you can't find your tokens back in your wallet after sending them from the exchange, you can follow these steps:

• Check the transaction record, is the transaction completed?
• Make sure you look at the right network. Your MetaMask wallet might be connected to the Binance Smart Chain network, hence not showing your assets.
• Add the contract address of your token to the wallet. You can find the address of your token via https://etherscan.io (Ethereum) or https://bscscan.com (Binance Smart Chain). The token address can then be copied in to the MetaMask wallet by clicking on add custom token.

Setting up your dashboard

To make things a bit more clear, I would advice you to use the DeFi dashboard Zapper.fi. Zapper is an interesting platform that lets you quickly and easily deploy and manage your DeFi positions within a single interface. It is a DeFi portfolio management dashboard that helps you stay on top of your portfolio, liquidity pools, and liquidity mining positions.

Zapper supports Ethereum, Binance Smart Chain, xDai and Polygon. In order to connect to the right network, you must first connect your MetaMask to the network you want zapper to connect to. By clicking in the top right corner of your MetaMask wallet you can connect to the network you want Zapper to manage for you.

The first tab of Zapper, shows an overview of your account. It shows the value of your assets in your MetaMask wallet and how your deployed assets are performing in the DeFi protocols (if you deployed any already).

In order to reduce gas fees, Zapper has several features that can "Zap" your assets fast and "cheap" in order to:

• Start providing liquidity in a pool.
• Swap tokens.
• Bridge your tokens from one network to another.

Zapper also keeps track of the estimated APY's (Annual Percentage Yield) of the various pools from different DeFi protocols as well as farming opportunities.

A list of DeFi protocols

Before wrapping this post up, I want to share the following website: https://defipulse.com/

DeFi Pulse records the top performing DeFi protocols on the Ethereum main chain as well as their TVL (total locked value) and ranks them accordingly. This page is really worth checking out as it can help you to pick the right protocols to deploy your assets in.

In order to monitor the DeFi space of Binance Smart Chain, Polygon and xDai I like to use https://dappradar.com/rankings/category/defi and https://defiprime.com/#defi_projects. However, If you use other resources in order to find the right dapp, let me know!

That's it for this guide!

I really do hope that this guide helps you to get started on your DeFi adventure.If I missed something or whatever let me know so I can change it.

What is DeFi?

DeFi or decentralized finance is a movement that aims at making a new financial system that is open to everyone and doesn’t require trusting intermediaries like banks. To achieve that defi relies heavily on cryptography, blockchain and smart contracts. Smart contracts are the main building blocks of defi.

It’s worth noticing that currently most if not pretty much all of the defi projects are built on Ethereum. The main reason for this is the Ethereum’s fairly robust programming language called Solidity that allows for writing advanced smart contracts that can contain all the necessary logic for the defi applications, besides that Ethereum has the most developed ecosystem across all the smart contract platforms with thousands of developers building new applications every day and the most value locked in smart contracts which create an additional network effect. In fact, all the defi protocols mentioned in this article are built on Ethereum.

Quick History of DeFi

One of the first projects that started the decentralized finance movement was MakerDAO.

MakerDAO, founded in 2015, allows user to lock in collateral such ETH and generate DAI – a stable coin that by using certain incentives follows the price of US Dollar. DAI can be also used for saving on Maker’s Oasis platform. This recreates one of the pillars of the financial system – lending and borrowing. In fact, defi is trying to create the whole new financial ecosystem in a permissionless and open way. Lending and borrowing is only one part of this ecosystem. Some of the other important parts are stable coins, decentralized exchanges, derivatives, margin trading and insurance.

Lending and Borrowing

Besides MakerDAO that I just mentioned there are a few other important defi projects in this category.

The main one is Compound. Compound at the time of creating this article is on of the biggest defi projects in the lending category with ~$5.6B worth of assets locked in the protocol.

Compound is an algorithmic, autonomous interest rate protocol that allows users to supply assets like Ether, BAT, 0x or Tether and start making interest. Supplied assets can also act as collateral for borrowing other assets.

Another popular defi project in this category is Aave.

Algorithmic Stable Coin

With clever use of smart contracts and certain incentives it is possible to create a stable coin that is pegged to the US Dollar without having to store dollars in the real world. I’ve already mentioned MakerDAO that essentially allows the users to lock in their collateral and generate DAI. DAI is a good example of an algorithmic stable coin.

Besides DAI, there are multiple other non-algorithmic stable coins like USDT, USDC or PAX. The main problem with them is the fact that they’re centralized as there is a company behind them that is responsible for holding the equivalent of the value of stable coins in USD or other assets. Nevertheless, these stable coins gained a lot of popularity and are extensively used in defi applications like Compound or Aave.

Decentralized Exchanges

Decentralized exchanges or dexes, in opposite to standard, centralized crypto exchanges, allow for exchanging crypto assets in a completely decentralized and permissionless way without giving up the custody of the coins. There are 2 main types of dexes the liquidity pool based and the order book based ones.

A few examples of the liquidity pool based ones are Uniswap, Kyber, Balancer or Bancor. Loopring and IDEX are examples of the order book based ones.

Derivatives

Similarly to traditional finance, derivatives are contracts that derive their value from the performance of an underlying asset.

The main defi application in this space is Synthetics which is a decentralized platform that provides on-chain exposure to different assets.

Margin Trading

Margin trading also similarily to traditional finance is the practice of using borrowed funds to increase a position in a certain asset.

The main defi apps in the margin trading space are dYdX and Fulcrum.

Insurance

Insurance is yet another part of traditional finance that can be reproduced in decentralized finance. It provides certain guarantees of compensation in return for a payment of a premium. One of the most popular applications of insurance in the defi space is protection against smart contract failures or protection of deposits.

The most popular defi projects in this space are Nexus Mutual and Opyn.

Oracles

Another really important although not strictly limited to finance part of the defi ecosystem are oracle services that focus on delivering reliable data feeds from the outside world into the smart contracts. The most popular project in this space is Chainlink.

These are pretty much all the main parts of the defi ecosystem. They can also be combined together in multiple various ways. We can think about them as “money Legos” as more complicated defi projects can be built on top of the existing blocks.

DeFi vs CeFi

Let’s compare the main differences between defi and cefi that stand for centralized or traditional finance.

DeFi:

• Permissionless
• Open
• Censorship-resistant
• Cheaper
• Built on the blockchain

CeFi:

• Permissioned
• Closed
• Can be censored
• Expensive
• Built on old foundations

What are the risks?

Before I wrap up this post I have to also mention the potential risks associated with defi.

One of the main risks are bugs in smart contracts and protocol changes that can affect the existing contracts. This is also when users can take additional insurance to lower the risk of potential issues.

Besides that, you always have to check how decentralized a defi project really is and what is the shutdown procedure if something goes wrong. Does someone have an admin key that can be used to shutdown the protocol? Or maybe there is some on-chain governance in place to make such a decision.

On top of that, you have to always account for the more systemic risk that can be caused by for example asset prices sharply losing their value which may result in a cascade of liquidations across multiple defi protocols.

Network fees and congestion can also be a problem, especially if you want to avoid liquidations and you’re trying to let’s say supply more collateral on time. Upcoming Ethereum 2.0 and second layer scaling solution can help to solve this problem.

There is also a set of more subtle features or changes that applied to one of the protocols may incentivise users to certain non-obvious actions that can cascade across multiple protocols. A good example of something like that would be a recent distribution of COMP tokens in the Compound protocol that caused users to get into seem to be non-profitable high-interest borrowing that was actually profitable due to being rewarded in the additional COMP tokens. Even though situations like that can be quite dangerous they make the whole ecosystem stronger and less vulnerable to similar situations in the future.

Summary and the future of DeFi

As you probably already noticed, defi is a super interesting and vibrant space that is full of opportunities. Although, you have to remember that it is still a very nascent industry, so it’s a high risk and a high reward game.

Defi is the closest thing that can actually disrupt the traditional financial industry. In opposite to most of the fintech companies defi is built on the new rails instead of relying on the outdated technologies and procedures.

Currently, most of the financial products can be only created by banks. Defi is open, permissionless and enables cooperative work in a similar way to the Internet.

Although defi is currently built predominantly on Ethereum, with more adoption of interoperability protocols we may see more projects being built on different chains in the future.

DeFi wallets

What are the best DeFi-friendly wallets? What features do they support? And what are the pros and cons of using each of them? I’ll try to answer these questions in this post.

In general

Wallets, allow for sending, receiving and storing cryptocurrency. They come in many different shapes and forms, but the most popular options are:

• a browser extension
• a hardware wallet
• a mobile app
• a web wallet

DeFi-friendly wallets facilitate managing your digital assets and interacting with DeFi applications, such as decentralized exchanges or lending and borrowing protocols.

Let’s start with a wallet that most DeFi users are very familiar with: Metamask.

Metamask

Metamask is a crypto wallet and a gateway to blockchain apps. It allows users to easily connect to all popular DeFi apps such as Uniswap, Compound, Aave, Maker and Yearn Finance.

Metamask supports ETH and Ethereum based tokens such as ERC20 and ERC721. It is basically a bridge into Ethereum.

Metamask (and all other wallets) mentioned in this post is non-custodial. This means that users have complete control and ownership over the assets stored in their wallet.

But like always, with great power comes great responsibility. Users of non-custodial wallets cannot rely on the wallet provider to recover their wallet and instead, they have to take wallet recovery into their own hands. This is usually achieved by securing a recovery phrase.

A recovery phrase, also known as a seed phrase, is a set of words that can be used to fully restore a wallet with all of its corresponding private and public keys. This means that losing access to your wallet, together with losing your recovery phrase is equal to losing all of your digital assets stored in that wallet. This is also why everyone, who decides to use a non-custodial wallet, has to take the security of their recovery phrase seriously.

The basic security measures for your recovery phrase include:

• Write it down offline e.g. on a piece of paper, preferably with multiple copies stored securely in different locations
• Never store any copies of your recovery phrase online e.g. in a Google doc or Apple notes
• Move funds to a new wallet if you have to recover an existing wallet using your recovery phrase

In Metamask, the private keys derived from the recovery phrase are stored in the user’s browser and they are not sent to an external server, for security reasons. The private keys are used to sign transactions in the user’s browser before broadcasting them to the Ethereum network. Metamask allows for creating multiple accounts where each account has its own pair of private and public keys that can be derived from the recovery phrase.

So, what are the pros and cons of using Metamask?

Pros:

• Non-custodial
• An easy to use bridge into Ethereum and DeFi apps
• Open-source
• Private keys are kept in the user’s browser

Cons:

• It is still a “hot” wallet – so the keys are stored on the device that is connected to the Internet which increases the risk
• It only supports Ethereum-based assets – this could be a problem for people who want to keep all of their assets in one place.

With over 1 million users, Metamask is usually a go-to wallet for everyone interested in DeFi. Although Metamask is mostly used as a browser extension, it also offers a mobile app. The users have an option to sync the existing wallet with a mobile app, creating a new wallet or recovering a wallet using a recovery phrase.

Hardware Wallets

Our next DeFi-friendly wallet is a hardware device that most of the cryptocurrency users have already heard of: Ledger. Ledger allows users to store multiple assets including ETH and ERC20 tokens, Bitcoin, Litecoin or Zcash. Ledger, similarly to Metamask, requires users to write down their recovery phrase when setting up the device.

With Ledger, user’s private keys are stored offline on a secure hardware device. This provides full isolation between the private keys and online devices such as computers or smartphones that can be more vulnerable to hacks. This makes it a great option for users that have a significant amount of digital assets.

When it comes to DeFi-friendliness, Ledger has recently added a feature that allows for lending coins on Compound directly from the hardware device via the LedgerLive management app. They are also working on adding more DeFi features in the future.

Additionally, Metamask allows users to create a separate account that is connected to a hardware wallet, such as Ledger. The account behaves exactly like any other MetaMask account making navigating across multiple DeFi apps super easy. The main difference is that in order to sign a transaction, the hardware device has to be connected to your machine. A ledger device is highly recommended to anyone taking the security of their digital assets seriously.

The pros and cons of using Ledger:

Pros:

• Highest degree of security available for the everyday user
• Supports a wide range of cryptocurrencies
• Integrated with Compound via LedgerLive

Cons:

• The inconvenience of using a separate hardware device
• Requires security of the physical device (although each Ledger is also secured by a PIN code)

The most popular model is Ledger Nano S which connects to your computer via USB. Ledger also offers a range of other models including a Bluetooth-based Ledger Nano X.

Mobile Wallets

When it comes to DeFi-friendly wallets that are available on your phone, Argent is one of the best choices. Argent makes interacting with DeFi easy by directly integrating with multiple different DeFi protocols such as Uniswap, Aave, Compound or Set Protocol.

Argent, similarly to the other already mentioned wallets, is non-custodial. When a new wallet is created, Argent creates a smart contract on Ethereum that is controlled by the user of the wallet, so Argent doesn’t have any control over that smart contract at any point. This allows for enabling extra features that wouldn’t be possible to achieve just with a simple Ethereum address.

When it comes to security, Argent uses a different recovery model. Instead of writing down a recovery phrase, users can set up social recovery by choosing “Guardians”. Guardians can be your trusted friends or family members, but also other devices such as hardware wallets, MetaMask or third party services.

In order to recover a wallet, the majority of Guardians have to provide an approval. If the number of Guardians is even, 50% is enough to proceed with the recovery.

Argent also provides an option to set daily transfer limits and even the ability to temporarily freeze your wallet, just like how you can freeze a credit card.

So, The pros and cons of using Argent in a nutshell:

Pros:

• Non-custodial
• Doesn’t require a recovery phrase
• Integrated with the most popular DeFi protocols
• Daily limits and locking option

Cons:

• Requires a good understanding of the social recovery model
• Still a limited number of DeFi protocols available (cannot just use a new one)
• Still not as secure as a hardware wallet

DeFi Dashboards

Although they are not strictly wallets, it’s also worth mentioning two apps that make managing a DeFi portfolio much easier: Zapper and Zerion. Both apps allow users to see their portfolio in one place. A user can either connect a wallet, such as Metamask or Ledger, to be able to invest or transfer their assets or they can provide an address/set of addresses to see a portfolio in a view-only mode.

I hope this post helped you out with;

• Getting a deeper understanding of crypto wallets.
• Setting up a crypto wallet.

Smart Contracts

What is a smart contract? How do smart contracts work? And what are they good for? I'll try to answer these questions in this post.

What are smart contracts?

A smart contract is an agreement between two or more parties in the form of computer code. The contracts are stored on the blockchain and cannot be changed. Transactions that take place in a smart contract are processed by the blockchain, which means they can be sent automatically without the intervention of a third party. When you enter into an agreement with a smart contract, no confidential advisor is required. The transactions only take place if the conditions in the agreement are met.

What can smart contracts do?

Smart contracts help you exchange money, stock or anything else of value in a transparent, trustless manner, all while avoiding the services of an intermediary and the possibility of conflict. Smart contracts provide you:

• Autonomy - You are the one who makes the deal and you don't have to rely on an intermediary to confirm transactions. The execution is automatically managed by a decentralized network, which excludes manipulation of contracts.
• Speed ​​- Automated contracts can save you hours on manual paperwork.
• Security - Smart contracts are secured with similar cryptography that encrypts websites. In short, it keeps your documents safe.
• Savings - Because they disable the presence of an intermediary, smart contracts can save you a lot of money. Where, for example, you would normally have to pay a notary to witness your transaction, this is now regulated by the blockchain.
• Backup - Unlike files on your computer, data on the blockchain is duplicated many times over. So you do not have to be afraid of losing something that is registered on the blockchain. Also, there is no way anyone can say they lost the contract or the dog ate it.

A smart contract in effect

As an example; If you were to register cinema tickets on the blockchain using a smart contract, then as a visitor you will receive the tickets in your personal wallet. You only have to show the address to which the tickets were sent upon entry and the cinema can immediately be sure that you do not have any fake tickets and that you have actually paid for your tickets. This gives a better customer experience and the cinema can save a lot of costs in this way because it no longer needs ticket processing services.

But why is this so safe?

Thanks to blockchain technology, we can decentralize smart contracts so that they are fair and trusted. Decentralization means that they are not controlled by one central party, such as a bank or the government.

The blockchain is a shared database managed by many different computers (nodes). As a result, not one person or company has control over it. It also means that it is almost impossible to hack it and therefore smart contracts can be executed securely and automatically without anyone being able to change them.

Best practices for smart contracts

In principle, smart contracts can be used for any type of transaction, it does not have to be financial. Here are some industries where smart contracts can be used conveniently.

Insurances

The insurance world could be shaken up considerably by blockchain technology. An example of a smart contract was a project run by a French insurance company called AXA. AXA offered flight insurance that were paid out if the policyholder's flight was delayed by more than two hours. AXA was running a pilot project that payed out insurance via smart contracts on the Ethereum blockchain. Unfortunately the project has been discontinued.

The smart contract worked with an “if / then function”: IF the flight was delayed by more than two hours, THEN the policyholder would be paid. Because the smart contract was connected to a database that keeps track of flight times, the function could be performed automatically and paid for via the Ethereum blockchain. This would have saved a lot of time for AXA, but also for the policyholder. This is just one example of the many options that smart contracts offer.

Healthcare

Within healthcare, smart contracts will be used to record and securely transfer data. We can already see examples of smart contracts used in the medical industry, such as the company Encrypgen, for example. This is an application that uses blockchain to transfer patient data in a secure manner, eliminating the need for third-party access. In this way, the patients are in control of their own data. If researchers want to use patient data, they have to pay for it. The patient also chooses whether the data may be sold or not.

Governments

Governments guarantee that it is extremely difficult to manipulate the voting system, but despite that, smart contracts could alleviate all concerns by providing an infinitely more secure system. Smart contracts could also prevent low voter turnout. Much of the small turnout is due to a clunky system consisting of lining up a queue, showing your identity, and filling out forms. With the use of smart contracts, anyone can transfer their votes securely online, which is expected to generate much more response.

Business management

There is still a lot of room for improvement within business management and smart contracts can help a lot. Why do administration when everything is registered on the blockchain anyway? Right, the blockchain is already doing the work for you. You also do not have to make a pay slip every month. The money automatically goes to your employees as soon as they have fulfilled the agreements. Companies can simply set up a smart contract that states: IF the date is 10/20/2020, THEN $2500 will be sent to employee A. This means that employees will always be paid on time and that they will never be underpaid. The advantage of the company is that it is all automated, saving them a lot of time and money!

Fundraising (ICOs)

In principle, anyone could create their own token and sell it to the general public in order to raise money for a project. In 2017 there was a real ICO craze, where some projects managed to raise tens of millions within hours. There was even an EOS ICO that lasted for a year and racked up more than $ 4 billion in total!

If you want to organize an ICO (Initial Coin Offering) you create a token and a contract to sell the token. The function of the smart contract in this case would be: if person A sends an X amount of ETH, person A gets an X amount of tokens.

Smart contracts in a nutshell

The most important features of a smart contract are:

• Digital Agreement - A smart contract is an agreement in the form of computer code.
• Blockchain - Transactions are processed by a public database, based on blockchain technology.
• Confidentiality - A transaction can only take place if the conditions in the agreement are met.

Conclusion

It will be a while before smart contracts are everywhere in everyday life, but we can say with some certainty that the technology has a lot to offer.

I hope this post helped you with:

• Getting a better understanding of smart contracts
• Understanding the significance of smart contracts within the crypto space.

Non Fungible Tokens

What are NFTs? And what can you do with them? In this post I’ll try to answer these questions.

What is an NFT?

If you want to understand the concept of NFT, you must first know what a Fungible token is. NFT stands for Non-Fungible token. An important property of a fungible token or “normal” token is that they are interchangeable - You can exchange bitcoins with each other, the value is equally divisible for everyone - bitcoins can be divided into parts and you can exchange them. For example: 0.003240000 BTC.

An important difference with the Fungible tokens is that the NFTs have a unique aspect and cannot be replicated. This unique aspect is encoded in the token's metadata. Think of it as a certificate of authenticity.

Some features of NFTs:

• They are unique, this allows you to identify items with them.
• They are not divisible.

The latter has the advantage that you can only claim right to a certain product, service or other object such as an art object. Compared to a real-life example; a football ticket for the match is for one person. You cannot share this ticket with multiple people. There is one seat available for you in the grandstand.

What can you do with NFTs?

The NFTs have already entered the gaming industry. However, there are plenty of applications to come up with in other situations as well. Think of; birth certificate, diploma, or ID. All these unique items can be "tokenized". Tokenizen is digitizing a certain asset and linking it to the blockchain, such as art.

NFTs vs normal tokens

Another difference between normal tokens and NFTs is the protocol they run on. The normal tokens run on the Ethereum protocol: ERC-20.

For Non-fungible tokens there is a choice of two protocols: ERC-721 and ERC-1155. Of which ERC-721 is the most used. ERC-1155 is slightly newer and less used.

The ERC-1155 protocol has been developed to enable developers to implement this protocol in a smart contract in a smart and efficient way. This can then be used to generate unlimited fungible (identical) tokens and non-fungible (unique) tokens.

The ERC-721 protocol, on the other hand, is used to generate non-exchangeable tokens, forcing developers to implement a new smart contract for each new token.

Non-fungible tokens and gaming: Crypto Kitties

A well-known example using ERC-721 tokens is Crypto Kitties. Each ERC-721 token in that game is a unique digital cat.

You can breed these with the help of another digital cat and create new cats. The new cats can then be bought and sold on the platform.

Decentraland

Another good example of a platform that utilizes NFT's is Decentraland. The name already gives it away: it is a (virtual) world that is completely "built" on blockchain. It can be compared to Simcity: you buy a virtual piece of land, on which you can build and develop whatever you want. Nobody decides what you can build, you are completely free. In addition to buying virtual land, you can also trade other unique assets with other players in the form of NFTs.

Ethernity chain

Ethernity Chain, a new player to the game, is developing a community-centric platform for digital artists to create limited edition NFT lines. Ethernity Chain enables users to own unique digital artifacts and artwork, which are tokenized and traded on the blockchain. This is of particular appeal to the gaming, music and sports industries. However, the scope for NFTs is unprecedented. Ethernity Chain addresses this with the use of Authenticated non-fungible tokens (ANFTs).

NFTs in the future: What can you expect from them

One development in which NFTs can play a major role is DeFi. Decentralized Finance. This topic has been growing in popularity in recent years. And the Non-Fungible tokens can play a supporting role in this.

Let's look at an example: a car accident. Two different parties. Two different insurance companies that have to sort everything out among themselves. They need to collect all data. This is a lot easier via the blockchain, because everything is linked. An NFT may contain data about an insurance policy or car. Link smart contracts to this, and you know: you don't have to think about anything yourself. The blockchain will solve it for you.

Final words

In this post, you’ve learned that non-replaceable tokens are unique and have unique properties. This allows them to be associated with a specific item. In addition, items such as artwork, have different values ​​that make it interesting to use NFTs. Especially in the gaming industry, it is becoming more popular to use NFTs.

Liquidity Pools

You may have come across the theory of liquidity pools in the Defi ecosystem.

But what are liquidity pools and how do they work? And why do we really need them in decentralized finance? In this post I will explain how they work, their main benefits and general aspects.

What are liquidity pools?

Liquidity pools are pools of tokens that are locked in a smart contract. By offering liquidity, they guarantee trading, and because of this, they are widely used by decentralized exchanges. DeFi platform Bancor took one of the first initiatives to include liquidity pools.

Liquidity pools, in essence, are the trading aspect of a decentralized exchange. Their role is to increase the liquidity of the market among market participants.

How do liquidity pools work?

In its simplest form, a single liquidity pool contains 2 tokens and each pool establishes a new market for the same pair of tokens. DAI / ETH is perhaps a clear example of a popular liquidity pool at Uniswap.

The first liquidity provider, when a new pool is created, is the one who decides the initial price of the assets in the pool. The liquidity provider is encouraged to provide the pool with an equivalent value of all tokens.

Based on the liquidity provided to a pool, the liquidity provider (LP) receives special tokens called LP tokens in proportion to how much liquidity they provide to the pool. A charge of 0.3% is allocated proportionally to all LP token holders when a transaction occurred in the pool.

The liquidity providers needs to burn their LP tokens if they want to get their underlying liquidity back, plus any unpaid fees. By utilizing a deterministic price algorithm, any token swap within a liquidity pool results in a price shift. This process is also referred to as an automatic market maker (AMM).

A constant commodity market maker algorithm is used for basic liquidity pools such as the one used by Uniswap, which means that the amounts of the 2 tokens given remain the same. In addition, a pool still has liquidity, no matter how massive a trade, because of the algorithm. The main reason for this is that as the target amount increases, the algorithm increases the price of the token asymptotically.

The importance of liquidity

The reason that liquidity is so important is that it largely determines how the price of an asset can shift. In a market with low liquidity, a relatively limited number of open orders are open on both sides of the order book. This suggests that one trade can shift the price significantly in any direction, making the stock unpredictable and unattractive. Because of this, liquidity pools are an important part of the Decentralized Finance (DeFi) revolution.

What are liquidity pools in Defi?

Liquidity pools are intended to successfully address the low liquidity problem and thus ensure that the price of a token does not fluctuate significantly after executing the order of a single large trade.

As mentioned earlier, decentralized exchanges offer bonuses to those who invest in the liquidity pools to maximize engagement. The user has to deposit money into the liquidity pool to reap the benefits and take advantage of it. Liquidity pools are regulated by one or more smart contract protocols. The amount of funds to be invested and the proportional ratio of each token will vary between different DeFi platforms.

How to participate in a liquidity pool?

To provide $50 in liquidity in an ETH / USDC pool, it requires a deposit of $50 in ETH and $50 USDC. In this situation, a total deposit of $100 is required. In return, the liquidity provider collects tokens for the liquidity pool. These tokens reflect their proportional pool share and allow them to withdraw their pool share at any time.

Every time a seller places a trade, a trade fee is deducted from the trade and the order is sent to the smart contract with the liquidity pool. The trading fee is set at 0.3% for most decentralized exchanges. In this case, if you deposit $50 ETH and $50 USDC and you make 1% of the pool with your donation. You will then receive 1% of the 0.3% trading fee for one of the specific trades.

How do liquidity pool exchanges work?

There are currently two types of decentralized exchanges in the DeFi space, namely:

• Exchange of order book: The order book exchanges depend on a bid / ask arrangement to fulfill trades. Orders are redirected to an order book when a new buy or sell order is placed. Then the exchange's matching engine executes matching orders for the same price. Examples of order book exchanges are 0x and Radar Relay.
• Liquidity pool exchanges: LP exchanges exclude the emphasis of order book trading from their exchange. By doing this, they enable the exchange to keep the liquidity level stable. Examples of LP exchanges are Kyber, Uniswap and Curve Finance.

Advantages of liquidity pools

• Guaranteed liquidity at any price level: Traders do not need to be directly connected with other traders as liquidity is constant, as long as clients have invested their assets in the pool.
• Automated Pricing Enables Passive Market Making: Liquidity providers put their money into the pool and the pricing is controlled by the pool’s smart contract.
• Anyone can become and earn a liquidity provider: Liquidity pools do not require listing fees, KYCs or other obstacles associated with centralized exchanges. If an investor wants to provide liquidity to the pool, he only needs to deposit the equivalent of the assets.
• Lower gas fees: Gas fees are reduced by the minimal smart contract design offered by decentralized exchanges such as Uniswap. Effective price calculations and fee allocations within the pool imply less volatility between transactions. Uniswap V3 will reduce the gas fees even (30%) more.

Returns

The return of the liquidity pool depends on three factors:

• The asset prices upon delivery and withdrawal
• The size of the liquidity pool
• The trading volumes.

It is very important to remember that, in proportion to what’s originally invested, investors would end up removing some ratio of assets. This is where the market movement can work either with or against you.

Risks of Liquidity Pool

Of course, as with everything in DeFi, you have to consider the potential risks. Some of the associated liquidity risks are listed below:

• Impermanent loss
• Possible smart contract bugs.
• Liquidity pool hacks
• Systemic risks

Impermanent losses

Before you join a liquidity pool, I would like to stress out the impact of impermanent losses.

Impermanent loss describes the temporary loss of funds occasionally experienced by liquidity providers because of volatility in a trading pair.

This also illustrates how much more money the LPs would have had if they simply held onto their assets instead of providing liquidity.

LP tokens

Like any other tokens, a user can use the tokens from the liquidity pool during the period of the smart contract. A user can therefore deposit this token on another platform that accepts the liquidity pool token to get additional yield to maximize returns. Therefore, the user can compose two or three interest rates using yield farming, and ultimately increase returns.

An example of such a DeFi platform is harvest.finance. Harvest.finance allows the user to stake their LP tokens and rewards them with additional rewards on top of their fees rewards from the liquidity pool. In harvest.finance’s case, they reward the user with FARM tokens.

So as an example: Let’s say you have deposited $100 in a USDC/ETH liquidity pool on Uniswap with an annual percentage yield (APY) of 50%. The received UNI LP tokens can then be staked at havest.finance for additional rewards, which in this case would be 70% FARM APY. This means that you would receive in 1 year:

• $50 in LP ($25 in USDC and $25 in ETH tokens).
• $70 in FARM tokens.

As you can see, by staking your LP tokens rewards can be highly lucrative. By utilizing these techniques, APY’s of over 200% can be achieved. Of course, you need to remember that the price of tokens such as FARM are quite volatile and thus are risking to turn your $70 in FARM into way less amount of $ in a matter of days.

If you are interested in yield farming, I would recommend to use DeFi dashboard zapper.fi, which gives a great overview of all current liquidity pools and farms.

Final words

Liquidity pools provide a user-friendly platform for both users and exchanges. The user does not have to meet any special eligibility criteria to participate in liquidity pools, which means that anyone can participate in the provision of liquidity for a token pair. In the DeFi ecosystem, liquidity pools play an essential role, and the concept has been able to increase the level of decentralization.

Oracles

What are oracles? How do they work? And how do smart contracts benefit from them? I’ll try to answer these questions in this post.

Blockchain Oracles

You may have heard of the Oracle problem. This problem is actually a very simple limitation, and that is that blockchains cannot retrieve or send data themselves to an external problem. In any case, this function is not built into the blockchain itself.

As a result, blockchains are actually isolated networks that look suspiciously like a computer without an Internet connection. And that isolation is precisely what makes the blockchain so secure, because no one can access it just like that.

The participants of the blockchain network check whether everything is done according to the rules, based on the consensus algorithm. For example, they check whether the transaction has been properly signed and whether the transaction can be made within a smart contract. This also makes smart contracts very trusted. They work exactly as they are made, and it is impossible to deviate from them.

However, smart contracts must be connected to the outside world, so that they can be used in as many situations as possible. For example, smart contracts in the financial world need market information to pay for settlements, and smart contracts in the insurance world need certain information from the internet to make decisions about policy payments.

Smart trade finance contracts need trade documents and digital signatures to know when to release payments.

So you see that an awful lot of external information is needed before smart contracts can be used in all sorts of ways. And none of the above information is generated within the blockchain. So there must be a connection between the blockchain and external systems in order to set up a new infrastructure, also known as the 'Oracle'.

Blockchain Oracles therefore in fact provide the data necessary to be able to execute smart contracts when the set conditions are met. A blockchain Oracle is the only way for the blockchain to communicate with the outside world.

What does a blockchain Oracle do?

Blockchain Oracles are therefore the bridge between the blockchain and external systems that can provide the blockchain with information. In fact, it is the man-in-the-middle that takes care of the communication between two different systems.

An Oracle has several functions to ensure that this communication can be established.

Let's talk a little bit more about Oracles' key features:

• Listens to the blockchain network to check for requests to fetch data outside the network to make smart contracts work.
• Retrieve data from different types of systems in order to be able to offer the requested data.
• Convert data to the correct format in order to allow different systems to communicate with each other. A blockchain cannot just communicate with any other system, because they are different programming languages, have different system requirements, etc. The Oracle takes care of the compatibility.
• Validate performance with a cryptographic proof that certain transactions, signatures and executions actually took place.
• Make calculations on data. Consider, for example, calculating the median, as well as performing more complex tasks, such as generating insurance quotations based on different types of data.
• Sending data and evidence to the blockchain and other systems, so that they can then perform the necessary actions. For example, smart contracts can perform actions based on the data that the Oracle sends.

In order to provide the above functions, the Oracle must work on and off the blockchain at the same time. The part that sits on the blockchain is there for establishing a blockchain connection (to listen for requests), broadcast data, send evidence, convert blockchain data and sometimes perform calculations on the blockchain.

The portion that works outside of the blockchain is for processing requests, retrieving and formatting external data, sending blockchain data to external systems, and possibly performing calculations in more advanced Oracle networks.

Oracle examples

There are many different situations where Oracles can offer a solution. Consider, for example, betting on football matches. For example, you could place a bet with a friend about the winner of a match.

You then put this bet into a smart contract. The winner will then automatically receive the reward. But the smart contract will have to know who the winner of the competition is. The fairest way is that it happens automatically, and no person has to enter the outcome.

In principle, a smart contract does not interact with the competition. An Oracle will therefore have to be made so that the blockchain and the smart contract can read who has become the winner of the Classic.

By means of a trusted API, the smart contract can read who has won the competition. Smart contract then determines who is the winner of the bet, and the money is then sent to the winner.

In the absence of Oracle, the bet could not be settled fairly. Then there should be a person who enters who the winner is, but in that case there is a chance that this is not done completely honestly, because the importer can also enter something else.

Chainlink

An example of an oracle platform is Chainlink. Chainlink wants to connect different blockchains as well as external systems. They do this by giving the smart contracts access to resources such as data feeds, web APIs and traditional bank details. These resources are provided by the affiliated agencies that can use the smart contracts in return. As a result, they do not have to switch to a new system themselves and can still use smart contracts. In addition to the fact that they are allowed to use these smart contracts, they also receive a reward in the form of LINK tokens for supplying data and APIs. When a party does this, they are called Chainlink Node Operators. They are then responsible for maintaining the connection between the API and the Chainlink network. The Chainlink network consists of all connected Node Operators.

Band Protocol

Another interesting oracle platform is Band Protocol. The main difference between Chainlink and Band Protocol is that Band Protocol uses its own blockchain called BandChain, based on Tendermint, with a Delegated Proof of Stake (DPoS) consensus algorithm. It works in the Cosmos ecosystem. Chainlink, on the other hand, is not a blockchain, it is a kind of network of nodes that only work when oracles are solely focused on delivering data between entities. There is no blockchain of its own, because it is all based on Ethereum.

Conclusion

With a blockchain Oracle we can have the blockchain communicate with central systems, so that much more is possible. Smart contracts in particular can make good use of this.

Blockchain Oracles therefore ensure that we come a little closer to a future in which blockchain can play a major role. It builds a bridge between the world as we know it today and a world as it could be if we use blockchain.

Wrapped Bitcoin

You might have come across the term “wrapped Bitcoin” in the DeFi space. How is it possible that (wrapped) Bitcoin is available on Ethereum, even though Bitcoin is on another block chain? And why would you use wrapped Bitcoins in the first place? In this post I’ll try to answer these questions.

Wrapped bitcoin explained

Wrapped Bitcoin (WBTC) is an ERC-20 token, linked to bitcoin 1:1, launched on the Ethereum network on January 30th, 2019. As a result, bitcoin can be used in the largely Ethereum-powered DeFi market.

How wrapped Bitcoin works

There are three main players in the process of obtaining WBTC: the user, the merchant, and the custodian.

To exchange Bitcoin for Wrapped Bitcoin, a user submits a request to a WBTC merchant. Traders distribute WBTC in exchange for bitcoin - or vice versa. They have also included a KYC step in the process. The traders act as an intermediary between the user and the custodians, who form the network's liquidity pool.

When the trader submits the transaction request to the custodian, the custodian chooses to allow or deny the request for WBTC. The minting and burning is done through an exchange, directly between the merchant and the custodian.

The process starts when a merchant submits a coin request through an Ethereum smart contract while sending Bitcoin to the custodian. At that point, the custodian waits for confirmation on the Bitcoin block chain, approves the request on the Ethereum network, and releases the WBTC to the merchant.

In order for the user to get their tokens, they must enter into a trusted exchange with the merchant. Once the user has his WBTC, his Bitcoin is essentially "wrapped" in an Ethereum wrapper. Hence the name "Wrapped Bitcoin."

How wrapped Bitcoin benefits the DeFi space

Liquidity is the foundation of all finance. Lenders have no value without money to borrow. In addition, limited liquidity could kill a fast-growing financial movement. If investors rushed to DeFi and encountered one platform after another that didn't have enough liquidity, DeFi would quickly be slapped with crippling labels like 'unsustainable' and others by DeFi doubters.

Since the Bitcoin and Ethereum blockchain don't go well together, and DeFi is largely powered by Ethereum, there has been a thick brick wall between DeFi and Bitcoin investors. Wrapped Bitcoin is a sledgehammer trying to tear down that wall. If investors keep accumulating via this way, a flood of liquidity can flush into the DeFi space.

How to add WBTC to your portfolio

Investors can go through the "wrapping" process with a trader, or they can buy WBTC on one of the several DeFi exchanges such as Uniswap. WBTC follows the price of BTC. Once obtained, you can use it to invest in DeFi protocols.

WBTC Wrapping Fees

As with most financial services, wrapping BTC comes at a cost. These are the fees you must pay to the following entities:

• Custody fee. These are collected by the custodian when the trader chooses to mint or burn wrapped tokens.
• Merchant Fees. The merchant takes a fee from the user as payment to help him convert his BTC into WBTC.
• Sidechain transaction fees. To help prevent spam on the sidechain, there is a fee shared by all entities using a sidechain node.

Other types of BTC

Although WBTC might publicly be the most known of BTC tokens, there are a few other ones which I would like to elaborate on:

• renBTC: REN works via a smart contract on Ethereum and a HTLC transaction on Bitcoin. When engaging with this smart contract, a balance blocking operation in BTC and the minting of RenBTC on Ethereum is carried out, and all in a decentralized way, without intermediaries.
• tBTC: A user can obtain tBTC by depositing BTC into a wallet through the tBTC Dapp within the Bitcoin blockchain. The custody method performed by a decentralized pool of custodians who each have to supply a collateral in Ether.
• sBTC: Created by Synthetix, It provides access to the value of Bitcoin without the friction of owning a Bitcoin wallet or holding it. This allows Ethereum users to gain non-custodial exposure to Bitcoin, which means they don’t need to trust an institution or protocol to hold the underlying asset. This also enables it to be used within the Ethereum ecosystem, for such purposes as trading or any one of the many others available on the blockchain.

Final words

Wrapped Bitcoin, as well as the other variants, may be just what DeFi needs. Since it is linked to BTC and users can obtain it through a fairly simple process, it can rise. As bitcoin players, big or small, increasingly move to WBTC, renBTC, tBTC and sBTC, the liquidity boost can help DeFi soar to new heights.

For investors, this offers a new way to earn interest on bitcoin holdings by depositing the token in yield farming DeFi protocols.

Forks

You might have heard of forks. A fork is a piece of cutlery, which... Oops, wrong fork! Forks play an essential role within the crypto world. New blockchains and platforms are born on a daily basis because of them. Once you understand what forks are – And what they do, it will be much easier to wrap your head around most blockchains, cryptocurrencies and tokens.

What is a fork?

When a blockchain is getting too large, it is almost impossible to adapt new stuff to the protocol. Consider Bitcoin – Imagine that Satoshi comes up with the idea to adjust the protocol of the blockchain. This is almost impossible due to the size of the blockchain.

To make this work, he would have to make a separate version of the Bitcoin blockchain, a protocol which is different from the Bitcoin protocol. There will then be a split off from the blockchain. And this exact thing happened; consider Bitcoin Cash. The Bitcoin Cash blockchain is the same as that of the Bitcoin blockchain, but with slightly different protocols.

We call the blockchain that splits off a fork. There are then two versions of the same blockchain, with different rules. The reason why it is called a fork, is that this looks quite a bit like a real fork when you visualize it.

There are two versions of a fork. These are the soft fork and the hard fork. Let us talk a little more about them, so that you will get a better understanding what you could do with forks.

A soft fork

First up, the soft fork. The soft fork is a new version of the blockchain that will eventually return to the original version of the blockchain.

This creates the case that some nodes work in the 'old' version of the blockchain, and other nodes work in the 'new' version. They still make blocks at the same time, but the protocols that are used are different.

The usefulness of a soft fork

Every system needs maintenance at some point. Consider, a website, or your own laptop. It receives updates at a certain time. After these updates, certain rules in settings have been changed – For example, new security features.

There are also blockchains of whose creators would like to update the protocol. However, that is often not possible, because most blockchains are too large for this. The maker can then a use soft fork to update the protocol.

Imagine that a blockchain always gives 1 coin as a reward to the miner. The maker wants to change this to 2 coins. For this he could make a new version of the blockchain, where the protocol states that the reward is 2 coins. Some of the nodes will end up in the new part, while another part will remain in the blockchain with the old rules. Both blockchains continue to produce blocks at the same time. However, at some point someone in the old environment will make a mistake by, for example, giving 1 coin as a reward. This node was not yet aware of the new protocol. The network of the updated nodes will then correct it so that the old node can adapt to the new rules. Ultimately, all nodes are aware of the new protocol, after which the entire blockchain continues as before (but with the new protocol).

Hard fork

With a hard fork, things are slightly different. As previously explained, with a soft fork every node can adapt to the new protocol. Now, here is the difference with the hard fork.

The nodes in a hard fork cannot or will not adapt to the new protocol. When they see other nodes following a different protocol, they will not allow and deny their blocks. That is when a new fork arises.

A hard fork can be planned, as in the case of an update, but can also be caused by a disagreement.

When a hard fork is planned, the nodes with the old protocol will be given the option to update their software with the new protocol. They can choose not to do this, so they continue to work with the old protocol in the blockchain. In most cases, the blockchain with the old protocol will die out over time, as most nodes have been updated to the new protocol.

Another scenario is that a hard fork arises because of disagreement. For example, some people may want to adjust the protocol, and others want to adhere to the old protocol. Due to this disagreement, one party decides to start a fork. Nodes can then decide whether to stay in the blockchain with the old protocol or go to the blockchain with the new protocol. In almost all cases, the new protocol will eventually lead to a separate crypto coin.

Examples of forks

There are many crypto coins that have been created from another crypto coin. Some of them have even grown bigger than the original crypto coin. That is why it is always interesting to keep an eye on blockchains that decides to split up.

Ethereum

You may remember the Ethereum DAO hack. In this hack, $ 55 million worth of Ethereum was stolen. This caused widespread disagreement between Ethereum's nodes. In the end there were two different groups. One group wanted to reverse the hack by modifying all the blocks from the past, while the other group was strongly against this. They felt that something like this goes against all principles of blockchain. In the end, these two groups did not came to an agreement. This caused a split in the Ethereum blockchain. The group that opposed the hack's rollback split off and started a new blockchain, is now known as Ethereum Classic.

Bitcoin Cash

The split of Bitcoin and Bitcoin Cash was about an issue that Bitcoin had been facing for a while. It is common knowledge that it can take quite a long time for a transaction to be validated by the Bitcoin network. Because of this, many people feel that Bitcoin is not sustainable. Therefore, a group decided to increase the number of transactions in the Bitcoin blockchain. Several proposals were made, but none were received well. One of these proposals was to increase the block size. This proposal eventually led to a hard fork of Bitcoin, which is now known as Bitcoin Cash.

Sushiswap

A fork isn’t necessarily strict to blockchains. Forks can also be started from platforms, such as DeFi platforms. Ever since Uniswap made their code open-source and available for anyone to fork, several platforms have implemented it. One of the better-known platforms that did this is Sushiswap.

Sushiswap is a fork of Uniswap and was created in 2020 by an anonymous team called Chef Nomi. Although Sushiswap started as a direct clone of Uniswap – they are both DEXES and use automated market-making where liquidity providers can add funds to liquidity pools to receive trading fees – both platforms have grown into a different direction.

The focus of Sushiswap is user-friendliness. Sushiswap enables liquidity providers to stake LP tokens for extra rewards in the form of Sushi tokens. Sushiswap also focuses on adding features of which the community has voted for. Uniswap, on the other hand, discreetly developed version 3.

Replay Attack

In the case of blockchain forks, most investors decide to wait a while before making a transaction with the new crypto coin. This is because they might otherwise fall victim to a replay attack.

When a hard fork takes place, the two blockchains split from each other. If there are enough investors who decide to immediately buy the new crypto coin, hackers can copy the transaction to the old version of the blockchain. They can then proceed to steal crypto coins from your wallet with the transaction data. Because the blockchain is anonymous, it is not possible to find the perpetrator of the attack. In that case, the anonymity that the blockchain offers works against itself.

A replay attack can only take place in the first days of a new crypto coin. After a few days, the algorithm will solve the problem by means of replay protection. That is also the reason that most people do not buy crypto coins during the first days of the blockchain. The chance that they will fall victim to this attack is too great.

Conclusion

Thanks to soft forks, nodes are able to update their protocol. Hard Forks give the opportunity to split nodes that do not agree with each other, and thus create new protocols. Forks keep the blockchain healthy. Even though new forks are initiated daily, they make sure that only the best blockchains and platforms will survive.

Lending and Borrowing

DeFi had recently breached a new milestone: after breaking $100 billion TVL, it managed to be the equivalent of a top 40 U.S. bank. New investors are moving their assets to DeFi on a daily basis. And at the time of writing, lending and borrowing platforms are becoming widely popular. Which brings us to the question: What is all the fuss about lending and borrowing in crypto? And who are the big players in this game?

What is crypto lending?

Crypto lending is an alternative investment form, where investors lend fiat money or cryptocurrencies to other borrowers in exchange for interest payments. This means there are two main parties involved in this loan:

• The lender, who will receive interest from the borrower in exchange for the loan.
• The borrower, who will deposit crypto-assets as collateral to secure the investor’s investment.

By depositing collateral, lenders can be sure that if something goes wrong the collateral will be used to compensate them. All DeFi lending services are based on blockchain, which is usually the Ethereum blockchain. This means that there are no traditional banks or custodians.

Why Crypto Loan Rates Are So Attractive

Traditional banking does not offer any attractive interest rates anymore. Some of them even go so far as to have a negative deposit rate. No wonder many investors are looking for more lucrative opportunities in search of passive income.

Cryptocurrency lending is still a topic of debate, but more and more people are turning to crypto loans as an alternative source of income. Interest rates can even go up to 30%. DeFi is a young and evolving market and the demand for it is constantly increasing. Borrowers can take out cryptocurrency-backed loans to ensure they have available funds while avoiding losing their exposure to specific crypto assets.

The lenders are those who help provide these loans to the borrowers through DeFi platforms, and often through centralized financing (CeFi) platforms.

It is no secret that DeFi has taken the crypto lending industry a significant step forward. Let’s take a look at the advantages:

• All loans are provided through smart contracts. Every detail of the loan has been automated and verified.
• DeFi lending does not require custody to perform any operation.
• Income interest is automatically adjusted to the market.
• The interest or collateral is collected automatically, so no need to worry if the deal goes wrong.

In short, DeFi loans have proven to be a safe and easy way for investors to make their money work for them without breaking a sweat (that is if you don’t look at your investment every minute).

The Crypto Lending Ecosystem

While crypto lending platforms are not classified as banks, they can be centralized or decentralized entities such as Nexo, BlockFi, Celsius, Aave, Yearn.finance or Compound. These crypto lending platforms play the role of the middleman in both CeFi and DeFi.

Top crypto lending platforms in DeFi

Crypto lending platforms are springing up like mushrooms, which can be confusing for investors. So, for the sake of clarification, let’s review some of the well-known crypto lending platforms in DeFi:

Aave

The name Aave comes from the Finnish word for "ghost" and is a lending protocol on the Ethereum blockchain.

The main feature of Aave is its open-source environment. It is a non-custodial protocol that allows for decentralized lending and borrowing. Lenders provide liquidity to the market to generate passive income, while borrowers can… well, borrow! After providing collateral of course.

Lenders earn from ERC20 compliant aTokens at a ratio of 1: 1 to the delivered assets. This means that while lending 36 Dai, they receive 36 aTokens (in this case, 36 aDai).

Interest rates are adjusted algorithmically based on supply and demand, but Aave allows borrowers to choose a stable interest rate (at any time) that changes less often. What makes Aave unique is its latest feature: flash loans. This feature allows borrowers to borrow any available amount of assets without collateral.

Compound

Compound is an algorithmic money market protocol on Ethereum that, like Aave, allows you to borrow or lend money and earn interest for providing collateral. The interest rates are automatically adjusted based on supply and demand.

As in the case of Aave, asset balances provided are represented by ERC20 minted tokens, but in Compound’s protocol they are called cTokens. When the investors received their cTokens, which is after providing collateral, they can borrow up to 50-75% of their cTokens value depending on the type of the underlying asset.

The Compound Protocol reserves 10% of the interest paid as reserves; everything else goes to the lenders.

Yearn.finance

The Yearn Finance platform communicates with several other DeFi protocols on the Ethereum blockchain with the aim of maximizing the investors’ returns. It can be described as a AI advisor for DeFi returns. Because of this, investors can earn the most from lending their stablecoins. Yearn works purely based on codes without a financial intermediary.

Yearn has an automatic reward system has been developed based on the YFI token. The Yearn platform consists of several products:

• Earn - Earn indicates where the highest interest can be earned by lending a crypto asset. Earn searches across different lending protocols such as Balancer, Aave and Compound to find the best interest rate. Users can deposit DAI, USDC, USDT, TUSD or sUSD on the yearn.finance platform to start earning interest.
• Vaults - a collection of investment strategies designed to maximize returns from other DeFi projects and operate as actively managed investment funds. The use of these decentralized funds does not come without risks. The yDAI vault was robbed of $11 million dollars due to a vulnerability on February 5, 2021.
• Zap - allows to combine and execute different trades with one click to save time and money. Thus, an investor can instantly trade DAI for yCRV in one click instead of three different actions across the Yearn.finance and the Curve Finance platform.
• YFI tokens - Users can earn YFI tokens by placing cryptocurrencies in Yearn.finance contracts running on the Balancer and Curve DeFi trading platforms, which use the Yearn.finance platform.

Because of these features, Yearn.finance provides an extensive yield farming service that enables users to capture crypto assets in a DeFi protocol in order to automatically earn more cryptos and achieve better returns.

Top crypto lending platforms in CeFi

While writing this article, gas fees on the Ethereum blockchain are reaching absurdly high numbers. This makes investing in DeFi for smaller investors not profitable. They could, however, consider CeFi platforms. With CeFi, investors trust the people behind a business to ethically manage funds and execute on services the business is offering. This differs from DeFi, where investors trust that the technology will function as intended to execute on services being offered.

Nexo

Nexo is a cryptolending platform founded in 2018 by the same people that were behind Credissimo, which is an organization that has more than 10 years of experience in offering loans. It is probably the most known CeFi platform of this list. Like Compound and Aave, Nexo offers a service that allows you to act as both a borrower and a lender. The platform is especially interesting for investors who think that they currently receive too little interest on their savings account (which is everyone). At Nexo you receive up to 8% interest on your euros, dollars, pounds or stablecoins.

The benefits of Nexo are:

• Fully licensed and regulated.
• Insurance up to $ 100 million (BitGo Custody).
• Fully automated platform.
• Processed more than $ 1.5 billion.
• 8% interest for lenders.
• Flexible loan with 5.6% interest for borrowers.
• All loans are 100% covered.

It’s also worth noting that Nexo is developing a payment card called the Nexo card, which allows investors to spend the value of their digital assets without having to sell them.

Block.fi

BlockFi is a peer-to-peer credit marketplace that was founded in 2017 by a number of key figures from the financial sector. Block.fi supports the following coins: Bitcoin, Litecoin, Ethereum and Chainlink. They also support USD stablecoins. Like the other platforms, interest can be compounded. BlockFi charges a withdrawal fee, which is deducted from the total withdrawal amount. Investors get 1 free withdrawal per month, so if you plan your withdrawals strategically, you pay no fees at all.

Celsius network

Although not supporting US investors, Celsius carved a name for itself. The Celsius Network was founded in 2017 by Alex Mashinsky (CEO), Daniel Leon (COO) and Nuke Goldstein (CTO). Celsius is currently working with ~250 large institutional investors. These companies borrow crypto from Celsius on which they pay an interest of 16%. That is a high interest rate, but that is because these companies often have no other choice, because they are limited by law. For example, most institutional investors are not allowed, to invest in crypto because of the volatility. This is circumvented by borrowing crypto. The companies deposit dollars as collateral, putting Celsius at minimal risk. This is also exactly how users can borrow from Celsius.

Of that 16% interest paid by Celsius' institutional clients, 80% goes to Celsius users. The amount of interest you get on your crypto depends on which crypto coin(s) you have deposited and your loyalty level. It is worth noting that as of writing, unlike Nexo and Block.fi, Celsius has never been hacked, doesn’t have withdrawal fees and offers the highest lending interests (~10%).

Final words

DeFi (and CeFi) crypto lending platforms are experiencing a hype that has attracted billions of dollars from investors. Based on these numbers, it can be concluded that migration from banking to blockchain and exchanges seems like a natural next step for the entire crypto niche and will most likely keep continuing and evolving.

Margin Trading

The year is 2021. DeFi is booming. Loan and yield farming platforms are incredibly popular: Billions of dollars circulate in them. But, DeFi also has its margin and derivatives platforms. First-time investors typically stay far away from these platforms – which they should. Nevertheless, it is important to talk about these platforms and explain how they work. So, In this article, the focus is on margin trading and it’s DeFi platforms.

Margin trading

In essence, margin trading is investing with borrowed money. It allows you to buy more financial products (such as stocks, options or futures) than you have available in money. The use of this borrowed money is also called leverage. This ensures that profit results are increased and can thus ensure higher returns. However, it also has a bigger risk of larger losses. In margin trading, the user’s portfolio serves as collateral and, when prices are falling, this can lead to a margin call.

How margin trading works

Margin trading, simply put, is leveraged investing. The leverage is determined by the investor. The concept of margin trading is most easily explained with an example:

Let’s say an investor has a wallet with $10.000 of ETH and buys for $15.000 in ETH. In this case, the investor buys $5.000 in ETH above of what he was able to buy with the amount in his wallet. The extra $5.000 in ETH is bought with money borrowed from the broker. So, the investor buys the $5.000 in ETH "on margin" and pays interest on this borrowed amount.

Pros and cons of margin trading

The advantages of margin trading are:

• It enables investors to take larger positions. Should the investor prove right and the price does indeed move in the right direction, the profits are higher due to the use of leverage.
• Some financial products, such as USD currencies, are usually not very volatile. The use of margin can ensure that high returns can still be made, although the risks also increase with leverage.

Some of the disadvantages of margin trading are:

• Using leverage allows results to be magnified. When a trade goes wrong, an investor will therefore have to deal with greater losses.
• Margin trading ensures that investors may be faced with a so-called margin call, with which they can lose more than their investment. In a margin call, the investor has to add money or close part of his portfolio, because the leverage has become too great in relation to the equity capital. With cash accounts there is no leverage and the maximum loss is therefore limited to the deposit.
• Like borrowing, the use of margin is not free. The interest 1. depresses the return and 2. it may be flexible. The latter can cause interest costs to fluctuate. Using margin makes the portfolio more volatile. It is therefore advisable when you use margin in your portfolio to keep a close eye on it.

Margin trading DeFi platforms:

There are fewer margin trading platforms in DeFi than "regular" DeFi exchanges. Let's take a look at the 2 best-known DeFi margin trading platforms on the Ethereum blockchain.

dYdX

dYdX is a decentralized trading platform for margin trading in combination with a lending & borrowing marketplace. Lenders and borrowers can gather here and earn interest on an Ethereum (ETH) basis, use loans and leverage on the trading platform. The dYdX trading platform runs on smart contracts, on the Ethereum blockchain without intermediaries. It is a great defi project that works completely transparently. dYdX currently has one of the largest volumes and has a lot of liquidity compared to other decentralized crypto exchanges. Investor will have to deposit collateral before trading.

dYdX supports the following trading features:

• Spot: Investors can buy and sell currencies “on the spot”. This is the most standard form of investing.
• Margin: With this feature, investors can use a leverage of 2x to 5x on their spot trade.
• Perpetuals: For even higher leverage, investors can leverage their investment up to 10x via this feature.

dYdx supports the following currency pairs: ETH-DAI, ETH-USDC, and DAI-USDC. More currency pairs are being added over time. It is also worth to mention that dYdX offers 2 different types of trades: Isolated and Cross. Isolated assigns a specific amount of an asset as margin. Cross utilizes all positive balances in your dYdX Margin Account as margin.

Just like the platforms described in my previous post about lending and borrowing, dYdx also supports traditional lending & borrowing options. Currently, the dYdX Ethereum DEX supports the following digital assets: ETH, DAI and USDC. A loan must be backed by collateral, covering 125% of the loan and must be kept above a minimum of 115%.

Fulcrum

Fulcrum, like dYdX, is a decentralized trading platform. It enables trustless and permisionless transactions, without fees. It sets aside 10% of the accrued interest for the maintenance of the platform and the insurance fund. Fulcrum uses smart contracts, and works on both the Ethereum and Binance blockchain. The platform supports more than 10 cryptocurrencies for loans, and dozens of currency pairs for margin trading. Like dYdX, the investor will have to deposit collateral before a leveraged position can be taken.

Fulcrum only supports the margin trading feature, where the leverage can be increased up to 5x. No spot or perpetuals tradings can be performed on this platform.

As mentioned earlier, Fulcrum also supports traditional lending & borrowing features with a wide range of cryptocurrencies. The lending rates of both fulcrum and dYdX are higher than those of Aave and Compound. What I personally like about Fulcrum is its user-friendliness, thanks to its minimalistic yet colorful interface.

Conclusion

Margin trading is a high risk/reward game which should only be exercised by experienced investors. Both fulcrum and dYdx are designed to be robust yet simple platforms for margin trading and lending that takes full advantage of the benefits of smart contracts and decentralization.

Derivatives

Traditional banking does not offer any attractive interest rates anymore. Some of them even go so far as to have a negative deposit rate. Because of this, It is getting more popular by the day for investors to move their money from their banking account to centralized exchanges to buy stocks or crypto. And then there are investors who take it even further: They invest in DeFi. It is common knowledge to spread your investments in, for example, various stocks, crypto and indices to minimize risks. In case of stocks and indices, this would still require the investor to invest via centralized exchanges. Except… they don’t have to. At least, not anymore.

Stocks in crypto

The DeFi market is gaining more and more platforms that allow investors to invest in regular stocks such as Tesla, Apple or Google. These products are called synthetic assets and are in fact derivatives. By investing in these products, investors can still trade “shares” of companies via DEXES, and therefore spread investments more widely.

Now, the term derevatives might not ring a bell, and that’s ok. Before we dive into some DeFi platforms that use derivatives, let’s first explain what they are.

Derivatives

Derivatives are financial products based on an underlying asset, such as shares or commodities. A derivative gives the buyer the right to buy or sell a specific commodity at a specific price. The most well-known derivatives are options, swaps and futures.

These derivatives can have different underlying values, such as a stock, stock index, commodity or currency. They are mainly used to hedge risk or to speculate.

Financial derivatives are traded on the stock exchange, but also between parties. This is called over the counter (OTC). Derivatives owe their popularity to the fact that the contracts are standardized. The products are therefore easy to trade and the liquidity is high.

Because derivatives are available on stock exchanges, it is possible to take a position in the underlying asset through this product, such as a share or a commodity such as oil.

Types of derivatives

Here is an overview of the most common derivatives you’ll find in centralized exchanges:

• Futures: A future is a forward contract in which the buyer and seller set a price and time at which the underlying financial product is delivered. The traders enter into an obligation by means of a future. Futures are available for financial products such as stock indices and government bonds, as well as physical products such as gold, silver and oil.
• Options: An option is a financial product that gives the buyer of the option the right to buy shares at a predetermined price. In addition, the date on which the right can be exercised has also been determined, the so-called expiry date. The price at which the option is traded is called the option premium.
• CFDs: The abbreviation CFD stands for Contract For Difference. With this product, an investor can easily speculate with leverage on a price rise or fall. With a CFD, the buyer and seller agree to settle the difference in value of the underlying asset from the moment of agreement.
• Swaps: An interest rate swap is a financial product in which two parties exchange interest payments. An interest rate risk can be hedged or an interest position can be taken by means of this derivative. The value of the swap depends on the interest rate.

Risks of derivatives

In view of the many negative experiences that individuals (and companies) have with financial derivatives, the risks of these products are always emphasized. It is recommended that you read carefully about how a derivative works before you start trading them.

The most important risks are:

• Leverage: Due to the leverage effect, a small price movement in the underlying asset can already cause a large change in the value of the derivative. From a technical point of view, losses can often even be unlimited. On the other hand, it goes without saying that an enormous profit can be made through derivatives.
• Counterparty risk: Counterparty risk is mainly run with an over-the-counter transaction. As a private investor you usually have little to do with this. Nevertheless, it is important to know exactly what the risk entails.

Now, with that out of the way, let’s look at some of the DeFi platforms that support synthetic assets.

Synthetix

Synthetix is ​​a decentralized protocol for deploying synthetic assets on the Ethereum network. The project also includes the Synthetix.Exchange. The deployment of synthetic assets is done through Ethereum tokens called Synths, which can replicate the value of cryptocurrencies such as Bitcoin or Ether. The value can also be replicated of more traditional stocks such as Apple shares (AAPL). The protocol uses its own Ethereum token, SNX, to ensure the proper functioning of its services. SNX is thus used as a guarantee for the stability and liquidity of the various Synths offered to the users.

The difference between Synths and “regular” tokens is that their value fluctuates in relation to the underlying asset they replicate. To take a simple example: sBTC will have a similar value to traditional BTC. This allows the investor to take advantage of the fluctuations of the underlying assets without having to own them directly.

The following Synths are available:

• Cryptocurrencies such as BTC, ETH and BNB.
• Fiat currensies such as USD, EURO and JPY
• Stockindices such as gold- and silverindices.
• Inverse Synths, such as inverse Bitcoin.

UMA

UMA, short for Universal Market Access, is an Ethereum-based protocol that allows users to create custom synthetic tokens that can track the price of just about anything. To be more specific, UMA allows you to trade any asset with ERC-20 tokens without any real exposure to the asset itself. This allows anyone to access assets that would otherwise be out of their reach. The UMA token is used for protocol management and price oracle.

Since an investor can use almost any asset as collateral with UMA, you can use, for example, cUSDC. cUSDC is received after depositing USDC into Compound. In this example, cUSDC accrues the interest from the initial USDC deposit. With this token, it is then possible to create a synthetic token. This synthetic token can represent, for example, the price of gold. This token not only tracks the price of gold, but also earns 10% interest per year through the USDC that is locked.

Final words

The DeFi derivatives market is growing. Thanks to platforms like UMA and Synthetix, it is now possible for investors to invest in synthetic assets, which would normally only be possible via CeFi. It is therefore expected that derivatives platforms are going to play a major role in future derivative investing.

Indices

In traditional stock markets, millions of dollars are invested into Index funds. The most popular category of index funds are ETFs, which are passively managed funds that fill their investment basket by tracking a particular index. This makes it easy for investors to have good spreading in their portfolio without putting too much effort and time into managing it. Crypto also has its indices, which are very similar to how ETFs work. Typically, crypto indices track currencies or tokens. Before we talk about crypto indices – For the sake of clarification – Let's first focus on what ETFs exactly are and how they work.

What are ETFs

Exchange Trades Funds (ETFs) allow investors to invest in a basket of securities such as stocks, bonds, commodities or a mix of these. This offers the investor diversification benefits. Investing in ETFs has become increasingly popular in recent decades.

ETFs are mutual funds that want to track the performance of a basket of securities. For example, if you buy an ETF that tracks all of the securities within an index, you can invest in all of the securities in that index by purchasing just one ETF.

An ETF is also referred to as a publicly traded fund because it is traded on a stock exchange just like stocks. The price of the ETF changes during the trading day as they can be traded in the market. This differs with mutual funds as they can only be traded once a day after the stock markets close.

Types of ETFs

There are different types of ETFs available on the market. Each ETF has a prospectus and a fact sheet that describes the characteristics of the ETF, such as composition, objectives and risk. These documents are available on the website of the ETF issuer.

Below are some examples of ETF types.

• Index ETFs track a basket of stocks that are comparable to a particular index.
• Bond ETFs can consist of a basket of government bonds, corporate bonds, and government and local bonds.
• Sector ETFs track securities from a particular sector, such as technology, banking, or the oil and gas sector.
• Commodities ETFs can consist of commodities such as oil or gold.
• Currency ETFs invest in currencies such as the euro or the Canadian dollar.
• Blockchain ETFs own stocks in companies that have business operations in blockchain technology or in some way profit from it. The blockchain ETFs are out of the scope of this article.

Tracking methods

The tracking methods the ETF uses to track the underlying securities may vary. The tracking method can be both physical and synthetic. Physical ETFs try to track their target composition by holding all, or at least a representative sample, of the underlying stocks that make up the index. For example, if you invest in an S&P 500 Index ETF, you own any of the 500 stocks represented in the S&P 500 Index, or a subset of them. Physical replication is fairly straightforward and transparent. Most ETF products are physical ETFs.

A synthetic ETF is designed to mimic the performance of an underlying composition using derivatives (eg S&P 500 futures) and swaps instead of physical stocks.

Indices in Crypto

Now, with the fundamentals out of the way, let’s see what kind of DeFi indices are out there.

PieDAO DEFI+L

DEFI+L is a tokenized representation of the biggest projects on the Ethereum blockchain. When an investor buys DEFI+L, the smart contract either purchases the underlying assets from Uniswap or other decentralized providers, or uses tokens available in the investor’s wallet, sending them to the treasury. In this way DEFI+L tokens are fully backed by reserves, redeemable at any time at the press of a button.

The DEFI+L index is built using Balancer smart pools which constantly rebalance and react to market changes in real-time.

It’s also possible to stake DEFI+L in the DEFI+L / ETH pool. Investors are able to provide liquidity in return for a steady stream of DOUGH. This pool enables an efficient market for other investors to easily swap in and out of the DEFI+L token.

At the time of writing, the underlying assets in which this index is investing is as followed:

• YFI (Deposited in the Aave lending protocol)
• Aave (HODL)
• SUSHI (Staked at Sushiswap)
• UNI (Deposited in the Compound lending protocol)
• SNX (Deposited in the Aave lending protocol)
• MKR (HODL)
• COMP (Deposited in the Compound lending protocol)
• LINK (Deposited in the Aave lending protocol)

PieDAO DEFI+S

DEFI+S is a tokenized representation of the most promising projects in the space. Like DEFI+L, when a user buys DEFI+S, the smart contract purchases the underlying. If the investor holds all the required tokens in his wallet, the tokens can be directly bought as well. In this way DEFI+S tokens are fully backed, and can be redeemed at any time at the press of a button.

This index is also built using Balancer smart pools. For both DEFI+L and +S indices, there is no withdrawal fee.

At the time of writing, the underlying assets in which this index is investing is as followed:

• UMA (HODL)
• REN (HODL)
• LRC (HODL)
• BAL (HODL)
• PNT (HODL)
• MLN (HODL)

DeFi Pulse Index

The DeFi Pulse Index (DPI) is another index that tracks the performance of DeFi assets on Ethereum.It was the first of its kind by deploying an index of decentralized finance that isn’t synthetic or a derivative and lets the investor own the tokens that comprise the capitalization weighted index. Like DEFI+L and +S, DeFi Pulse Index tokens are directly redeemable for its DeFi tokens.

DPI is built on Set Protocol’s new v2 infrastructure and is automatically rebalanced. Still, the DeFi Pulse team manually curates the index as well.

Currently, DPI invests in the following assets:

• UNI
• Aave
• MKR
• SNX
• COMP
• YFI
• SUSHI
• REN
• LRC
• BAL
• KNC
• FARM
• CREAM
• MTA

sDEFI

sDEFI is an index token developed by the community of Synthetix. Synthetix is one of the leading on-chain synthetic assets and derivatives trading platforms on Ethereum. sDEFI can only be purchased on the Synthetix Exchange with Synthetix’s native stablecoin, sUSD. As such, sDEFI is not only an attractive financial instrument covering the performance of the DeFi market, it’s also a unique value proposition of the Synthetix project in general. It is import to note that sDEFI is comparable to a synthetic ETF: it is designed to mimic the performance of underlying composition by using derivatives. In sDEFI’s case, Chainlink price oracles are used to track the prices of the selected tokens.

As of writing, the sDEFI index includes the following tokens:

• Aave
• SNX
• YFI
• UNI
• COMP
• MKR
• BAL
• CRV
• KNC
• REN
• UMA
• WNXM

Conclusion

With so many high potential DeFi projects launching on the Ethereum platform, it can be very difficult for investors to separate the wheat from the chaff. Luckily for them, DeFi indices can help investors with setting up healthy portfolios with little to no maintenance from the investor’s side.

Consensus Algorithms

Every day, millions of transactions are performed on various blockchains. To perform a transaction, one has to pay a transaction fee. Transaction fees are paid to cryptocurrency miners in exchange for their transaction verification work.

All transactions that take place on the blockchain are verified by a consensus mechanism on the network. In short, a consensus mechanism is a fault-tolerant mechanism that is used in computer and blockchain systems. It is used to achieve the necessary agreement on a single data value or a single state of the network among distributed processes or multi-agent systems, such as with cryptocurrencies.

Now, Let’s take a deeper dive into what kind of consensus mechanism are used in blockchains.

Proof of Work

Proof of Work is a protocol with the main purpose of countering cyber attacks such as a DDoS attack. Proof of Work is an idea originally published by Cynthia Dwork and Moni Naor in 1993. In Nakamoto's 2008 Bitcoin white paper, Proof of Work is perhaps the greatest idea, as it allows for trustless and distributed consensus.

A trustless and distributed consensus system ensures that (for example in the case of Bitcoin) a payment can be made and received without the need for a third party. Traditional payment methods (Banks, CreditCard, Paypal) require a party to handle the transactions. These parties also keep their own register of the transaction history. With Bitcoin and other cryptocurrency, everyone has a copy of this register (blockchain). No third party is required because everyone can immediately verify the information / transactions.

Back to Proof of Work. This protocol is a prerequisite for the intensive form of calculations (also called mining) that must be performed to create a new group of trustless transactions on the blockchain.

Mining is necessary for two reasons:

1. Verifying the legitimacy of transactions.
2. Create new digital cryptocurrency by rewarding miners for performing reason 1.

To verify these transactions, miners have to solve a mathematical puzzle. The first miner to solve this problem gets the reward (in new cryptocurrency). Verified transactions are stored in the public blockchain. This puzzle is a bit more difficult with each new block. That is why miners have to work more efficiently.

Proof of Stake

Proof-of-Stake is the validation of transactions and the creation of blocks on the blockchain by means of the betting (staking) of crypto coins. In contrast to Proof-of-Work, where transactions are validated through the use of computer power.

With Proof-of-Stake, nodes validate the transactions and node create blocks by putting their crypto coins in a stake wallet. These crypto coins must remain in this wallet and cannot be traded. With a normal version of Proof-of-Stake, people with few crypto coins will not be able to stake. The more crypto coins you have, the more likely you are to be chosen by the network as a node.

When one has 1,000 crypto coins, one is 10 times more likely to be chosen as a node than someone who has 100 crypto coins. A node that staked more crypto coins is therefore more likely to create a new block on the blockchain and validate transactions. Therefore, it will make more money than a node that puts in less money.

Why does a node behave in the group interest? Can't a node act in self-interest and validate transactions in its own interest? This could be done when a node has a majority. This is 51% of all crypto coins and therefore hardly affordable by anyone. Furthermore, a node will never do this. A node uses its crypto coins to be able to validate transactions. When a node does not act in the group interest, a node will run a great risk of losing the crypto coins and no longer being admitted to the network.

Proof of Stake variants

Over the years, many new Proof of Stake variants have been created. These so called enhanced versions try to improve the original Proof of Stake consensus mechanism by implementing small changes such as how users are chosen to be the next staker, or how to create better user and transaction anonymity. Let's take a look at what kind of POS variants are out there.

Proof of Storage

Instead of using a blockchain, the Proof of Storage network uses a blocktree. Also instead of seeing every single transaction listed, the user will only see transactions that are relevant to them. Each node on the blocktree contains a blockchain.

Proof of Stake Time (PoST)

Proof of Stake Time uses coin age. Coin age is a way to display how long a coin has been in one's possession in order to prioritize it for use in transactions or mining. It is calculated by multiplying the number of coins by the average amount of time in blocks they have been possessed.

With Proof of Stake Time, instead of using the amount of coins to calculate age, they use the period of time the coins have been held at the specific address. This method was implemented to avoid making the rich, richer, which many Proof of Stake methods do.

Proof of Stake Anonymous (PoSA)

With Proof of Stake Anonymous, all transactions are made invisible by other nodes of the network. These nodes receive rewards for helping in the anonymization of the transaction. Other nodes provide inputs and outputs to the transactions, making it impossible to determine the source and destination of the transaction.

Proof of Checkpoint (PoC)

Proof of Checkpoint is a hybrid system that utilizes any Proof of Stake system with a Proof of Work system. The idea of this concept is to mitigate attacks on the Proof of Stake system; however, it is still subject to an attack on a node that has been offline for an extended period of time and can in turn be used to provide false information about the blockchain.

Every x amount of blocks on the Proof of Stake system requires a Proof of Work block to be mined. Each Proof of Work block contains no transactions and are directly linked to both the Proof of Work network and the Proof of Stake network.

Proof of Stake Velocity (PoSV)

Proof of Stake Velocity rewards users based on how many coins they have and how actively they use them.

Delegated Proof of Stake (DPoS)

The way Delegated Proof of Stake works is that it has users voting for "delegates" who are then given the power to earn rewards from running a full node. This method is supposed to be more efficient and should protect all users from unwanted regulatory interference.

Proof of Activity

Proof of Activity (POA) was proposed as a variation to Proof of Stake. It is a method that compliments Proof of Work and helps prevent a 51% Attack, which is when a user or pool controls 51% or more of a network's mining hashrate. Proof of Activity, in short, selects a random peer from the network to sign a new block. This method requires continuous data exchange. In order to reduce traffic, the block template does not include the transaction list and is instead added by the last signer.

Proof of Burn (PoB)

The way Proof of Burn works is that users are providing proof that another user have burned some of his/hers coins, in the process of sending a transaction to an address that is unspendable. This method only works with coins mined from Proof of Work crypto currencies. Users will try to burn the most amount of coins to hopefully win the block reward. Most times Proof of Burn has been introduced to seed other coins by destroying the value of one.

Proof of Importance (POI)

Proof of Importance was introduced to promote economic activity. Each account is assigned an importance score that proxies its aggregate importance to the economy. This method helps make sure that all the computers on the network agree with each other and can stop people from spending coins they do not have. Users who are important can harvest and earn rewards.

Proof of Capacity (PoC)

Crypto currencies that utilize Proof of Capacity, also known as Proof of Space, use Hard Drive Mining to validate new blocks. Burst coin was the first to introduce this concept. Proof of Work miners burn resources whereas Proof of Capacity allows you to use allotted space on your hard drive to mine. An algorithm is used to create chunks of data called plots by repeatedly hashing public keys. The more space that you have, the more likely you are to mine a block.

Conclusion

Consensus mechanisms are essential to the functioning of distributed systems such as blockchains. There is no “perfect” consensus mechanism, and chances are that there never will be, but it sure is interesting to see newer cryptocurrencies coming out with their own consensus mechanism protocols.

Stablecoins

Compared to the traditional stock market, the crypto market is extremely volatile. At the time of writing, we are in a bull run. During bull runs, profit can easily be made: You invest (in a coin you researched thoroughly) and wait for your profit to grow. But what if the bull run turns into a bear market? In what assets should you invest? This is where stablecoins come into play.

Why stablecoins exist

Stablecoins have different functions. We will discuss two of them below.

Hedging against the volatility of the price of crypto coins

One of the main arguments against cryptocurrencies is that the price is too volatile. investors who are against crypto believe that crypto coins can therefore not be used in daily life.

Fortunately, stablecoins are here to counter that argument. Stablecoins can ensure that cryptocurrencies are accepted more quickly. It makes financial aspects like borrowing, saving and salary easier in the short term, at least that's the promise.

Hedging against price falls

Stablecoins are mainly used on cryptocurrency exchanges. It can be a way to hedge against exchange rate fluctuations. It works like this:

Suppose the price of bitcoin is currently six thousand dollar. You expect the price to fall. At that time you can choose to exchange bitcoin for a stablecoin such as Tether. Will the exchange rate drop to five thousand dollar? Then you still have six thousand dollar in digital currency. If you expect bitcoin to rise again, you can then exchange the stablecoin for bitcoin again.

Types of stablecoins

There are many different types of stablecoins available to investors. below we discuss the most well-known stablecoins.

Tether

The first Tether tokens were released on October 6, 2014 as a layer to the bitcoin blockchain. Back then under the name RealCoin.

Tether is a cryptocurrency that reflects the value of the US dollar. The idea was to create a stable cryptocurrency that could be used as a digital dollar. With Tether investors can benefit from the advantages of blockchain technology, without the high price fluctuations that often prevent people from using, for example, bitcoin as a means of payment.

Many exchanges offer USDT as a trading pair, allowing investors to buy many different cryptocurrencies directly with a currency that reflects the United States dollar (USD). Tether is often used as a kind of refuge for when things are going a bit less with, for example, the bitcoin or when the price fluctuations are once again gigantic.

However, it should be emphasized that Tether is a centralized crypto coin. Although it works on the blockchain, not everyone can access the ledger. This means that investors cannot easily verify whether everything is going as promised. Instead, everyone is asked to have faith in the company behind the coin. This is quite ironic, because the whole idea of cryptocurrency was born precisely to solve the problem of centralization and trust.

Many skeptics doubt whether Tether LTD actually has the same amount of dollars in their account as the amount tether coins that are in circulation. This doubt may have arisen due to a lack of transparency in tether. While the tether blockchain is public, Tether LTD's bank account is not.

Tether has announced that indeed they do not only have dollars in the bank account. They say they also use bitcoin and ether as collateral.

That doubt led to a disturbance in the force on October 15, 2018. The once so stable tether faltered because the price fell rapidly. The tether price dropped to 85 cents in a few hours and then recovered to a somewhat common price of 97 cents.

USDC

USDC, or USD Coin, is a stable coin. As the name might suggest, the digital currency is pegged to the US Dollar. One USDC is worth one dollar and vice versa. The currency is still very new: it can only be traded since the beginning of October 2018.

When news came out that this new coin, a collaboration between Center (a crypto platform backed by Goldman Sachs, one of the largest US investment banks) and Coinbase, was available, the price rose equally significantly. On October 15, 2018, 1 USDC price was $ 1.11. The exchange rate has now stabilized again and has fluctuated around the dollar limit.

The USDC is fully backed by Dollars. That means that for every USDC in circulation, there is a physical dollar in stock at Circle (the company behind USD Coin). This reserve is reported regularly and transparently.

TUSD

A relatively new digital currency is TUSD (TrueUSD). Simply put, this is the transparent version of USDT, at least according to the developers.

1 TrueUSD equals 1 US dollar in this case too. However, unlike Tether (USDT), TrueUSD (TUSD) is less centralized. The platform behind the coin (the TrustToken asset tokenization platform) spreads the dollars to cover the amount of TUSD in circulation across multiple trust companies that have signed escrow agreements. Moreover, TUSD is more transparent by showing what is happening and where by means of statements. Each bill shows what is on the table, leaving no doubt about how much dollar is present.

DAI

MakerDAO (MKR), the platform behind USD stablecoind DAI, uses the Ethereum blockchain, allowing the Dai stablecoin to be fully inspected by anyone and eliminating the need for a central organization to verify transactions. Dai is therefore also seen as a decentralized alternative to the centralized Tether.

MKR is a cryptocurrency that is built on the Ethereum blockchain. Its purpose is to stabilize the value of DAI through smart contracts called Collateralized Debt Positions (CDP). When the smart contract life ends, the MKR token is gone. MKR can be sent and received through any Ethereum account or smart contract programmed to use the MKR transfer function. It is more stable than most currencies in the market because of the way it is valued.

Dai is pegged to the US dollar, which means that 1 DAI = US $1. The currency is managed autonomously through smart contracts that adapt and respond to market dynamics, ensuring that the currency is tied to the USD. In this way, it provides traders with stability regardless of the market condition.

The Dai coins are therefore stable and linked to the USD. On the other hand, the MKR token is free to move in price and increases in value in accordance with an increase in usage. You can use MKR to pay for the costs incurred on CDPs that generate Dai in the Maker system, and as the demand for Dai and CDPs increases, so should the demand for MKR. In addition, when stability costs are paid with MKR, the issued MKR is permanently destroyed. This decreases the overall MKR supply, increasing its value.

PAXG

Pax Gold is the first digital asset to be backed by physical gold bars. PAX Gold is a Paxos Standard Token from the Paxos Trust Company in America.

The design is based on the ERC-20 token protocol of the Ethereum platform. This gold-backed token combines all the benefits of a crypto asset and gold on account without any storage fees. In fact, PAX Gold resolves a contradiction in the gold market: being able to own physical and share and trade gold with ease.

PAX Gold tokens represent 1/400 part of a numbered gold bar. It is a 400 oz tokenized gold bar certified by the LBMA (certified London Good Delivery bars). Vault storage and security is provided by Brink's in London. PAX Gold can be traded instantly and cheaply 24 × 7 on the Ethereum blockchain. It is also divisible to 18 decimal places making it accessible to everyone.

Final words

Stablecoins offer an excellent opportunity to hedge against volatile or bear markets. It is up to the investors to choose which stablecoin they want to invest in. One thing is sure: the crypto market offers plenty of choice.

Yield Farming

Yield farming is becoming increasingly popular among crypto investors. Of course, this is not illogical: DeFi platforms offer much higher interest rates compared to traditional banks. To understand yield farming, you first need to know what the interest-on-interest effect (or compound interest) is.

Compound interest

When you are saving money at a bank, you receive an interest payment for this: the so-called savings interest. Depending on the chosen type of savings, the interest is paid into the savings account or another (checking) account. If the interest payment is added to the savings account, you also accrue interest over that interest amount. This is called the interest-on-interest effect (compound interest).

Factors for success

The effect of compound interest depends on three factors:

• Time. How long do you leave the money? You can see in the graph that the effect increases as more time passes.
• The percentage of interest or return that you make. Nowadays you hardly get any interest on a savings account, this affects your return. As a result, the effect of interest-on-interest is limited. The higher your return, the greater the impact of what Einstein called the eighth wonder of the world.
• The starting amount. The larger your starting amount, the greater the effect. After all, that starting amount grows every year.

One of the richest investors on the planet, Warren Buffet, has been taking advantage of compound interest for years. He bought his first stock when he was 11 years old. He made above-average returns and stayed off his money for decades. You can imagine how big the effect of interest-on-interest is.

Example:

Let’s say you want to deposit $20,000. There are 2 banks who both offer interest. One pays 4% per year and the other one pays 1% per quarter. Let’s put $10,000 in both banks and see what happens:

• Bank A: interest payment: 4% (per year)

• Bank B: interest payment: 1% (per quarter)

• Bank A: 4% of $10,000 = $400 in interest per year

• Bank B: 1% of $10,000 = $100 in the first quarter

• 1% of $10,100 = $101 in the second quarter

• 1% of $10,201 = $102.10 in the third quarter

• 1% of $10,303.10 = $103.03 in the fourth quarter

• Bank B: total amount of interest on an annual basis: $406.13.

The effective return of bank B is higher than bank A: 4.06 percent on an annual basis.

Example of yield farming

Because yield farming is often combined with liquidity pools, I suggest that you read my post about liquidity pools first. You can do so by clicking this link.

In my previous post about liquidity pools I provided a good example of yield farming with liquidity pool tokens (LP tokens):

Like any other tokens, LP (liquidity providers) can stake their tokens from the liquidity pool during the period of the smart contract. A LP can therefore deposit this token on another platform that accepts the liquidity pool token to get additional yield to maximize returns. Therefore, the user can compound two or three interest rates using yield farming, and maximize returns.

An example of such a DeFi platform is harvest.finance. Harvest.finance allows the LP to stake their tokens and rewards them with additional rewards on top of their fees rewards from the liquidity pool. In harvest.finance’s case, they reward the user with FARM tokens.

So as an example: Let’s say you have deposited $100 in a USDC/ETH liquidity pool on Uniswap with an annual percentage yield (APY) of 50%. The received UNI LP tokens can then be staked at havest.finance for additional rewards, which in this case would be 70% FARM APY.

You can see that, by staking your LP tokens, rewards can be highly lucrative. By utilizing these techniques, APY’s of over 200% can be achieved. Of course, you need to remember that the price of tokens such as FARM are quite volatile and thus there is a risk to turn your $ in FARM into way less amount of $ in a matter of days.

If you are interested in yield farming, I would recommend to use DeFi dashboard zapper.fi, which gives a great overview of all current liquidity pools and farms.

Yield farming platforms in DeFi

Harvest.finance

Harvest Finance is an automated revenue farming protocol developed for users who want to put their assets to work in high-yielding farming opportunities. Harvest will appeal most to those who cannot manage their decentralized financial positions (DeFi) 24/7 – which is most of us.

If you've ever spent time in DeFi, you already know that manually moving money between the different protocols takes time. Developing strategies and control positions takes time as well and gas fees on the Ethereum network are, at the time of writing, pretty high.

Harvest Finance tries to help by automatically searching for the latest DeFi platforms with the highest return. It then optimizes the yield with the latest farming techniques. In addition to your optimized return, you often receive extra interest in the form of harvest.finance’s own token: Farm.

Harvest works best for those looking for an easy way to harvest the yield from the latest projects in DeFi. Hence the name "harvest". To put money to work in these high yield farming opportunities, users only have to deposit supported tokens to get started.

Sushi swap

As a liquidity provider you receive an extra fee on top of almost all liquidity pools on Sushiswap in addition to transaction fees: a daily payout is Sushi tokens. SUSHI is Sushiswap's own token.

When you have earned some SUSHI, you can take your SUSHI to the SushiBar. Here you can convert your SUSHI into the xSUSHI token. With this token you will earn about 5% interest per year on your amount in SUSHI:

xSUSHI automatically earns fees (0.05% of all swaps, including multichain swaps) proportional to your share in the SushiBar.

You can earn even more by depositing your xSushi on lending platforms such as Aave, to receive a small interest on top of your other interest.

Curve.fi

Curve.fi is a decentralized exchange that mainly focuses on exchanging stablecoins (dollar, euro or gold tokens).

Curve pays the liquidity providers from transaction fees made in their pool. This is approximately between 0-10% interest per year, depending on the liquidity pool.

Like Sushiswap, Curve pays interest on top of this transaction fee in its own token: CRV. These interest payments can get pretty high (> 30%!).

Curve also allows you to lock CRV coins into their vault for a set amount of time. Based on how long you lock your tokens and the amount of tokens you’re locking, you can expect even higher interest rates (up to 80%).

Conclusion

Because of the interest-on-interest effect, you can let your savings grow faster, without depositing extra money into the account yourself. The higher the savings interest and / or the savings balance, the greater the effect. So, The longer you leave the money, the greater the yield. Thanks to DeFi (and its platforms of course), high interest rates are accessible for every crypto investor.

Sidechains

One of the biggest drawbacks of decentralized platforms is scalability. For example, Bitcoin and Ethereum are limited in their transactions (per second) compared to centralized payment companies such as VISA. This issue, also called the scalability problem, is a well known challenge for decentralized platforms. Bitcoin, for example, can only handle a maximum of 7 transactions per second. VISA however, can process over 20,000 transactions per second. This is of course a huge difference and if Bitcoin, or crypto as a whole, wants to compete with entities such as VISA, they still have a very long way to go. Fortunately, there are several layer 2 solutions to improve scalability, one of them being sidechains.

What is a sidechain?

A sidechain is a separate blockchain that is connected to the parent blockchain (main chain) using a two-way link. This means that in addition to the main chain, one or more blockchains exist that are linked to it and can communicate with the main chain. In other words, you can move your cryptocurrencies from the main chain to the sidechain and back again.

The main reason for creating such sidechains is to take most of the work off the main blockchain. For example, the Bitcoin mainchain does all the work that can be done and that's a lot. Hence, only a maximum of 7 tp/s are possible. Moving the lion's share of this work to other blockchains associated with it saves a lot of work on the main chain, freeing up a lot of space. This allows the main chain to focus on what is most important, which is safety in almost all cases. Sidechains can be, for example, specially designed for micropayments.

How a sidechain works

To be able to use a sidechain, you need to use the main chain. From the main chain you can send a number of the relevant cryptocurrency to a special 'exit address'. The coins will be locked at this address, so you can no longer spend them. Once you have done this, a simple payment verification (SPV) will take place. This confirms on all chains that your cryptocurrency's are no longer on the main chain. It normally takes a while for your coins to be sent to the side chain. This waiting period was set on purpose to make it even more difficult for malicious parties to engage in 'double spending'. After this period, the exact amount of cryptocurrency on the side chain will be released for you to spend.

The pros and cons of sidechains

The sidechains are great for scaling blockchains. However, everything has its drawbacks. Let’s summarize the pros and cons of sidechains.

Advantages of side chains

• It ensures that the biggest share of the work is taken off the main chain. This makes the blockchain (much) more scalable.
• Different side branches of a cryptocurrency can arise, each of which has its own specialty.
• It ensures that cryptocurrencies can communicate with each other. They are also perfect for developers to experiment with. For example, before a Beta release is released on the main chain, it can first be tested on a side chain.

Cons

• The biggest disadvantage of sidechains is that they need to be secured just as well as 'normal' blockchains. This means that it requires miners to keep an eye on whether everything that happens on it is legit. With Bitcoin, miners are rewarded for this in the form of BTC. Unfortunately, this is not possible with side chains. So another solution must be devised to give miners a motivation to keep the network safe.
• In many cases, sidechains are not the best solution for solving scalability. If we look at global payment traffic, a few sidechains will not ensure that blockchain technology will be able to handle all this traffic. Communicating the side chains with the main chain will then still cause delays and expensive transactions.

Examples of sidechains

xDai

xDAI is the network which houses the first ever USD stable blockchain. Designed to be efficient and user friendly, the xDAI blockchain can process transactions instantaneously and in an inexpensive process and at the same time pegging the value to 1 USD per xDAI. The range of tools available for users makes xDAI easily adoptable by users looking to transfer value in an easy to use manner.

The xDAI chain is a EVM sidechain which is very similar to Ethereum but instead uses a different consensus model. The chain uses similar functionality as ETH 1.0 meaning developers can easily create their smart contract and develop them on the xDAI sidechain, with cheaper costs and quicker transfer times using the xDAI token.

Usage of the xDAI chain helps solving the problem of instability and congestion on the Ethereum network. Users can rely on xDAI to bypass Ethereum’s high gas fees when there is high traffic by using the xDAI chain.

RSK

Rootstock (RSK) is a two-way pegged sidechain to Bitcoin intended to facilitate full Turing-complete smart contract functionality for the Bitcoin ecosystem. Along with improving transaction speeds and increasing scalability, it focuses on adding smart contract functionality to the Bitcoin ecosystem. The RSK Virtual Machine (RVM) is the core of the smart contract platform that enables EVM-compatible smart contracts to seamlessly run on RVM.

RSK can scale around 300 transactions per second without sacrificing decentralization and reduce storage space. Its new set of services is designed to advance transactability. RSK, with its protocols such as DECOR and GHOST, can even bring instant payments to the network, whereas transaction time in Bitcoin is much higher.

Loom network

The Loom Network is an Ethereum-based sidechain platform focused on social media and gaming dApps. It aims to relieve congestion issues on Ethereum using offchain development and interoperability.

LOOM, the native ERC-20 cryptocurrency token of the Loom Network, is a membership token that’s staked for access to Loom Network dApps. Proprietary tokens can be created on sidechains. The Dapps on the Loom Network are called DAppChains and run on their own independent blockchains. Any consensus, rules, and other details can be customized per chain. Quite some projects are developed on Loom Network, and it’s expected to continue growing its ecosystem.

Polygon

Polygon (MATIC), also classified as a commit chain, is a framework for creating interconnections between blockchain networks. It tries to address some of Ethereum's main limitations - including processing capacity, poor user experience (delayed transactions), and lack of community governance. Polygon does this by using a new sidechain solution.

The long-term goal is to enable an open, borderless world where users can seamlessly use various decentralized products and services without having to navigate through middlemen first. The aim is to create a hub to which different blockchains can easily connect, while overcoming some of their individual limitations, such as high cost, low scalability and limited security.

Polygon differentiates itself from “regular” sidechains because it uses a variety of extra technologies including:

• POS Chain: Polygon's main chain is an Ethereum sidechain known as the Matic POS Chain, which adds a layer of Proof of Participation (POS) security to blockchains launched on Polygon.
• Plasma chains: Polygon uses a scaling technology known as plasma to move assets between the base chain and the sidechains via plasma bridges.
• ZK Rollups: An alternative scaling solution used to merge a large number of off-chain transfers into a single transaction.
• Optimistic Rollups: A solution that works on top of Ethereum to facilitate near-instant transactions through the use of Proof of Fraud.

Conclusion

As time goes by, more and more users are interacting with blockchains. Due to the limited scalability of blockchains, sidechains can be used to prevent blockchains to overload and improve overal scalability. The ultimate goal of sidechains is to make the main chain only focus on high-value transactions, pegging of sidechains and an overal safe environment.

ZK Rollups

Scalability is without a doubt the biggest problem that Bitcoin (BTC) and other blockchains are facing. Due to the nature of most blockchains, cryptocurrency suffers from slow transaction speeds and high transaction costs. Ethereum is no exception either. In fact, since the rise of DeFi and NFTs, the Ethereum network has become clogged.

A lot of other crypto projects are trying to overthrow Ethereum by using different infrastructures. Cryptocurrencies such as Polkadot, Cardano and Binance’s blockchain claim to be faster and more scalable than Ethereum. However, Ethereum hasn’t been sitting still either.

The DeFi giant is currently busy making the network more scalable. All solutions for making the network more scalable fall under the guise: "Layer 2 Solutions". In my previous post we’ve discussed about one of the Layer 2 Solutions: sidechains.

Another highly anticipated Layer 2 Solution are ZK Rollups. Let’s dive into what ZK Rollups exactly are and how they are used.

ZK Rollups

ZK Rollups are Layer 2 Solutions, or second layer solutions. Layer 2 is a collective term for solutions designed to help scale up networks further by handling transactions outside of the network's main chain (layer 1). The main chain is the chain where all Ethereum transactions are handled.

The transaction speed suffers when the network is busy. As the network gets busier, transaction costs increase as transaction senders want to outbid each other. This can make the use of Ethereum very expensive, as can also be seen in real-time on the Ethereum gas tracker.

The DeFi and NFT hype is not the first time that the Ethereum network has been overloaded. In the 2017 bull run during the ICO hype and the CryptoKitties bubble, we saw the same thing happen. Since the vast majority of ICOs are made on the Ethereum blockchain, this resulted in a similar increase in transaction costs at the time.

Layer 2 Solutions are therefore in favor of scaling up the network so that the use of Ethereum becomes cheaper.

ZK Rollups are one of the options being developed for a 2-layer construction that increases scalability by putting mass transfer processing into a single transaction. ZK Rollups bundle hundreds of transfers into one single transaction. After bundleing, a smart contract takes care of the verification of all transfers included in that one transaction.

A zero knowledge proof (ZK) approach is used to present and publicly record the block's validity on the Ethereum blockchain. The Zero Knowledge protocol reduces computer usage and storage resources for block validation by reducing the amount of data held in a transaction; no knowledge of the complete data is required.

Simply put, Zero Knowledge can be best described as a situation where each of two parties to a transaction is able to verify to each other that they have certain information, while not having to disclose what that information is.

For ZK Rollups, the Zero Knowledge part is done by the zk-SNARK. Namely, it reports to have knowledge that the root data of the penultimate accepted snapshot matches the root data of the new snapshot, without showing the root data to the validator: the SNARK only reports the hashes.

How ZK Rollups work

Now you know that ZK Rollups is a scalability solution that is the second layer on the main chain. The next step is how ZK Rollups work exactly.

ZK Rollups are solutions that execute transactions outside the mainchain, but place transaction data in the mainchain. Thus, because transaction data resides on the mainchain, Rollups can be secured by layer 1. Taking over the Ethereum backbone security properties for the transaction data, while execution is performed outside of layer 1, is a defining feature of ZK Rollups.

Three simplified features of Rollups are:

• Transaction execution not on layer 1, but off-chain on the Rollup Chain.
• Proof of transactions is at layer 1.
• A ZK Rollup is a layer 1 smart contract that can enforce proper transaction execution by using the layer 1 transaction data.

ZK Rollups require the implementers (relayers) to stake part of their ETH in the Rollup contract. This encourages the executors to verify and execute transactions correctly so that the network remains secure.

There are several types of Rollups, namely:

• Zero Knowledge (ZK) Rollups: performs calculations outside the chain and submits validity proof to the main chain.
• Optimistic Rollups: Assumes that transactions are valid by default and only performs calculations, via a fraud proof, in the event of a challenge.

Optimistic Rollups are easier to implement in the Ethereum blockchain, but do not bring nearly the same scalability benefits as ZK Rollups. I’ll discuss Optimistic Rollups in an another post.

ZK Rollups bundle, or "roll-up", hundreds of data transfers off-chain and generate a cryptographic proof known as a zk-SNARK. zk-SNARK stands for "zero-knowledge succinct non-interactive argument of knowledge". The zk-SNARK is the proof of validity of hundreds of transfers in the form of a hash and is eventually placed on the main chain.

A ZK Rollup is formed on the basis of a reasonable technical concept. The ZK Rollup scheme consists of two types of users: transactors and relayers.

Transactors

Transactors are basically just participants of the smart contract within the Ethereum network. They complete their transaction and broadcast the transaction to the network. The transaction data consists of:

• A "to" and "from" address
• A transaction value
• The network costs
• The nonce

The smart contract stores the data in two Merkle Trees; one for the addresses and one for the transaction amounts and the nonce.

Relayers

Relayers collect a large number of transactions to make them into a Rollup; a roll-up of transactions. It is the job of the relayers to generate the zk-SNARK certificate of validity.

Any participant in the Ethereum network can become a relayer, as long as they have staked the required number of ETH in the smart contract.

zk-SNARK

The ZK Rollup smart contract maintains the status of the transfers made at layer 2. The status can only be updated with a validity card; the zk-SNARK. The zk-SNARK is a hash that represents the blockchain's validity status.

The zk-SNARK is formed in the following order:

1. The zk-SNARK compares the blockchain snapshot of before a new bundle of transactions with the blockchain snapshot from after a new bundle of transactions. The goal is to prevent the adjustment of the transactions on the blockchain.
2. The ZK Rollup smart contract will only accept a new transaction bundle when the previous snapshot hash matches the most recent saved snapshot hash (0x1f59b49c).
3. If accepted, the new bundle of transactions will be saved in the contract with a, at that point, new recent snapshot hash (0x862ae48).
4. The zk-SNARK proves that if the previous snapshot hash has a value of 0x1f59b49c, and the new transaction bundle data is added to it, the result is that the new snapshot hash is 0x862ae48.
5. The zk-SNARK only reports the changes in the verifiable hashes to the Ethereum mainnet.
6. This allows only bundles to be added to a Rollup whose root information matches that of the previous accepted snapshot.

This ultimately ensures that ZK Rollups make the network faster. The Zero Knowledge protocol reduces the computing power and storage resources needed to validate the block, eliminating the need for knowledge of all data, but only of the zk-SNARK.

With a ZK Rollup, there are no delays in moving funds from layer 2 to layer 1, as the ZK Rollup contract's proof of validity has already verified the funds. So a ZK Rollup makes validating a block faster and cheaper because less data is included.

Disadvantages of ZK Rollups

Yes, there are also disadvantages to ZK Rollups. ZK Rollups cannot be used by the Ethereum Virtual Machine (EVM) on which all DApps are built. Thus, existing DApps cannot implement ZK Rollups in their current ecosystem.

Another issue is that the first setup of ZK Rollups is a centralized process, because the first status cannot be verified. A small group of developers will therefore initially deal with the initial status of the Rollup. This undermines the decentralization of Ethereum and also opens the risk of hacking attacks via social engineering.

Summary: The pros and cons of ZK Rollups

In order to finalize this (way too long) post, let’s make quick summary of the pros and cons of ZK Rollups.

Pros

• Reduced costs per user transfer.
• Faster than Optimistic Rollups and Plasma.
• Less data in each transaction increases layer 2 throughput and scalability.

Cons

• Not (yet) compatible with the Ethereum Virtual Machine.
• The initial setup of ZK Rollups promotes a centralized process.

Conclusion

ZK Rollups are a solution for blockchains to be able to scale up further, so that they can execute faster and more transactions. Like other Layer 2 Solutions such as sidechains, ZK Rollups are a Layer 2 Solution on top of the main chain (off-chain). And because of this, not all data has to be included in the main chain, making the validation of blocks faster and cheaper.

50 Common Terms in Crypto

If you're just getting started with crypto, or are struggling with all the terms that go around on this subreddit, this list is for you.

Behold the top 50 crypto terms you should know!

• 51% attack

A 51% attack represents the situation where more than half of the computing power within a given blockchain of one person or one concentrated group. This ensures that this group gains full control over this blockchain. For example, they can stop all mining, stop all transactions or spend every coin of this specific blockchain infinitely often.

• Address

A cryptocoin address is the location where you store your crypto coins and from where you send and receive your coins. You could compare it with your home address. This address usually consists of a whole row of numbers and digits, which looks something like this: 1KXghhUZRVFmfk9Jreo3vvuV3HDoCJyYJZ. This address is the public part of the two encrypted keys (see private and public key) that are required for the holder to verify a transaction.

• Airdrop

This is a kind of giveaway for founders who determine a particular cryptocurrency, giving those coins or coins away. The promotion is for a short period. This is done to publicize the tokens and distribute the tokens.

• Altcoin

This name is used for all crypto coins that are not Bitcoin (alternative coins).

• Altseason

This is the term given when money flows to altcoins faster than Bitcoin. In other words, when investors buy more altcoins than Bitcoin.

• AMA

Ask me anything. A (mostly) new crypto project likes a session for users to ask them questions about the project. Reddit and Discord are often used for this.

• AMM

Automated Market Maker. That is to say, it is a kind of decentralized exchange platform (DEX). A mathematical formula is used to price assets. In a traditional exchange, it works differently, and assets are priced according to a price algorithm.

• Arbitrage

Buying and selling the same asset on two exchanges to take advantage of small price differences.

• ASIC mining / miner

ASIC stands for Application Specific Integrated Circuit. This is, in fact, a chip that is specially designed to perform one specific task. For this reason, thanks to ASIC mining, you can mine coins a lot faster than a regular computer or laptop could. For example, for Bitcoin, there are special ASIC miners who are only concerned with solving the SHA-256 algorithm. There are also crypto coins that are impossible to mine with an ASIC.

• ATH

ATH means All Time High. This is the highest price a cryptocurrency has ever achieved.

• Bag

A bag in the crypto world refers to the coins and tokens that you hold as part of your wallet. Typically, the term is used to describe a significant portion of a particular cryptocurrency. For example, a 'moon bag' is filled with the coins you currently own that you think will make you rich.

• Bear market

A bear knocks everything down with its claws. That is why a market where the trend is in a downward movement is called a bear market. Sentiment is then negative and prices predominantly fall.

• Blockchain

A blockchain is a kind of digital ledger of transactions that works from a decentralized network. Thanks to cryptography, a ledger can be kept by a large number of computers that together create the network. Every time a new transaction is made, it is added by the miners with date, size, etc. to the blockchain as a new block.

• Block

The blocks are the "pages" in the digital ledger of the blockchain. These are files with immutable data that are permanently stored on the blockchain.

• Block reward

The block reward is the reward that miners receive for finding a mathematical solution related to that block. With Bitcoin, this reward is 25 Bitcoins per mined block. This halves every 210,000 blocks.

• BTFD

Buy the f * cking dip! This term is used when the price of a cryptocurrency or the market is in a dip. People are inclined to leave because they are afraid of losing. But a dip offers opportunities to buy a coin or token cheaply before it starts to rise again.

• Buy the Dip

Same as BTFD only without the expletives.

• Bull market

A bull stabs its horns and throws you up. That is why a Bull Market is a market where the trend is in an upward movement. Prices are rising and sentiment is positive.

• Cold storage

Cryptocurrency is stored “offline”. You do this if you want to safely store coins for a longer period of time. A hardware wallet is an example of cold storage.

• Cryptography

Also called secret writing. This focuses on techniques for hiding or encrypting information to be sent so that it is impossible for anyone accessing the channel on which it is sent to find out what information was sent.

• Cryptocurrency

A kind of digital currency based on cryptography. This concerns both Bitcoin and other altcoins.

• DAO

A DAO is a "decentralized autonomous organization" and can be described as an open source blockchain protocol governed by a set of rules, created by its elected members, that automatically perform certain actions without the intervention of intermediaries.

• dApps

These are decentralized applications (dApps) are digital applications or programs that exist and run on a blockchain or P2P network of computers rather than a single computer, and are beyond the reach and control of a single authority.

• DeFi - Decentralized Finance

DeFi, or decentralized financing, is a new way to conduct financial transactions through applications. It excludes traditional financial institutions and intermediaries and is run through the blockchain. Think of it as removing brokers, exchanges, banks and other middlemen from the equation.

• DEX

A DEX is a Decentralized Exchange or a decentralized exchange. Decentralized exchanges are a type of cryptocurrency exchange that allows direct peer-to-peer cryptocurrency transactions to take place online securely and without an intermediary. No identification is required at these exchanges.

• Distributed & Central Ledger

A distributed ledger is an agreement of shareable, shared, and synchronized data, which in this case is spread across several networks. These networks are then distributed over many computers.

With a central ledger, the synchronized and shareable data is controlled by one network or individual.

• Double Spending

This means that a particular cryptocoin can be spent more than once. This stops the blockchain from working.

• Dust Transaction

A transaction of extremely few coins that represents almost no value, but takes up space on the blockchain.

• ECDSA

Elliptic Curve Digitial Signature Algorithm is a lightweight cryptographic algorithm used to sign transactions on the Bitcoin protocol.

• ERC20 token

An ERC20 token is in some ways comparable to Bitcoin, Litecoin and any other cryptocurrency; these tokens are assets based on blockchain technology. They have value and you can send and receive them. ERC20 tokens are only issued on the Ethereum network.

• Escrow

A concept in which financial assets are held by a third party to protect them during an asynchronous transaction.

• Fiat money

Currencies that were once backed by gold (golden standard). Currently it only has value because people value it.

• FOMO

"Fear Of Missing Out". This often occurs when a cryptocurrency increases in value so quickly that people are afraid that they will miss the boat to riches, causing the price per coin to be even higher.

• FUD

"Fear, Uncertainty, Doubt". This crypto term is often used to describe the volatility of the crypto market.

• Fork (branch / split)

A fork happens when an alternate operational version of the current blockchain separates permanently. This can be done in three different ways:

• By a 51% attack

• Because there is a bug in the program

• Because new substantial changes have to be made to the current blockchain.

• Genesis block

The block mined first in a blockchain

• Halving

This means that the minable reward (see block reward) is halved. This happens every time with a certain amount of mined blocks. With Bitcoin, for example, this is for every 210,000 blocks.

• Hash

A mathematical process that takes a variable number of data as input and produces a shorter result of a fixed length.

• Hashrate

This is the speed at which the math problems for certain blocks can be solved. In other words, the speed at which a new block can be discovered. ASIC mining, for example, causes the hash rate to go down.

• HODL

Originally 'Hold' was meant, but in a tipsy mood a chat participant kept talking about how he was 'hodling' his coins. This quickly became a meme and now it has become established in the crypto world and means holding onto your crypto coins for the long term. Sometimes it also refers to 'Hold on for dear life'.

• ICO

Stands for Initial Coin Offering. This is a form of crowdfunding, where the public can invest in a blockchain startup in advance. As a thank you for the financial support they are rewarded with a certain amount of coins.

• IEO

This is an Initial exchange offer. It is a variant of Initial Coin Offerings (ICO), managed directly by cryptocurrency exchanges.

• KYC

This stands for 'Know Your Customer'. It refers to the verification process that customers must go through to verify their identity and associate it with a cryptocurrency wallet. Crypto exchanges gain a better understanding of the potential client's activities and can determine whether or not they are legal in nature. A legal requirement for many central exchanges (CEX) to admit customers to their fair.

• Mining

Mining is the crypto term used to search for new block rewards. For finding and solving blocks, a reward is given to the miner.

• Moon

When a cryptocurrency "goes to the moon," it means people think its price will rise exponentially.

• Multisig (multiple signatures)

Multisignature is a form of technology that ensures that extra security is added to Bitcoin transactions. Multisiganature addresses require another user to sign the transaction before it can be added to the blockchain.

• NFT

An NFT is a Non-fungible Token. They are unique and cannot be exchanged. They live on the blockchain.

• Node

A node is a computer connected to the crypto network that uses a client tasked with validating and tracing transactions. Each node receives a copy of the current blockchain, which is automatically downloaded when it joins the Bitcoin network.

• P2P

This stands for peer-to-peer. A (crypto) term that refers to computers that directly build a network with each other without a central server in between.

• Privacy coin

These are a class of cryptocurrencies that enable private and anonymous blockchain transactions by obscuring their origin and destination. Some of the techniques used include hiding a user's real wallet balance and address, and combining multiple transactions to circumvent chain analysis. Examples are Monero (XMR) and Zcash (ZEC).

• Private key

A string of letters and numbers that is kept secret by the user. It is specially designed to sign a digital transfer using a public key. In the case of Bitcoin, this is a private key that must work with a public key.

• Public key

A string of letters and numbers that is public and can be viewed by anyone. This can be used in combination with a private key to sign a digital transaction.

• Pump and Dump

This is a crypto term used for the unethical process of pumping and dumping a relatively cheap coin. The coin is first obtained in a very cheap way by a certain group of persons who then "pump" the coin (make its value rise sharply) by advertising it a lot. When the coin has appreciated enough, they dump their coins with a lot of profit, leaving a large group at a loss.

• PoW

Stands for Proof-of-Work. This is a system that links computing power with mining capacity. The more powerful your computer can mine, the more you will be rewarded for this.

• PoS

Stands for Proof-of-Stake. This is a system that links the interest in a particular crypto coin to the mining capacity. This means that the more tokens you own of a particular crypto coin, the more you can mine this coin.

The PoW and the PoS are both consensus algorithms. With this mechanism you can organize as a user, but also machines, in a distributed environment. All agents, the nodes of a blockchain, must agree on a single source of truth. Even if some of the nodes fail. This means that the system must be fault tolerant.

• DPos

Stands for Delegated Proof-of-Stake. This is a variant of Proof of Stake that uses supernodes or masternodes to approve transactions.

• Scam coin

A coin created for the sole purpose of making the creator of this coin rich (usually through pump and dump).

Often this is accompanied by a Pyramid scheme. A pyramid scheme is a business model that recruits members through a promise of payments or services to enroll others in the scheme, rather than providing investment or selling products.

• SHA-256

The cryptographic algorithm used for Bitcoin's PoW system.

• Signature

A signature is a mathematical process by which someone can prove that he / she is the owner of his / her wallet. For example, a "private key" is used.

• Smart Contract

A two-way smart contract is an immutable agreement that is recorded on the blockchain, containing specific logical actions that are comparable to a "normal" contract. Once this contract has been signed, it can never be changed again. A smart contract can be used to set certain benchmarks that must be met in exchange for money.

• Wallet

See "address"

• Whale

A whale is someone or a company that owns a large percentage of a particular crypto coin. It is often the case that a whale can also manipulate the price of this crypto coin.

• Whitepaper

A document that describes in detail the protocol of the crypto currency.

• Yield Farming

Yield farming, this is also known as liquidity mining. This allows you to generate a way for rewards with cryptocurrency holdings. In simple terms, this means locking cryptocurrencies and receiving rewards. This happens on DeFi projects.

Token Types

Many new tokens are created on the blockchain every day. However, these tokens can be very different from each other in terms of usability. While one token could give you the right to profit sharing, the other gives you the right to perform certain actions on the blockchain and yet another type of token functions as a digital share.

There are currently five different token types, with each token type having its own utilization. The five token types are:

• Asset Tokens
• Equity Tokens
• Utility Tokens
• Reputation Tokens
• Security Tokens

The above mentioned tokens will be further explained in this post.

Utility tokens

Utility tokens can be used to access or pay for a product or service of a particular crypto project. The tokens have a specific use case within the ecosystem of the blockchain project. These types of tokens are often referred to as "User Tokens". Most of the utility tokens in the current market are ERC20 tokens and thus developed on the Ethereum blockchain.

A utility token is not originally intended to serve as an investment, because these types of tokens are aimed at the token functionalities of the relevant blockchain project. Yet there are many cryptocurrency investors who only buy utility tokens for profit. Quite understandable, because the majority of the current token market are utility tokens, a large number of which have made nice price gains.

Features of Utility tokens

As a token creator, you enjoy various benefits when you create a utility token. For example, you do not have to comply with certain legislation that applies to other types of tokens. These laws and regulations do not apply to utility tokens, because they are not designed as an investment by nature. In addition to not having to comply with various laws and regulations, utility tokens have a few other characteristics, namely the following:

• Utility tokens operate on an existing blockchain on which smart contracts have been developed, such as Ethereum or Gochain.
• Each token has its own functionality and in most cases can only be used within one specific blockchain project.
• They make it possible to trade digitally.
• They have more functions than just a means of payment. They are also used as proof of a product or share.

However, there are also many utility tokens that have not worked out as originally planned.

Below are some examples of issues utility token investors have encountered:

• The tokens do not have a real "use case" because the idea was not feasible in practice.
• The utility tokens are not adopted by the target group, so that the tokens are not or rarely used.
• The owners of the tokens have no control, allowing the founding team to make their own decisions about the functionalities and future of the tokens.
• The tokens are not liquid, which means that they are barely tradable. This is generally bad for the value of the tokens.

Examples of Utility tokens

Basic Attention Token (BAT) is a good example of a utility token. BAT is built on the Ethereum blockchain and is a decentralized advertising platform on which advertisers and publishers can come into contact with each other. Advertisers buy advertising space via the BAT platform to be able to advertise, while publishers of advertising space are paid in BAT.

FUNtoken (FUN) is another example of a utility token. FUN, like BAT, is built on the Ethereum blockchain and specializes in online casino games. FUN can be used to make purchases in the FUN app, but also to make purchases within certain games offered on the FUN platform.

A third example of a utility token is Sirin Labs Token (SRN). SRN token was thus developed to enable investors in Sirin Labs to take advantage of SRN by using it to pay for products and services offered by Sirin Labs.

Security tokens

Security tokens can be seen as an investment product. Security tokens are bought with the expectation to receive dividends or profit from them. Security tokens can be marketed just like utility tokens, only then not via an Initial Coin Offering (ICO) but via a Security Token Offering (STO). An STO is similar to an ICO, but safer since security tokens have underlying value. The underlying value of security gives investors more security than when they invest in utility tokens.

However, many crypto projects do not want their token to be labeled as a security token. When a token is seen as a security, the issuer of the token is bound by certain laws and regulations that he would not be bound by in the case of a utility token.

This is because security tokens fall in the same vein as stocks, bonds and ETFS. This may be accompanied by limitations in terms of tradability. Less tradability often makes it more difficult to launch on an exchange with a lot of volume. As a result, security tokens are not always as popular as an investment option compared to utility tokens.

Features of Security tokens

As the creator of a security token, you must comply with certain laws and regulations. These laws and regulations do not apply to utility tokens, because they are not designed as an investment by nature. In addition to having to comply with various laws and regulations, security tokens have a few other characteristics, namely the following:

• The tokens entitle you to a profit distribution in case a company makes a profit.
• They give the right to control within the company.
• They are supervised by national regulators such as the AFM or SEC.

Examples of Security tokens

Blockchain Capital is a good example of a Security token. Blockchain Capital was one of the first companies to launch a security token. With the STO of their BCAP token, Blockchain Capital managed to raise $ 10 million in 6 hours. People who own the BCAP token are entitled to a portion of the profits made by Blockchain Capital.

Another example of a Security token is Slice. Slice is a commercial real estate platform where international investors can invest in real estate in the United States. Slice offers partial ownership of commercial properties that entitle investors to a "dividend" in tokens paid out quarterly.

A third example of a security token is Siafunds. In addition to Siafund, the blockchain project Sia also has a Siacoin, but the Siacoin is a utility token. The Siacoin can be used within Sia's "cloud storage" platform by both tenants and lessors of "cloud storage". The Siafunds token has no functionalities, but as the owner of Siafunds tokens you are entitled to a part of the profit from the project.

Equity tokens

Equity tokens are more of a subgroup of the security token. Security and equity tokens are tokens that represent a tradable security on a blockchain. The difference, however, is that an equity token is proof of the value of a company, just like a stock or a debt certificate. With an equity token you become co-owner of a certain project. You can compare an equity token with a digital share, but from a blockchain project.

The Security and Exchange Commission (SEC) is the one that determines whether a token is an investment product or not. This decision is made on the basis of the Howey test. When the SEC regards a token as an equity token, the issuer of the token will have to comply with the laws and regulations imposed by the SEC.

Features of Equity tokens

The main feature of an equity token is that they have exactly the same properties as a share, but on the blockchain. As an equity token holder, you are co-owner of the relevant blockchain project. Being a co-owner also gives you the right to control within the company, which in turn depends on the percentage size of your position in the company.

The fact that equity tokens are very similar to stocks bodes well for the future. At the moment there are not many equity tokens in circulation. This is partly because there is still a lot of uncertainty in the crypto world regarding laws and regulations. The legality of equity tokens must be tested on the basis of the laws and regulations within the jurisdiction where the token is issued.

However, with a view to the future, equity tokens are a very safe option for investors to invest. Reasons for this are: regulation, co-ownership and employee participation.

Examples of Equity tokens

Neufund is at the forefront of issuing equity tokens. Neufund is a German company that specializes in issuing equity tokens. German laws and regulations offer the possibility to legally issue equity tokens. Foreign companies can even issue an equity token with Neufund without a parent or subsidiary in Germany.

The Neufund platform is used to raise funds and finance for companies by issuing equity tokens. Neufund does this with the help of smart contracts and the Ethereum blockchain. The equity tokens are issued through Equity Token Offerings (ETOs).

Reputation tokens

The Reputation token, also called a reward token, is a token that is used within the ecosystem of a blockchain project. The amount of Reputation tokens you own determines your final status within the network. You can earn Reputation tokens by actively participating in the network.

By completing tasks you will receive a reward in the form of Reputation tokens. The more tokens you have, the higher your reputation will be within the network.

Features of Reputation tokens

As the creator of a Reputation token, just like with a utility token, you do not have to comply with the laws and regulations that apply to security tokens and related items. These laws and regulations do not apply to reputation tokens, because they are by nature not designed as an investment. In addition to not having to comply with various laws and regulations, reputation tokens have a few other characteristics, namely the following:

• Reputation tokens can be earned without having to invest.
• Reputation tokens are marketed through an ICO.
• Reputation tokens often have a tight-knit community, as a lot is contributed because of the rewards.

Examples of Reputation tokens

Augur is a well-known example when it comes to Reputation tokens (REP). Augur has built a platform with which they want to decentralize the gambling market. With Augur's REP token you can bet on sports matches, for example, with which more REP tokens can be earned.

The people who create events on the Augur platform have to pay for this with REP tokens as underlying value. In return, event creators receive a portion of the fee in REP tokens to create and maintain the event.

Asset Tokens

Asset tokens are tokens used to represent a physical product. With an asset token you can, for example, have your house represented by a cryptocurrency. You do this by placing the rights of a certain product such as a house in an asset token. For example, when you tokenize your home, you could sell your home in part or in full by means of asset tokens via the blockchain.

Imagine that your house is worth $ 500,000 and you want to convert your house to asset tokens. Then you can use asset tokens to transform the value of your house into, for example, 500,000 tokens of 1 $ or 1,000,000 tokens of $ 0.50. In case you convert your house to 500,000 tokens of $ 1, each token represents 1 / 500,000th part of your house.

Other examples of products that lend themselves well to tokenization in an asset token are book and film patents, paintings, gold, commercial properties and debtor and creditor balances.

Features of Asset tokens

Like other tokens, asset tokens also have certain characteristics. Illiquid assets are the most obvious asset group to convert to asset tokens. However, corporate debt and assets are seen as a much larger potential market. Asset-backed tokens can be divided into four categories:

• Tokenizing tangible products such as houses and paintings
• The tokenization of intangible products such as patents or digital products
• Tokenize commodities such as oil, gas, coffee and sugar
• Debt and equity tokenization

Asset tokenization can bring several benefits. Quite a few effects in such a current form, namely limitations. Securities tokenization can bring about the following benefits:

• Lower costs by avoiding 3rd parties
• Higher liquidity because purchasing becomes more accessible
• Faster transaction speed (due to higher liquidity)

A disadvantage of asset tokens is that to a certain extent there will be centralization again, while one of the core values ​​of cryptocurrencies is decentralization.

Examples of Asset tokens

Goldmint is a good example of an Asset token. Goldmint is an asset token that represents physical gold. By buying Goldmint tokens, you are buying gold. Gold coin represents gold or gold products from 24 karat gold.

Another example of an Asset token is Latoken (LA). The LAtoken platform allows investors to trade physical products with each other. LA represents these traded physical products.

Airdrops

Most people know the Airdrops from Apple. A smart functionality to wirelessly send documents, photos, videos, websites and map locations to and from a Mac and iPhone. But do you know what an airdrop is in terms of Crypto?

There are several ways to earn Cryptocurrency with Airdrops. However, not all ways are safe and legal. In this post we will dive into what Crypto Airdrops exactly are and how it you could possibly benefit from them.

What are Airdrops?

An Airdrop is a marketing campaign to bring a coin to the attention of the general public. In other words: new cryptocurrency that is (partly) distributed for free. This is a completely new form of marketing.

More and more companies are discovering the success of cryptocurrency and want to participate. This keeps new cryptocurrencies coming up. By giving away a small portion of the coins, the underlying company hopes to generate enough attention, so that there are enough interested parties and potential investors who want to participate in the token sale (paid tokens).

Because companies cannot or are not allowed to do marketing via the normal (social) media channels, this is a good solution and the rewards reach the user immediately. The "middle man" is thus taken out.

What can I do with an Airdrop?

The main purpose of participating in an Airdrop is to try to sell your received Crypto for a profit on the crypto market. For this to work, however, it is necessary for the token to be "listed" at an exchange where new speculators can buy this token from you. You need to have an account with an exchange where the relevant coin of the Airdrop is listed. These can be all kinds of exchanges. Registering with an exchange is often a simple task.

If you’re already regularly participating in Airdrops, you know how difficult it is to manually keep track of when your token has been listed on an exchange. Fortunately, there are all kinds of tools that can do the job for you.

What are the benefits of an Airdrop?

The value can vary a lot, but it is often between $ 1 and $ 20. It is definitely worth it for 5 minutes of work! One of the most successful Airdrops was the Airdrop of Ontology (ONT).

People who registered for the ONT newsletter received 1,000 ONT tokens. If you sold these in June, you would have just made more than $ 9,000. However, the knife cuts both ways. It also regularly happens that your Airdrop is ultimately worth nothing if you have not sold on time. An Airdrop is often only available for a few days / weeks.

How did crypto Airdrops originate?

After the great “boom” of the crypto market at the end of 2017, ICOs (Initial Coin Offerings) suddenly became a lot more popular and many were added at the same time. Many of those companies wanted to raise a lot of money as quickly as possible, so they started advertising a lot on the internet. When the market turned out to be uncertain and some people had been scammed, the ad providers became a lot stricter. A large number of providers, such as Google and Facebook, had also banned cryptocurrency ads (this has now been partially lifted). This also made it a lot more difficult for crypto companies to advertise. It is possible that this made alternative marketing for crypto companies such as an Airdrop a lot more attractive. Airdrops were also used to quickly grow a community in the number of members.

What do I need to participate?

So, by participating in an Airdrop you receive free tokens / coins. A certain wallet is required to receive those coins. Examples are: My EtherWallet (MEW) for ERC20 tokens or a NeoWallet. Which wallet is needed is stated with the relevant Airdrop.

• Telegram; this is a must-have to participate in most Airdrops, as much of the communication is done via telegram channels.
• A wallet; for storing your tokens.
• (Optional) Twitter account and / or Facebook; Sometimes projects that organize an Airdrop ask for a like or share promotion, in this way you provide them with free marketing and receive a number of tokens in return.

Data that can be requested with an Airdrop are often: an e-mail address, a wallet address, a Telegram group to follow and to remain there until after the coin / token has been issued.

Note that most tokens will be sent to your wallet when the Initial Coin Offering “first token issue” (ICO) has ended.

Websites with Airdrop alerts

As mentioned above, the announcements of airdrops mostly take place on various crypto channels such as Twitter and Telegram. However, you can also follow airdrops via various websites and apps. Below is an overview of a number of websites where you can go for airdrop reminders and alerts:

• Airdrops.io
• Airdropking.io
• Coinairdrops.com

Crypto Airdrops on autopilot

There are also tools such as Airdropalert.com, which participate in airdrops for you on autopilot. The free coins or tokens are transferred to your Ethereum (ETH) wallet, without having to do much yourself. You usually pay a monthly fee for such services.

Are there any downsides to participating in a crypto Airdrop?

Short answer: If you’re careful, not really.

However, for those new to this market, we can imagine how strange it sounds, how easy it seems to make money this way. After all, how can there be situations where your Airdrop is suddenly worth extra cash.

The value of a token mainly has to do with the speculative nature of the market and the amount of “hype” that prevails at any given time. It can become worth a lot, it can also become worth little.

That said, participating in an Airdrop only takes time (+/- 5 minutes per Airdrop). However, always do thorough research before participating in airdrops. Many scams take place in the crypto world and airdrops are food for scammers. Be warned! Below is a short list of tips that you should consider before taking part in an airdrop.

Here are some tips regarding crypto airdrops:

• Never give anyone access to your private key!
• Wonder how reliable the source that promoted the airdrop is.
• Never pay for an airdrop!
• Estimate the professionalism of the company behind the airdrop.
• Be cautious with KYC (Know Your Customer) procedures.

What should I do if I have not received my crypto Airdrop?

While things are going well in most cases, there are sometimes situations where people have not received their Airdrop. Often the conditions have not been fully met (for example, forgetting a step in the registration process). However, it is also possible that something went wrong with the distribution of tokens / coins. I would therefore advise you to keep any confirmations and evidence. In the unlikely event that you have not received anything after distribution of the Airdrop, we advise you to contact the customer service of the relevant Airdrop. In most cases, you can just go to their Telegram channel for that.

Conclusion

Crypto airdrops can certainly be interesting, history has taught us that. There have been many airdrops with which you could have made a lot of money. The most important thing you need to remember is that caution is advised. There are airdrops that are solely focused on your personal information or even access to your crypto wallet.

Vaults

The number of investors that are making use of the different DeFi ecosystems is rapidly increasing. New yield farming opportunities appear daily, and investors need to be there just in time to take advantage of them. As an investor on the Ethereum network, you might think "What about the gas-fees?". And as an investor on the hugely popular Binance Smart Chain, you may not know where to start. Vaults are here to change this.

What are Vaults

Vaults are, simply put, pools of funds with an assigned strategy. The goal of Vaults is simple: to maximize the returns of its assets.

The reason why Vaults are so popular is because they save a lot of researching time and fees for investors. Typically, it can take hours to find the best yield farming strategy, not to mention the high transaction-fees (when investing on the Ethereum network). Another advantage of Vaults is that, no matter how complex the strategy of the Vault, the investor always gets his initial deployed asset back from the Vault.

Vaults often have multiple strategies which are, in their turn, very diverse. This allows Vaults to interact with different DeFi protocols to maximize their profit. Vaults can, for example, supply collateral and borrow another asset against this and then deploy the borrowed asset on another DeFi platform. When a certain platform no longer offers high yield, the Vault can, if its strategy allows, switch to another platform for higher yields.

Not all assets are used in the strategies of the Vaults. There is always an amount of assets that remain idle in the Vault. By doing so, investors can withdraw their assets for lower fees from the Vault. This way, the assets do not have to be withdrawn from the DeFi protocols, which greatly reduces gas fees. However, if an investor chooses to withdraw their assets from the vault, they still have to pay additional fees to cover for the gas fees gathered by the Vault.

Usually, the strategies of the Vaults are developed by the community of the respective platform. The developers receive a small percentage of the fee paid by the investors when they withdraw their assets.

How Vaults work

To fully understand how Vaults work, let's use a hypothetical Vault as an example. Let's call this Vault the WBTC Vault. This Vault uses the following strategy:

1. After an investor deposits its WBTC in the Vault, the WBTC is supplied as collateral on a DeFi borrowing platform. The Vault then borrows up to 50% of it's supplied collateral in USDC, creating a collaterised debt position. This means that if 1 WBTC with a price of $40,000 is used as collateral, the Vault can borrow $20,000 USDC.
2. The borrowed USDC is deposited into a liquidity pool on a DEX platform. Suppose this platform gives extra interest through its own token: the example token. The Vault now earns both the extra interest in example token plus the trading fees of that specific pool.
3. The WBTC Vault periodically swaps its example token for WBTC and uses the accrued trading fees from the liquidity pool to accrue even more interest.

As you can see, the Vault works extremely efficiently and cost-effectively thanks to its smart contracts strategy. Compare this to if an investor which has to perform all steps manually.

Examples of Vaults

Lately, an increasing number of Vault platforms have been developed. Below is a list of the most popular Vaults (+ their network compatibility) in the DeFi space.

• Autofarm.network (BSC, Polygon, HECO)
• Yearn.finance (Ethereum)
• Harvest.finance (Ethereum, BSC)
• Badger.finance (Ethereum, BSC)
• Vesper.finance (Ethereum)
• Idle.finance (Ethereum)

Risks

Of course, Vaults don't come without risks. For example, the smart contracts of the Vault can be prone to bugs or hacks, or the stable coin used in the Vaults strategy can lose its peg to the dollar.

The biggest risk of Vaults is liquidation. This can happen, for example, when the WBTC in the Vault mentioned in the example above drops in value. As a result, the 200% worth of collateral can suddenly drop below 150%. If the Vault does not refill its collateral back to 200%, the Vault may be liquidated, resulting in a loss of all WBTC. Fortunately, Vaults are programmed to intervene in time should this happen.

Conclusion

Vaults are extremely useful for investors who don't have the time to look for new yield farming opportunities within the DeFi space. By depositing your assets once, the Vault can apply its strategy to maximize the returns. Because of this, it is expected that Vaults will continue to increase in popularity.

Refills

Suppose you have earned some crypto by yield farming, liquidity pools, staking or from an increased price and you would like to spend your crypto profits. Unfortunately, most online and retail stores don’t accept Bitcoin or other cryptocurrencies as a payment method. Usually, you would have to convert your crypto to fiat via a crypto exchange, send it to your bank account and then buy products from a retailer. This process can be time consuming and costly; cash out limits, exchange fees and waiting for the bank transfer to be completed.

However, there is a clever workaround which is simpler, faster and cheaper. Cryptorefills allows you to buy gift cards with crypto by transferring your crypto to their wallet address in return for digital gift cards. You can then use your gift cards instead of fiat or credit card to buy a product.

A few words on gift cards

Typically, you give a gift card to someone as a present. The gift card contains a prepaid amount of money issued by a brand. So let’s say you have a gift card worth of $50. You can then use it online via the retailer’s website or directly in a shop. It depends on the gift card you are buying. Digital gift cards used online typically have a pin code that needs to be filled in on the retailer’s e-commerce site. Gift cards can be used at the retailer’s store by scanning their barcode. You can also print the barcode of your giftcard or keep a copy of it on your phone and show it to the cashier when you pay. What I find pretty neat about them is that you can buy them anonymously.

Cryptorefills

Back in 2020, Cryptorefills were limited in what they had to offer. They had some mobile phone prepaid cards and few gift cards. Lately, the amount of products they are offering has been growing exponentially: You can find nearly every type of gift card in their webshop.

In their early days, Cryptorefills only supported payments with Bitcoin. However, now you can buy their gift cards with Bitcoin, Litecoin, Dash, ETH and stablecoins like Tether, USDC, Dai. What I like about their payment system is that you can choose between various Layer 2 solutions and networks: Let’s say you pay want to pay with Bitcoin, try using Lightning. Prefer to pay with ETH? Use Avalanche or Polygon. By doing so, you can decrease the transaction-fees and the transactions will be much faster.

The team behind the service seems also very solid and active too. They have recently added the Avalanche and Polygon network to their list of payment options. They also have a high customer rating on Trustpilot.

So, the idea behind Cryptorefills is that they offer you gift cards from thousands of brands which you can buy with your crypto. You can then use those gift cards as to buy whatever you want without the need to convert your crypto to fiat. Pretty clever.

How to use Cryptorefills service

The first thing you need to decide is how you want to access their service. I prefer to use their app on my phone because it’s easier than going to their website via the browser. If you are a browser guy or gal, you can visit their website cryptorefills.com, it’s very user-friendly. Once you land on their home page, you can easily see the categories and brands. For example, if you want to buy something at Amazon, you can find the brand under the ecommerce category.

1. Once you have decided which brand you would like a gift card from, click on it.
2. On the product page, choose which cryptocurrency you want to pay with and the amount of Fiat you want your gift card to be charged with.
3. You will now be redirected to your Cart. Cryptorefills will ask you again what crypto would like to pay with. After choosing your cryptocurrency payment method, you can also choose a network. For Bitcoin, you choose to pay with Lightning, or for USDT you choose to pay with the Avalanche network. Then, click on “proceed to checkout”.
4. Cryptorefills will ask if you have already have an account on their website or if you would like to pay anonymously. If you choose to pay anonymously, you need to enter an email address so they can send the gift card to that address, which is usually a PIN code but can also be a barcode depending on the brand of your product. If you do have an account, you will receive Cryptorefills points whenever you buy a product. You can redeem these points for crypto vouchers in the ‘Redeem’ section of their website.
5. After logging into your account / filling in your E-Mail address you will be redirected to their payment page. The page shows you the wallet address that you need to send your crypto to. Once you have transferred your crypto, you will receive your product via your E-Mail address.
6. Congratulations! You have successfully placed an order via CryptoRefills. You can now use your gift card to buy products via retailers.

Conclusion

Once you get used to Cryptorefills, you realize that it is much easier, cheaper and faster than selling your crypto to fiat and transferring it to your bank account. Cryptorefills allows you to buy gift cards directly with your crypto within a few minutes and use it on whatever you would like to buy.

This post is sponsored by Cryptorefills

Crypto Attacks

Hackers find new ways to perform a hack every day. They try not only to steal money, but also sensitive data. Or they just want to completely destroy a system by running a dangerous script. The blockchain is also aware of this danger: Many attacks have taken place in the past, of which the 51% attack is probably the best known. A fairly new attack is the Dusting Attack.

What is Dust?

Dust is a term that has been used in the crypto world for much longer before it became known by the Dusting Attack.

In the crypto-space, we call a very small amount of crypto coins or tokens dust. This amount is often so small that you do not even notice that you have it in your wallet.

In essence, you can poses as little of a cryptocurrency or token as possible. For example, in Bitcoin's case, it is possible to have 0.00000001 Bitcoin (BTC) in your possession. The value of this is almost $0. This number of Bitcoin is also the smallest amount of Bitcoin that you can own.

The moment you make a transaction on a crypto (centralized or decentralized) exchange, a small amount of the relevant coin or token may remain. On some exchanges it is possible to exchange this dust for the native token of the relevant exchange. For example, at Binance it is possible to exchange dust for BNB.

In the case of Bitcoin, we speak of dust when the outcome of a transaction is lower than the transaction costs. This is also referred to as the dust limit, which is calculated based on the input and output of a transaction. For typical Bitcoins transaction, which do not use SegWit, this is 546 satoshis. For SegWit transactions, this number is 294 satoshis.

When a transaction is less than the mentioned number of satoshis, you will not be able to complete the transaction, resulting in that dust will remain in your wallet.

Dusting Attacks

During a Dusting Attack, hackers try to steal crypto coins by means of dust. Many users do not even notice when there is dust in their wallet. That's why hackers send lots of small amounts of crypto coins and tokens to different addresses. They then monitor all these addresses. For example, they check whether the dust is sent to another wallet, which also belongs to the victim. By keeping track of all these wallets, they know which wallets and addresses belong to the victim.

They then use this information to carry out a phishing attack. For example, they can send you a link with a malicious script running behind it. The moment you click on the link, the attack is carried out, after which the hackers try to steal crypto coins and tokens from your wallet.

Where Dusting Attacks are performed

Generally, Dusting Attacks are performed on the Bitcoin network. However, attacks on Litecoin (LTC), Binance Coin (BNB) and several other crypto coins and tokens are also known.

How to recognize a Dusting Attack

It can happen that hackers try to carry out a Dusting Attack on you. For example, there were hackers who tried to carry out a Dusting Attack on the Binance crypto exchange in October 2020.

You can recognize a Dusting Attack by looking at the crypto coins you have received in your wallet. The moment you have received crypto coins from an address that you do not know, there is a good chance that it is a Dusting Attack attempt.

In some cases there is a link in the transaction, which usually is a phishing link. Of course, you should never open such links.

What to do in case of a Dusting Attack

Do you think there is a Dusting Attack attempt on you? Then you don't have to do anything. Just leave the crypto coins in your wallet and do not send them to another address that belongs to you. The most important rule is that you should never open a link that you do not trust.

Protecting yourself from a Dusting Attack

There are several measures you can take to protect yourself from a Dusting Attack. These measures also help you to protect yourself from other attacks.

As mentioned before, you should never just click on a link. If you don't know where a link will take you, don't click on it. It can always happen that a phishing attack is carried out. After all, there are enough cases from the past where many users have lost large amounts of crypto coins and tokens.

It is also important to install a virus scanner that scans your computer or laptop daily for viruses. If something has gone wrong, the virus scanner can ensure that the virus is cleaned up before it can cause damage. It is also advisable to use a VPN, so that your internet connection is extra protected against external influences.

To really protect yourself, it is recommended to use a hardware wallet, such as Trezor or Ledger because Dusting Attacks are usually carried out on hot wallets.

Other crypto attacks

The Dusting Attack is of course not the only attack known within the crypto world. There are different types of attacks, some of which are carried out on individuals, while others are carried out on the entire community of the blockchain.

Ransomware

Ransomware is becoming an increasing problem. Not only individuals, but also large companies have to deal with ransomware. You probably know that ransomware is a type of malware that can take over your entire computer.

The moment you have ransomware on your computer, all your files will be encrypted. That means you can't use them anymore unless you have the special key to decrypt them. And now the coincidence occurs that only the hackers have this key.

They want to give you the key, provided you transfer a certain amount of Bitcoin to them. This can vary between a few hundred to several thousand dollars. If you don't transfer the money for a certain amount of time, all your files will be destroyed for good.

You can protect yourself against ransomware by using a virus scanner and not just opening a link or downloading a file. It often happens that hackers send an email with, for example, an invoice. However, when you open the invoice, ransomware is downloaded. If you are not expecting a certain email, file or link, it is better not to click on it.

Cryptojacking

To understand this hack, it is important to understand how the mining process works. In cryptojacking, someone's computer is used to mine crypto.

Again, the victim must first download a file from the Internet. Then the file will ensure that the computer power of the victim is used to mine crypto for the hackers. They are also the only ones who will receive the rewards for mining the crypto.

With cryptojacking, you can also protect yourself by using a virus scanner and not just opening a link or downloading a file. You can just download a file without knowing anything about it.

51% attack

The previous discussed attacks are usually performed on individual users. However, there are also various attacks that are carried out on the entire blockchain. Of these, the 51% attack is the most well-known.

Within the blockchain network, a consensus is made when at least 51% of the network supports it. Imagine a miner has a block ready. Then the nodes in the network will check whether the block is valid. When at least 51% of the network agrees with the block, it will be added to the network.

This also means that when one person or organization controls at least 51% of the network, the entire blockchain can be controlled by this organization. In this way, transactions can be approved that should not actually be approved at all. In that case, the blockchain is completely corrupt.

With a 51% attack, the goal is not financial gain, but destruction of the blockchain. The moment a 51% attack is performed, the price of the relevant currency immediately collapses. There is therefore virtually no financial gain to be made by the hackers.

Luckily, the chance that such an attack will be successfully carried out on, for example, the Bitcoin or Ethereum blockchain is virtually nil. This is due to the large network that is behind these blockchains.

Conclusion

You should now have a better understanding of how frequent performed attacks such as Dusting Attacks, Cryptojacking, Ransomware and 51% attacks work. In order to not get rekt, make sure you:

1. Don't open any links you don't trust.
2. Never share your Private Key.
3. Never share your seed phrase.

Metamask

Decentralization is becoming increasingly important and is an indispensable aspect of the crypto revolution. With the growing number of decentralized exchanges (DEXs), the world of decentralized finance (DeFi) is gaining in investors. One of the options for trading on decentralized exchanges is via Metamask. But how do you keep your Metamask safe and how do you prevent your digital assets from being stolen?

What is Metamask

Metamask is a software wallet that makes it possible to trade on various decentralized exchanges. Originally, MetaMask was designed to be an Ethereum wallet. Luckily, it is already possible to connect it to different networks, so that you can trade with your Metamask on different DEXs and in different networks. The browse extension gives you instant access to various protocols for trading crypto. Always make sure that you send your currency to the correct network!

The advantage of Metamask is that no one, except you, can determine anything about your own digital assets. It remains a strange fact for many investors that their crypto, on platforms such as Binance or Bitvavo, is still not entirely theirs. In principle, these exchanges can be hacked or go offline where your crypto is lost. Hence the famous saying 'not your keys, not your coins'. This is different with Metamask. It is with wallets such as Metamask that you are the only person who does have the keys and the coins are therefore exclusively in your possession. But there are other dangers lurking here.

Metamask: Basic Safety

Setting up a Metamask is child's play, but as easy as it is, it's important to be aware of the potential risks. Let's discuss the basic safety of your Metamask.

Seed Phrase

When creating your unique wallet, you will receive a seed phrase. These are 12 random words that serve as access to your Metamask wallet. This unique sequence gives a user direct access to your wallet. Therefore, write down this seed phrase when creating your wallet and keep it somewhere offline in your home. This way you can keep it in a safe, so that it is never lost. For example, if you have a new computer, you can download the Metamask browser extension again and restore your wallet with this unique code.

Already have an account and have no idea what your seed phrase is? Then it is also possible to consult this combination of words from your personal account. But beware, this is not entirely without danger either. We are now reasonably familiar with the internet, but we are not sufficiently aware of the dangers. One of the most underestimated dangers is using a public network when using your wallet.

Public network

Want to trade quickly on the bus or train via your Metamask? Not the best idea. A public network is a hotspot for scams and it is therefore easy for a cybercriminal to access. No reason to panic, if you give your social media an update, but when you do financial transactions, a hacker can get your login details immediately. Due to this, it is better to only use your Metamask via a secure network. This also applies to all software wallets and hardware wallets.

Giving permissions

Quickly approve that transaction? The world of crypto is still new and we quickly become familiar with the matter, sometimes too quickly. Quickly do that swap via Metamask and immediately give approval. Please note: with every transaction you will receive a warning from Metamask which access you grant exactly. Normally they only get access to the public address to make the transaction public on platforms such as EtherScan.

It may happen that you are asked to grant a different access, which you are not aware of. This freedom comes with great responsibility. Are you not paying attention and giving approval to something you actually don't agree to? Then the damage is already done. Due to this, double checking is a must.

Hardware wallet

Do you already have quite a bit of currency in your software wallet? Then it is a good idea to invest in a hardware wallet. Always keep in mind that there is a chance that your software wallet can be hacked. The more currency you have stored on your wallet, the more interesting it is for hackers. When you use a hardware wallet, you can say with certainty that no one, except you, has access to this currency. Examples of these hardware wallets are Trezor and Ledger.

Possible Hacks

There are several ways hacks can take place. I will discuss a few here, so that you can hopefully recognize and prevent them in time.

Metamask unlocked

Suppose you want to make a transaction and you go to a decentralized exchange, such as UniSwap or PancakeSwap and you unlock your Metamask. From this point on, not only does the protocol have access to your Metamask, but all other open tabs will also see that your Metamask is unlocked. Since the blockchain is public, knowing the address of your account is enough to view every outgoing and incoming transaction that has taken place in the past. Anyone can consult this via, for example, EtherScan. A scammer therefore immediately gains insight into your currency based on your transactions. Do you have a lot of currency on your Metamask? All the more interesting it is for a scammer to take you as a target.

Fake notifications

You may receive a false notification based on your transaction. You will receive a notification that your transaction has failed, and you will receive an overview of all details, such as currency value, destination address and date. When you go over this notification, the website proposes a new transaction, for the same amount. The transaction window looks identical, although the scammers have subtly changed the address. You tend to confirm it again here, but in reality you are just sending your currency directly to the scammer.

Incoming transactions

You may also receive a notification about an incoming transaction. Based on real data from previous transactions, you will be notified that you have to approve this transaction by means of a signature. This is the same principle as when you receive a package at home, which you have to sign for receipt.

If you already have experience with crypto, you know that you do not have to give approval for an incoming transaction. Yet these are mistakes that can be made quickly, often with disastrous consequences.

Metamask locked

Even if your Metamask is locked, a website can still see that you are a Metamask user, without having your address details. As long as it remains locked, not much can be done with it, but they can trick you in various ways so that you unlock your Metamask. Let's see how this happens:

Timing

As mentioned above, all open tabs will have access to your data from the moment you unlock your Metamask. Suppose you want to make a transaction via your Metamask, and you receive a transaction proposal. Metamask doesn't tell you which site this came from; it can happen that another website suggests this to you. This automatically assumes that this transaction is legitimate and therefore also comes from Metamask and the active protocol.

Phishing

The goal for a scammer, of course, is for you to unlock your Metamask so that he can access your digital assets. Here you may get a fake pop-up screen, explicitly asking for your password and even your seed phrase. Having a password is of course important, but a cybercriminal still needs access to your private keys. If they have access to this, that's the end of the story.

Metamask security settings

Fortunately, there are also a number of things that you can set well in advance to minimize the above risks. These take place in the settings of Metamask itself. One of the most important and important settings is the automatic locking of your wallet. You can set this via the browser extension as well as via the application.

Auto-lock timer

Just like with your phone, you can have your Metamask locked automatically after a certain amount of time. It often happens that after making a transaction you forget to lock your wallet back, which again offers a scammer plenty of opportunities. How you can set the auto-lock timer via the browser extension:

1. Go to settings – settings
2. Go to advanced – advanced
3. Auto-lock Timer – Set the number of minutes here

These settings are of course also available via the mobile application:

1. Go to settings – settings
2. Go to security – privacy
3. Auto-lock timer

Connecting MetaMask with your ledger

The safest way of trading is always to use a hardware wallet. With a ledger nobody has access to your assets. You can also connect your ledger to your Metamask, so that after completing the transaction, you are immediately completely offline and safe from online hacks. Via the settings, you can choose to use the Use Ledger Live at advanced. This is a bridge with your ledger. You can activate this function.

Conclusion

The popularity of DeFi is increasing daily and trading on various decentralized exchanges is becoming a daily business for many investors. The first time you connect a software wallet to a DEX it is awkward and new, but after a few times it feels familiar and familiar. But at these moments the danger lurks. You become blind to the risks and possible scams that can take place. That's why it's important to keep your Metamask safe.

I have shared the main scams and scams so that you can be extra careful with your Metamask wallet. A common saying in the world of crypto is “not your keys, not your coins”. This refers to central exchanges that have power over your digital assets. In response, investors are making the switch to the world of decentralized finance, but above all, with great power, comes great responsibilities. There is no other party that acts as a backup when something goes wrong with your digital currency. No one, absolutely no one else, is responsible for your actions and transactions in the world of DeFi. That is why it is so important to observe these safety measures.

Keep your assets safe!

Arbitrum

Due to the growing popularity of Ethereum, it suffered from scalability problems. This meant that users had to pay high amounts of ETH in order to complete a transaction. These transaction fees could sometimes amount to several hundred dollars.

Hopefully this problem will be solved when Ethereum 2.0 is up and running, although there are also plenty of parties who don't want to wait for this. For example, the team behind Arbitrum.

In this article, we'll focus on what Arbitrum is and how it should help solve Ethereum's scalability issues.

Ethereum's Scalability Problem

Suppose a given blockchain can process 100 transactions per second. As soon as no more than 6000 transactions per minute are sent, there will be no problems.

But what happens if 12000 transactions are sent in one minute? This is too much, and the network will not be able to process all of these transactions. The first 6000 transactions are processed, while the last 6000 end up in a so-called mem pool, which is a kind of queue.

You can imagine that this is only the beginning of a problem that is getting bigger. Unless, something is done about it. And that is something that Ethereum is working on: A major update, called Ethereum 2.0 or Serenity, which is expected to be carried out in 2022.

However, There are also developers who prefer to take matters into their own hands, such as the group behind Arbitrum, which is a piece of software that should provide a solution to Ethereum's scalability problems. Now that you know exactly how this problem is caused, it will be a lot easier to understand Arbitrum.

Existing solutions for this problem

Arbitrum isn't the only protocol trying to address this issue. There are already several projects that try to put an end to the scalability problem by means of sharding, sidechains, plasma, channels and rollups.

• Do you know how Vaults work? You can find out here!
• LP-tokens play an important role in DeFi. Let's find out how they exactly work!

LP Tokens

At central exchanges such as Binance and Kraken, investors trade their fiat money in exchange for crypto, or they trade between different crypto trading pairs. However, these trades are only possible because there is sufficient liquidity on such exchanges. In decentralized finance (DeFi), there are no central exchanges and all trading is done through decentralized exchanges, better known as DEXs. These DEXs need liquidity before you use them to trade tokens. Once you provide liquidity to a specific liquidity pool (trading pair), you will receive LP tokens in return. But what are LP tokens and how do they work? Let's find out in this post!

Decentralized exchanges

Before we delve deeper into LP tokens, it is important to know the distinction between a central and a decentralized exchange. As the word implies, central exchanges are centrally controlled and usually also have sufficient volume and liquidity to enable trades on their platform. Note that you will always trade one digital asset for another. For example, you can buy Bitcoin (BTC) with fiat money, but you can also buy Bitcoin with Ethereum (ETH). This is all possible because there is sufficient volume on the central exchange.

In DeFi, things work differently. Traders depend on decentralized exchanges (DEXs), which in turn depend on investors. That's right, they depend on the liquidity that investors lock in the protocol. To enable traders to swap tokens and to keep token pairs in balance (for example, a 50:50 ratio), decentralized exchanges use automated market makers (AMMs).

Automated Market Maker (AMM)

An order book is used on central exchanges. You can place limit orders so that you can buy or sell assets at a certain fixed price. This price is determined by the buying or selling volume, also known as supply and demand. An AMM is, among other things, highly dependent on the liquidity of the protocol.

An AMM works in the same way as an order book in that there are trading pairs, the only difference being that you don't need a counterparty to execute the trade. Suppose you are willing to buy Bitcoin at a price of $35,000. This transaction can only be executed when someone is willing to sell Bitcoin at this price. Instead, an AMM works with smart contracts that enable all these transactions. We no longer speak of peer-to-peer transactions (P2P), but of peer-to-contract (P2C) transactions.

Liquidity

Each decentralized exchange is in turn dependent on the liquidity on the platform. The more liquidity and trading pairs available, the more attractive it is for an investor to complete his or her trade in this protocol. Liquidity is also a factor that is built up over the years. This is accompanied by possibilities and trust, among other things. Let's take a look at the liquidity of the most famous DEXs:

UniSwap

UniSwap was the first AMM and version V1 was launched in November 2018. If we consult the statistics at the top of the menu, we see that there is a total volume of more than 2 billion dollars.

PancakeSwap

PancakeSwap is the decentralized exchange built on the Binance Smart Chain (BSC). At the time of writing, PancakeSwap has total liquidity of no less than $4.69 billion. But not every DEX has that much liquidity. According to CoinMarketCap, there are now 70 decentralized exchanges and new ones are added regularly. And how does a DEX try to be successful? By guaranteeing sufficient liquidity.

Providing liquidity

A decentralized exchange is therefore dependent on liquidity. And this comes from investors because they in turn are going to provide their liquidity. The protocol promises very attractive interest rates for liquidity providers when they offer their digital tokens in the protocol. This makes it easier for others to trade and, in addition to this attractive interest, the liquidity providers usually also receive part of the transaction costs that are made on the platform.

Adding liquidity to a protocol is always based on a trading pair with a ratio of 50:50 in value. Suppose you want to add 0.5 ETH to a pool, with the stablecoin DAI as another asset. Suppose the price of Ethereum is currently at $2500, so 0.5 ETH is equivalent to $1250. This means that you still have to add $1250 to DAI. But how does the protocol know who added what? This contribution is paid out by means of LP tokens.

With the new update of UniSwap V3, it is no longer necessary for this split to be 50-50. It is possible to set a range to deviate from this ratio. With UniSwap V2, this ratio still applies.

What are LP Tokens

LP tokens or liquidity provider tokens are tokens that are issued to liquidity providers, who make their digital assets available to the AMM protocol on a decentralized exchange (DEX). By using smart contracts, you will receive these LP tokens in your wallet immediately after the transaction. These serve as a kind of proof of ownership that you have contributed to add liquidity.

As soon as you add liquidity to a pool, you get LP tokens in return. For example, if your stake is 1% of the entire pool, you will receive 1 LP token, if there are 100 LP tokens in total. Your investment is translated into a percentage of liquidity in the pool. Keep in mind that you can always lose money and your investment is not necessarily stored in the LP tokens. Your percentage of liquidity of the pool is stored in the tokens.

Example: You decide to add liquidity on PancakeSwap and you do this by depositing CAKE and BNB into a liquidity pool. For this you will receive CAKE-BNB LP tokens. Thus, the number of LP tokens you receive for this represents your share of liquidity pool of the trading pair CAKE-BNB. Then when someone trades on PancakeSwap, he or she pays a percentage fee for this trade. Part of this is added as liquidity, and you receive the remaining share as a reward.

These LP tokens represent your share of the pool. You can not trade with these LP tokens. The value of LP tokens is also less relevant. After all, you always exchange it for your underlying liquidity. However, what is possible is to use these LP tokens to achieve even more returns by depositing them in a vaults or farm.

The value of LP tokens

Although the value of your LP token is less interesting, it is useful to know how to determine this value. You can do this via various online tools, but it can also be done via manual calculation. To determine the value of your LP token, take the total value of pool and divide it by the number of LP tokens in circulation. You can check also this via EtherScan if you're providing liquidity on the Ethereum blockchain. If they take place on the Binance Smart Chain, you can visit https://bscscan.com/.

Sell ​​LP Tokens

Selling your LP tokens is done in the same way as buying them. After participating in a liquidity pool, you have received these LP tokens and are stored in your MetaMask or TrustWallet. You can sell them at any time. Go to the decentralized exchange where you provided liquidity and go to the relevant pool.

When you've added liquidity, the pools you've contributed to will automatically load. Here you can choose to sell your LP tokens again. When you do this, you sell your position in the liquidity pool and receive your tokens.

You can sell your LP tokens by re-entering the platform and into liquidity. The pools you participate in automatically load here. In the example of BNB-CAKE, you can immediately recover the liquidity. Confirm that you want to withdraw 100% of your liquidity from this pool and your request will be sent. Within minutes you will receive proof that you are officially no longer a liquidity provider. From now on you will no longer have LP tokens, but separate BNB tokens and CAKE tokens.

Yield Farming

Yield Farming is a very attractive reason for many to make the switch to decentralized finance. Beyond the decentralization aspect, we cannot deny that astronomical interest rates affect us. On the contrary. After adding liquidity, we received these LP tokens, and we can sometimes use them to get extra returns. Characteristic of DeFi is the use of APY, which stands for Annual Percentage Yield, whereby compound interest is used. In contrast to the traditional interest rate, this is very attractive and is often used in combination with liquidity providing. In the protocol you can often stake these LP tokens to get extra rewards.

Risks

Adding liquidity is not entirely without risks. Of course, the risks with stablecoins are much less than with other digital assets. The greater the risk, the greater the interest. Despite the less attractive percentages, adding liquidity based on two stablecoins can be a good investment, provided you are currently not getting returns on your currency anywhere else.

Impermanent losses

The biggest risk with DeFi is the chance of an impermanent loss. This is a term that you have most likely already come across and that everyone is warning you about. Impermanent loss refers to the chance of a temporary drop in the value of your currency due to the volatility in a trading pair. You should never underestimate the volatility of crypto.

Conclusion

LP tokens play an important role in DeFi. They act as a proof of ownership for liquidity providers who have deposited their tokens in to a liquidity pool. If it wasn't for these liquidity providers, DEXs wouldn't be able to function and investors were only able to trade their crypto on regular centralized exchanges.

Market Psychology

This post focuses on the psychological effects of a price drop. Specifically, the reinforcing roles of social media (looking at you Reddit) and news are highlighted. When you know what a price drop does to the human psyche, you might be able take advantage of this.

There are various methods to estimate whether the price of Bitcoin (BTC) or other crypto will rise or fall. For example, you can perform technical or fundamental analyzes on your cryptocurrency to determine the expected price. In addition to these two more well-known forms of analysis, there is also a slightly less well-known alternative: sentiment analysis.

The investor's feeling is central here. This feeling is partly determined by the share price, but is also fed by external factors such as the news and opinions of others. We'll discuss the sentiment analysis in this post, with a central focus on the psychological effect of a price decline.

The current market sentiment

Q1-Q3 2021

​​​​​​​​​This year has been a great time for the crypto world. Making a loss seemed impossible and returns of hundreds of percent seemed up for grabs. Investor sentiment peaked and euphoria set in.

Crypto investors sprang up like mushrooms. How different this is past the month of May. The events of 2017 seem to be repeating themselves. But what consequences does this have for the price of the various cryptocurrencies? And what is the consequence for the sentiment on the stock market?

The cryptomarket has been taken some serious blows and the burning question is, do we stay in the corner where the final blows falls? Or will the cryptomarket recover and flip the price back up like a bull?

At the time of writing, BTC is trying to breach through the 48K resistance-level. This means that we are in what seems like a recovery phase, something we saw in the bullrun of 2013 as well.

In itself there is nothing strange about a number of strong corrections of as much as 20 to 30% during a strong bull market. As mentioned before, this also happened during the bull run in 2017 and in 2013. If it's your first time as a crypto investor, such a ride down seems pretty scary. It is difficult to determine whether these price drops are just corrections or a crash.

What is the current market sentiment?

At the time of writing, there is a positve sentiment in the crypto market, as you can see in the image below. The image shows the Fear & Greed Index. The general market segment is measured via various variables. Examples of these variables are social media, research and market volume.

​

The positive sentiment results in a bullish mentality among investors, due to the price of BTC (and other coins) going up strong. We're currently sitting at a greed index of 70, which is caused by the current resistance level at 48K.

What matters now is whether the positive sentiment continues. Nowadays you even discuss crypto with the local baker or that annoying drunk uncle at birthday parties. Even Paris Hilton gave advice on crypto. If everyone in your area has an opinion about crypto and says that you achieve brilliant returns without any effort, this can be a signal that a hype is coming to an end. Of course, this does not mean that the bull run is over.

The causes of the sharp price declines this year

1. Bad news (FUD).
2. The role of social media.

Bad news

In May 2021, the Chinese State Council released a summary of the Chinese government's plans for mining and trading Bitcoin. It stated that the Chinese government wants to stop mining and trading in Bitcoin.

Half a day later, this news item led to a fall in the Bitcoin price of more than 10%. But not only Bitcoin had to suffer, the altcoins also experienced a drop in price. This isn't the first time China has released a similar news story.

In addition to the bad news from China, there have been more examples of negative news lately. A similar message came a month earlier from Turkey where the Turkish Central Bank banned the use of cryptocurrencies as a means of payment. The rationale for the ban is the risks associated with the transactions and protecting the national lira.

The latest news came from the US, where the Senate approved the infrastructure bill, which contains stricter tax-reporting requirements for cryptocurrency brokers.

Social media

Elon Musk pushed the price of Bitcoin up in February 2021 by reporting that Tesla had purchased 1.5 billion dollars worth of Bitcoin and that it is possible for customers to pay with Bitcoin. Then the opposite happens. In the tweet, the 'Dogefather' said that Tesla no longer accepts Bitcoin as a means of payment. The reason for this is that mining Bitcoin is too polluting for the environment, according to Musk. This resulted in a price drop of Bitcoin.

The psychological consequences for investors after a price drop

Why is the crypto market reacting so strongly to these news reports and social media content? Let's first distinguish different types of investors within the crypto world. To date, there is a relatively small diversity of investors within the crypto world compared to traditional investors.

The different types of investors explained are the early adopters, institutional investors and the lazy investors. The market cycle is then discussed and finally, the psychological consequences of a price drop are explained.

Types of investors

You have the early adopters, these investors got in early and know the ropes. The large price fluctuations are nothing new and the early adopters are not impressed. These investors are usually steadfast with a strong belief in the product, after all they were one of the first to get in for a reason.

In recent years there has been an influx of institutional money. This means that investment funds, investment companies and banks are entering the market, as well as leading companies such as PayPal and Google.

This is a change from the bull run in 2017 where the increase was mainly driven by retail investors. These new entrants have a strong capital which drives the price of cryptocurrency further up.

Finally, there are lazy investors. These are investors who want to quickly profit from the success of the rising cryptocurrency. They step in on the advice of someone from their social circle in an upward trend. This is called the FOMO phenomenon.

The fear of missing out takes over from rational thinking and people step in blind. These investors have done little to no analysis and are in it for the money, limiting their crypto knowledge: There is too little knowledge about technological developments, BTC price history and an investment strategy is unknown to them

Little diversity

A consequence of this small diversity of investors is that the chance that they use the same investment strategy increases. The investors in the crypto market tend to follow a large group (r/CryptoCurrency) and therefore also use the same decision strategy. This increases the volatility within the crypto market. When fear reigns, the investment strategy is forgotten. Potential gains evaporate and losses are taken (buy high, sell low).

The market cycle

A market cycle is the movement within the market with psychological causes. The different motivations within the cycle can be seen in the following figure. The upward movement is mainly driven by enthusiasm, FOMO and following other investors.

Greed and faith play an important role in this. Rational thinking turns into irrational thinking. An overconfidence bias arises, which means that you have too much faith in the choices you have made. Risks are lost sight of and making a loss seems impossible at this stage.

Then, when prices start to fall, greed gives way to fear, denial and panic. Moreover, the ego gets a bang because the big drop shows that your judgment was not as good as you thought.

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The psychological effects of a price drop

The crypto world lacks objective information and this results in uncertainty. There are no annual reports available as is the case on the stock exchange. In the crypto world, the value is determined by supply and demand, potential, the development team, speculations, social media and news reports.

Moreover, many projects are still in the start-up phase where ideas are fully developed. Bad or good news can therefore do a lot to the value of a price, let alone the opinion of a very influential person involved in a tweet (Elon Musk).

This can make the price rise tens of percent but just as easily as dropping like a brick. Early adopters are less impressed by this. But the unwitting investor develops fear which can result in a wave of sell orders. This is where the wheat is separated from the chaff. Another example is the Chinese news item mentioned earlier in this article, a similar message also came out in 2017 and 2013.

Cognitive dissonance

Cognitive dissonance is an unpleasant feeling that arises when making choices. Nobody likes to make the wrong choice. And certainly not when money is at stake. For example, when you purchase a cryptocurrency, you will convince yourself that this is the right choice. After all, you want to keep the good feeling and not regret your purchase. You adjust your attitude, behavior or your thoughts to avoid the bad feeling.

You look for messages and sounds to confirm the good feeling. To avoid the bad feeling after a purchase, investors tend to herd and look for confirmation. Because if everyone else does it, then it must be good right?

If we look at the negative tweet from Elon Musk, we see this happening. One negative tweet from a person highly regarded in the investment world resulting in a whole bunch of people wanting to sell their crypto.

It seems that all these investors have blind faith in Musk and are willing to sell their crypto without a long reflection. This is due to the previously mentioned lack of knowledge and experience of investors.

The influence of social media on the course

Herd behavior is a fertile ground for the emergence of hypes. The crypto world is an example of this, but also think of the internet bubble or the housing market bubble. The internet and social media amplify herd behavior through the enormous reach, especially of influential people with millions of followers.

A tweet with a maximum of 280 words can shake the entire crypto world to its foundations. For example, Mr. Musk has influenced the market several times in both a positive and negative sense. The question that arises from this is why would he do this?

The reason he is trying to push the price up seems simple, more profit for Elon. But why would Musk want his investments to be worth less? And then buy cheaper again? Elon Musk knows the market like no other, he knows when he expresses himself negatively that a large herd follows his 'advice', causing the price to fall.

When investors panic, it ignites other investors and investor behavior becomes predictable. This is precisely where opportunities lie for investors who keep their cool and do the opposite of the herd.

Invest when no one dares. Don't be fooled by whales. But remember if you buy then someone else sells but for what reason? Enough profit? No more confidence? Behind the purchase and sale of this transaction is a motivation, a train of thought.

We are looking for confirmation

Social media is also a place where investors look for confirmation (social proof), especially with existing algorithms on social media, you will be linked to like-minded people. A danger of this is that tunnel vision arises because you are only looking for confirmation.

The positives stand out but the negatives of the investment are ignored. The right and above all diverse sources of information help to prevent tunnel vision. This phenomenon is called confirmation bias.

Another danger of social media is repetitive and simple information, which sticks in your memory better than complicated white papers. In addition, the search for confirmation is reinforced on certain forums, communities and Facebook groups.

Conclusion

Social media and news channels amplify fear and uncertainty among investors, especially inexperienced and ignorant investors. This group is more sensitive to reports than other investors such as the early adopters. Media platform forums increase the herd behavior and irrational thinking of investors during a price drop. A number of psychological consequences follow from this:

• Tunnel vision
• Herd Behavior
• Social proof
• The same decision moments
• Panic Selling & Growing Uncertainty
• Confirmation bias
• Anchoring heuristic

A cocktail of these consequences results in high volatility within the crypto market. If negative sentiment takes over, the price could decline and could end in a bear market. It is striking that after such big correction as the we saw this year, large numbers of crypto are often purchased by the so-called whales, early adopters and other parties, which gives the price a small boost. It may go against your logic to invest in a downtrend. But making money succeeds where others panic. If the majority of people sell, then there are opportunities there for the calm investor.

Impermanent Loss

What is the most popular term in DeFi which you have never heard of in traditional world? Probably aping in, but let's assume it's impermanent loss (IL). Every liquidity provider in AMM suffered from IL. But do you know that you can beat it? Read this article to find out how.

Impermanent loss explained

Let's start with a quick definition of IL. It's a difference in value between your current assets in liquidity pool (LP) and assets you would have if you hadn't added them to LP.

In other words: IL = current assets at current prices - initial assets at current prices

Why current assets are different than initial assets? Because this is how AMM works: each trade changes the amount of both tokens (x and y) in LP so that their product remains constant (x*y=k). It's like automatic rebalancing of your portfolio consisting of tokens x and y.

So if the price of token x (e.g. ETH) goes up and y (e.g. DAI) remains stable, your porfolio (LP) is rebalanced by selling ETH to DAI so that value of ETH equals value of DAI. As a result, you will have less ETH and more DAI in LP but the value of both assets will be the same.

This auto-rebalancing also means that the AMM has paper hands: each price increase in ETH results in selling a bit of your ETH to DAI. That's why your initial assets at current prices would be worth more outside of LP, you would HODL ETH without selling on the way up.

The example mentioned above shows that IL is pretty painful in LPs with volatile assets and stablecoins. We come to the 1st (obvious) tip: 1: To minimise IL, add to LP positively correlated assets. ETH and WBTC are perfect example. They are highly correlated, which means there's a low risk of IL.

Volume to liquidity ratio

When using AMMs, traders pay a fee which goes to liquidity providers. It's a source of passive income which can mitigate IL or even produce net surplus. How much fees you earn depends on trading volume. The higher the volume, the more fees for liquidity providers.

However, you have to share the fees with other liquidity providers. So your passive income from fees depends also on total liquidity in LP. The lower the total liquidity is, the higher share of LP you own and the higher fees you collect. What matters is volume to liquidity ratio (V/L).

The higher V/L, the more fees you earn, for example:

• For daily V/L of 1 and 0.3% swap fee, your 1$ of liquidity earns V/L * 0.3% = 0.003$ daily, i.e. 1.095$ annualized (109.5% APY).
• For V/L = 2, your LP APY = 2 * 0.003$ * 365 = 219%.

Second tip: 2: To offset IL, look for LPs with high V/L.

Where to look for pairs with high V/L? https://info.uniswap.org/pairs and https://app.sushi.com/pairs list all LPs with their APY based on daily fees annualized. So for Uniswap this APY is calculated in the way I described above, i.e. 0.3% * Volume (24hr) / Liquidity * 365.

Does 100% APY mean you will double your investment in a year? Not at all. Firstly, APY is based on V/L from last 24 hours: there is no guarantee it will stay the same. Secondly, it completely disregards the existence of IL which can be bigger than total profits from fees.

Averaging your entry

So you need a better tool which accounts for both Fees APY and negative IL APY to get Net APY: your net profit in LP. The best one I've used so far is from APY.vision. It allows you to investigate the historical performance of LP. Let's check a few of their dashboards.

THe dashboard shows Fees APY, IL APY and Net APY depending on the entry time into LP. See ETH-DAI UNI LP below. If you entered this LP 30 days ago, your APY would be close to 50%. However, APY since inception (11.05.2020) is -26% - IL APY is double Fees APY.

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Example above shows that even in a longer term (300 days) fees accrued in LP may not offset IL. But there is still a way how to counteract this. It's my 3rd tip: 3: Average your entry to LP to minimise impact of IL. It basically means to add to LP multiple times.

Each time you add to LP, you average your entry prices. The aim is to minimise the difference between average entry price ratio and current price ratio between two tokens in LP: the lower the difference, the lower IL. See IL APY in ETH-DAI with average prices since inception.

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APY.vision shows avg entry prices for your LPs in PRO mode but even in free version you see price changes (current vs avg entry) so you immediately know if one token outperforms the other. Your target is to keep these percentages close (low IL).

Reserve / Volume

This is another useful dashboard from APY.vision which shows V/L ratio (Reserves = Liquidity) each day. It doesn't account for IL, but it lets you see changes in V/L in time which may be useful in a short term LP strategy. See the graph from INV-ETH LP as an example.

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V/L in first days: 19.02, 17.05, 14.30, 5.46. This corresponds to APYs: 2083%, 1867%, 1566%, 598%. Such a high V/L is what you want in short term LP strategy - in 4 days you'd earn 17% on your liquidity, excluding potential IL. Let's focus on where to look for such high V/L.

The best LPs to benefit from high V/L are the ones with low IL. You want price to move inside a horizontal corridor as long as possible to maximise your profits from trading fees. This is my 4th tip: 4: Take advantage of LPs with high V/L and low IL.

My best picks for pools with high V/L and low IL:

• Tokens after IDO: huge hype => huge volume, price stays often flat at least for a few days until presalers and public sale participants end their dump.
• Tokens sold outside of AMMs on bonding curve for a limited audience (e.g. KYCed only): bonding curve = no sudden price movements; limits on participation = high volume on AMM with low liquidity => high V/L.

You can track your current LPs in http://apy.vision. If "Gains From Providing Liquidity" are positive, you're doing it right - you're making more than hodling. If they are negative, IL is winning - maybe you should add to LP to average your entry prices to mitigate it.

Sometimes fees alone can't offset IL but you can still earn a lot. That's my 5th tip: 5: Stake your LP tokens to earn in liquidity mining (LM) programs. Projects often reward liquidity providers with their own tokens (LM APY). Your Net APY = Fees APY + LM APY - IL APY.

Last piece of advice concerns exiting LP: 6: Time your exit to minimise impact of IL. The best time to exit is when current price ratio is close to average entry price ratio. So don't rush, wait and monitor your positions. Add to LP if needed.

You are going to make it.

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• Interested in what LP-tokens are and why they play such a big role in DeFi? Find out here.

Being a liquidity provider for tokens that shoot up (or down) in price is a pain. You want to respect the pump but you can't because you are getting rekt by "impermanent" loss. However, it doesn't have to be this way. Check out how!

"Passive income by providing liquidity"

Have you been there? You buy a token that you think will rally like AXS or MATIC. You have conviction and patience to hodl. To earn some "passive income" while waiting, you deposit this token to AMM. The pump finally comes and you realize you got rekt by impermanent loss...

The above story describes the experience of many novice liquidity providers (LPs). The promise of easy "passive income" in the form of liquidity mining (LM) rewards or AMM trading fees encouraged LPs to match their token with ETH or a stablecoin and deposit them into an AMM.

They either were completely unaware of impermanent loss (IL) or thought it wasn't a big deal:

• "It's impermanent."
• "It's only a 6% loss when my token outperforms the other token from the pair by 2x while I earn double digit APR."
• "It's usually very low."

OK. Let's see. I hope you noticed that the statements above are NOT incorrect. If not, let's get familiar with part 1 on IL. IL can be impermanent (equal to 0) or very low but it only happens if you somehow fail as a good investor.

Your token vs. the benchmark

A good investor outperforms the market. If your token doesn't outperform a benchmark, for example ETH, it's not a great investment. Why waste time on research and accept extra risk that a project fails or gets exploited if holding ETH can bear comparable or better results?

If a token outperforms ETH, it means that LPing with that token will incur IL. IL is positively correlated with the divergence between the prices of tokens in a pool. The bigger the winner (vs ETH) you picked, the more IL you experience.

No IL means your token performed the same as the other token in the pool. It's not a bad scenario though. You may not have picked a winner but you have earned trading fees on your holdings. Whether they compensate for the risk taken is a very subjective matter.

There is a third scenario too. It's picking a loser - a token that underperformed ETH. In this case, not only did you underperform a market but also, due to IL, ended with less money than you'd have by just holding your loser and ETH (unless LM rewards offset IL).

So, there are 3 scenarios for LPs:

1. LPing with a winner = big IL.
2. LPing with a mediocre = low IL.
3. LPing with a loser = big IL

Of course, LPs don't know how their token (TKN) will perform. But let's assume we know the future. What would be the best strategies then?

1. TKN is a winner - buy & hold (long).
2. TKN is a mediocre - buy & LP / borrow & LP.
3. TKN is a loser - borrow & sell (short).

Conclusion: if you expect your token to be a winner, don't provide liquidity to an AMM. It's usually better to just hold. Unless…

Impermanent loss protection

Unless there is an AMM which protects you from IL and allows you to have full exposure to a single token only.

Fortunately there is an AMM that does this. It's Bancor.

When you deposit your TKN into Bancor, you are NOT exposed to both assets in the pool like in other AMMs. You still hold a long position on TKN.

If TKN moons, you don't lose due to IL. Bancor has invented and implemented a novel mechanism to distribute the risk of IL across a wide array of pools in order to completely eliminate this risk for LPs. Think of Bancor as an insurance company.

IL-protection is a killer feature for token holders seeking yield. Let's use AXS as an example:

• Left graph: IL-exposed pool on Sushiswap.
• Right graph: IL-protected pool on Bancor.

Sushiswap vs Bancor AMM

In 109 days LPs on Sushiswap lost 25% vs holding while LPs on Bancor earned 2.2%.

2.2% in 109 days is 7.5% APR. It may not look impressive at first glance but it's real, risk-minimized passive income on your holdings. High APRs in IL-exposed pools are often very misleading and can disguise negative net APR when IL is accounted for.

I also strongly believe that APRs on Bancor have a huge potential to grow. Revenues for LPs come from trading fees, so the higher Volume to Liquidity ratio (V/L), the higher the APRs. Liquidity is already very deep on many pairs but volume is still not as high as it could be.

I believe that the market won't stay inefficient for a long period. Because Bancor offers a superior product for passive LPs, more and more DeFi users discover the benefits of the protocol. But to enjoy higher passive yield, Bancor also needs DEX traders to become more aware.

If you are an LP on Bancor, it's in your own interest to spread the news about the protocol to build stronger brand awareness and attract more traders. Tell other DeFi users to compare rates between DEXes or use aggregators for their own good. Bancor will benefit too.

Conclusion

If every DEX user on Ethereum made optimal decisions today, Bancor would have much higher volume. DEX traders would benefit from better rates and Bancor would generate higher passive yields for LPs. It's a net positive change and a step towards market efficiency.

The combination of single-asset exposure and IL protection turns Bancor pools into interest-bearing accounts for token holders. It's the best product for LPs now but it will be even better when traders start making optimal decisions. And it's not all!

Bancor core contributors have indicated Bancor V3 will offer novel trading features aimed at attracting more volume and fees for LPs. Not many details have been released yet but judging by the level of innovation introduced in V2.1 I suppose V3 may be pure fire...