There are several thousands of cryptocurrencies out there, known also as altcoins. These coins and tokens all have their own unique features and uses, for example, some are used to help decide the direction the creator company should take, others give you discounts or access to special features. The Coin Guide is a concise summary of the aims and technology behind a certain cryptocurrencies. Insight is crucial in this field. Many projects disguise their progress through complicated jargon, making it hard to distinguish those who are building something meaningful from those who are not.
Ethereum Founder Vitalik Buterin recently discussed in his blog post his excitement about Ethereum and its potential. He admits that originally, he was more general about what Ethereum can achieve. But now, after so many projects being developed on Ethereum, he is shifting his gaze to applications already known to work. In this article, we look at some Vitalik’s reasons as to why we should be excited for Ethereum and its potential.
What is Ethereum?
Ethereum is an open-source, public, blockchain-based distributed computing platform featuring smart contract (scripting) functionality. It provides a decentralized virtual machine known as the Ethereum Virtual Machine (EVM). The EVM can execute scripts using an international network of public nodes. Ethereum also provides a cryptocurrency token called “ether” ($ETH). Ether ($ETH) can be transferred between accounts and used to compensate participant nodes for computations performed. Ethereum was proposed in late 2013 by Vitalik Buterin and launched in 2015.
In countries with fewer links to the global financial system or with extreme inflation, cryptocurrency (and Ethereum) is a valuable asset. Vitalik realised this in December 2021 when he was able to pay for meals using cryptocurrency in Argentina.
One obstacle to the more widespread use of cryptocurrency, according to Vitalik, was high transaction fees. At the time, fees cost about a third of his meal, and several minutes to confirm. However, since he and the restaurant owner had Binance wallets, they were able to transfer the funds instantly for free.
Since then, there have been significant improvements to the Ethereum network. After the Ethereum Merge transactions are being processed at a much faster and more stable rate. Scaling technologies such as rollups will even further push Ethereum’s scalability. Technologies such as social recovery and multisig wallets with account abstraction are also improving wallet security. It may take years for these technologies to mature, but progress is certainly being made.
Donations are a notable use case for cryptocurrency. For example, we saw donations being made to Ukraine and refugees relying on digital currencies as a form of payment.
In addition, countries’ adoption of CBDCs (e.g. China’s DCEP/e-CNY) has led to serious concerns about financial surveillance and control. According to Vitalik, cryptocurrency is the only technology that can combine digitalization with privacy.
This makes payments one of the major reasons to be excited for Ethereum and its potential.
Reason 2: Decentralized Finance (DeFi)
Vitalik also sees huge potential in DeFi. In particular, he considers the following DeFi products to be especially important:
Decentralized stablecoins: Decentralized stablecoins are considered a secure and stable digital money. Essentially, halfway between holding crypto assets and withdrawing to fiat currency. They are also usually pegged to a reserved asset, such as the US Dollar, making it less volatile than most cryptocurrencies. Decentralized stablecoins have added aspects of being fully transparent and non-custodial. An example of decentralized stablecoins is the DAI token, DUSD or EOSDT.
Prediction markets: Prediction markets have been a reliable part of the DeFi landscape since Augur launched in 2015. They have been gaining traction ever since, demonstrating their utility in the 2020 US election. Allowing people to predict (and profit) from the outcome of the 2020 US elections. In 2022, both crypto-based prediction markets such as Polymarket, and play-money markets like Metaculus are becoming even more popular. Crypto-based prediction markets are advantageous, as they are more trustworthy and accessible worldwide. Vitalik expects these markets to continuously grow in terms of usage and value over time.
Other synthetic assets: Major stock indices and real estate have the potential to be replicated in the same way as stablecoins. However, there is a challenge in creating an appropriate balance of decentralization and efficiency to make these assets available at reasonable rates of return.
Glue layers: These will be necessary to allow users to easily trade between different assets, such as ETH, centralized or decentralized stablecoins, synthetic assets, etc.
Reason 3: Blockchain Identity
Vitalik is bullish on blockchain identity. Blockchain identity uses blockchain technology for aspects of identification such as basic authentication, attestations, naming, and proof of personhood. An example mentioned by Vitalik is the Sign In With Ethereum (SIWE) standard. The SIWE standard lets users log into websites similar to how we use Google or Facebook to automatically log in. But with SIWE, we can log into sites without fear of Google or Facebook accessing our private information, or locking our accounts. SIWE is currently used in end-to-end encrypted email, Skiff and many blockchain-based alternative social media projects.
Also, ENS allows usernames to be used with proof-of-personhood systems. This can enable users to prove that they are actually human. This is especially useful for airdrops and governance, as it ensures fairness and prevents abuse. Proof-of-attendance protocol can also confirm a person’s participation and thus their eligibility for airdrops and participation in governance.
Vitalik believes that each of these applications has its individual uses. But the true utility will be seen when these aspects are all combined. For example, users can log on to Blockscan chat using Ethereum, making them visible by their ENS name. Then, to fight spam, Blockscan chat could “verify” accounts by examining their proof-of-attendance protocols. This verification process could show information on a user’s participation, and even verify token balances or a proof-of-personhood profile. In turn, it can be determined whether the user should be eligible for rewards and perks.
Reason 4: DAOs
DAOs (Decentralized Autonomous Organizations) are smart contracts that represent an ownership or control structure over an asset or process. Vitalik believes there is still room for improvement for DAOs, particularly in terms of ensuring they are not abused. For example, DAOs are crucial for the long-term survival of decentralized stablecoins. But, there have been cases of malicious actors abusing DAOs to drain DeFi projects out of hundreds of millions.
Reason 5: Hybrid applications
Finally, Vitalik believes there are applications that can take advantage of both blockchains and other systems in order to improve their trust models. For example, voting can utilise systems such as MACI to combine blockchains, ZK-SNARKs, and a limited centralized (or M-of-N) layer for scalability and coercion resistance. This will allow voting to be censorship resistant, auditable, and private.
Conclusion
According to Vitalik, we are only at the beginning stages of building applications that will push Ethereum’s potential even further. Currently, these applications face the challenges of the limits of present-day technology, such as the lack of scalability of blockchains. There will also be other challenges to come, such as privacy issues.
However, there are numerous reasons to be excited for Ethereum, because all these problems can be solved. Vitalik believes that it will require us to look beyond the quest for excitement and short-term profit. Because sometimes, it is the more stable and boring applications that become the most useful and valuable in the long run.
Bitcoin (BTC) is by far the best-known digital asset with the largest trade volume.
Bitcoin is both a currency and a technology. At its core, Bitcoin is peer to peer electronic money with one express objective. The objective is to replace the intermediation and trust vested on centralised financial institutions. It aims to be a replacement for traditional fiat currency and an innovative settlement layer for processing transactions without requiring a third party.
To learn more about Bitcoin and how to get started with cryptocurrencies, check out our beginner’s guide series.
Beginner’s guide to Bitcoin and cryptocurrencies
Bitcoin is Decentralized
Before Bitcoin was invented, the only way to use money digitally, it was through an intermediary, like a Bank or PayPal. Even then, the money used was still government issued and controlled currency. However, Bitcoin changed all that by creating a decentralized form of currency that individuals could trade directly without the need for an intermediary. Instead of trusting a centralized bank to process transactions, we would trust a Protocol that is run by different individuals all over the world.
Each Bitcoin transaction is validated and confirmed by the entire Bitcoin network. There is no single point of failure, so the system is virtually impossible to shut down, manipulate, or control.
Main Features of Bitcoin
Decentralized control: There is no authority that controls Bitcoin. All transactions are visible on a public ledger called the blockchain.
Bitcoin is a store of value: You can use Bitcoin to purchase goods and services.
Security: Bitcoin has never been hacked.
Open source: the Bitcoin source code is publicly available and community members can update it.
Public: All transactions are visible on the Bitcoin blockchain.
Pseudonymous: You can use a pseudonymous identity to make Bitcoin transactions. It is not truly anonymous because the transaction addresses are visible on the public chain.
Limited supply: Bitcoin has a limited and predictable supply.
How do Bitcoin transactions work? How do you earn Bitcoin?
The Bitcoin network is essentially a decentralized public ledger that relies on the combined computing power of its community. Bitcoin works as follows:
Bitcoin transactions are unconfirmed until they are updated on the bitcoin transaction ledger. This is called the blockchain. This is a decentralised public ledger, i.e. everyone can update it and no one person controls this ledger.
People can help update this ledger by using specialised computers. The computers will generate random numbers. The aim is to generate the correct answer to the mathematical problem generated by the system.
The computer that guesses the solution gets to decide which of the pending bitcoin transactions will be grouped together into a block.
The block and the answer to the mathematical problem is sent to the bitcoin network. This is a network of computers.
The bitcoin network will check if the answer is correct. If it is, they will update their copies of the bitcoin transaction ledger with the block you had created. The process is then repeated. Hence the name “Blockchain“.
The computer which guessed the correct number receives an award of Bitcoins and the transaction fees for the transactions in the block.
This process is called mining. This is because you mine (earn) Bitcoins by helping update the bitcoin transaction ledger.
Bitcoin mining farm
What is the halving in Bitcoin mining?
The Bitcoin halving is an important concept for Bitcoin miners. When Bitcoin was first mined, miners were rewarded 50 BTC for generating the correct answer to the mathematical problem. Every 210,000 blocks which occur around every 4 years, this reward is cut in half. (locals.md) This is known as the Bitcoin halving.
The last Bitcoin halving occurred on 11th May 2020 at around 3:00p.m. EST. Following this halving, the block reward was reduced to 6.25 BTC. The next halving is therefore expected to be in 2024 when the block rewards will be cut down to 3.125 BTC.
Bitcoin owners store their coins using wallets. You do not actually hold your Bitcoins, rather you hold a private key that allows you to access your Bitcoin address i.e. your public key.
Click here to learn more about private keys and public keys.
Online wallets: Run on a cloud server and so can be accessed by multiple computers. Most common online wallets are cryptocurrency exchanges. Check out our review of the top exchanges.
Paper wallets: A printout which contains your public and private keys. Though the most rudimentary, it is the safest method of keeping your cryptocurrencies safe.
Desktop wallets: They are downloaded and installed onto your computer.
Who is Satoshi Nakamoto
It is the invention of a “Satoshi Nakamoto” in 2008 as a decentralised virtual currency that runs on blockchain technology. We still do not know the true identity(ies) of Satoshi Nakamoto, though there are people who claim to be him.
What’s the future of Bitcoin?
Bitcoin is getting more adoption for payments across the world. At the moment, many stores and merchants accept payment in Bitcoin. The list of merchants are increasing by the day.
Bitcoin is even usable with some credit and debit cards.
However, Bitcoin is not as easily scalable as most other subsequent coins. Accordingly, a future where Bitcoin replaces traditional currency is highly unlikely.
However, Bitcoin will remain an excellent Store of Value (SOV). This is because of its immutability and periodic price appreciation. That said, the question of regulatory policies across the world may be the actual obstacle to Bitcoin’s long-term success.
Can Bitcoin disappear?
Despite what some naysayers will say about Bitcoin having no value or being a scam, Bitcoin cannot and will not disappear. Bitcoin is widely accepted as a value accept and can be converted into fiat currencies. There are also many places that accept Bitcoin as a form of payment such as Home Depot, Microsoft, and Virgin Airlines.
Bitcoin is also decentralized (i.e. not held by any central authority). This means that no single person or entity can confiscate your Bitcoins or shut Bitcoin down.
What will happen after all 21 million Bitcoins are mined?
The total supply of Bitcoin is capped at 21 million and it is expected that all 21 million Bitcoins will be mined in around 2140. When this happens, Bitcoin mining fees will disappear. Bitcoin miners instead will only earn income from transaction processing fees instead of both block rewards and transaction fees.
BTC price predictions once the last Bitcoin is mined?
In an interview with Cointelegraph, Mohamed El Masri, Founder of mining solutions provider PermianChain predicts that BTC would be worth US$430,500 once the last Bitcoin is mined.
El Masri also feels positive that Bitcoin miners will still be able to profit from Bitcoin mining despite all of them being mined. This is despite the fact that by then, Bitcoin miners can only earn transaction fees as a source of income. His positivity stems from the fact that transaction fees will still generate almost US$3 billion a year at his predicted BTC price. This is because Bitcoin miners will still be a necessary part of supporting the Bitcoin infrastructure operating at any cost.
Hot and cold wallets are used to store your cryptocurrencies, specifically your private keys which grant you access to your crypto assets. They are therefore a crucial element of the cryptocurrency space.
The major difference between hot and cold wallets is that hot wallets are connected to the internet whilst cold wallets are not.
For those holding cryptocurrencies, the choice between cold and hot wallets depends on factors such as the amount of coins you hold, the frequency in which you trade etc.
Extra steps are required for trading. Save for the KeepKey which is partnered with ShapeShift exchange, users must first send their cryptocurrencies from their cold wallet to an exchange before they can trade. And when cryptocurrency prices fluctuate by the minute, this can have a profound effect on your gains.
Harder to use. They do require at least 10 minutes for initial set-up, and you will need to plug in your device every time before sending your cryptocurrencies. (www.speedclean.com)
Inconvenient. Even with the Ledger Nano X’s mobile feature allowing you to connect the device to your mobile phone via Bluetooth, it’s still not as convenient as a mobile wallet, which is simply an app on your phone.
Conclusion
Whilst there is a longer list of cons for cold wallets, they are still highly recommended on the basis of significantly improved safety of funds.
Numerous people have suffered from hacks and closures of exchanges. These victims have no way to get their funds back, or at best, it will take a very long time. For example, Mt. Gox exchange was hacked in 2011 and 2014. To date, none of its victims have gotten any of their stolen funds back.
Meanwhile, hot wallets are very convenient — if you leave your funds on exchanges, you can trade with the click of a button.
We recommend keeping small amounts of cryptocurrencies in hot wallets for day-to-day trading or spending only. Whilst the bulk of your cryptocurrencies should be kept in cold wallets. If you obtain any gains from trading, you should also consider how much you want to retain for further trading and immediately transfer the rest to cold wallets.
Ethereum 2.0 is coming soon and the question everyone wants to know is “will it cause crypto prices to crash?” This is particularly as markets around the globe are not looking great, and that includes the crypto industry. Everything has been bleeding heavily for months without a sign of stopping, as central banks keep hiking rates, global supply chains struggle, and spending and investment dry up. Stagflation is a very real possibility, and there is no telling how long it will take for us to cool down the overheated markets that have been going only up since the last recession more than ten years ago.
The aforementioned notwithstanding, active development in the blockchain space continues to march forward. Although investments might drop significantly, many builders keep on building no matter the state of the markets. As Ethereum is steadily approaching the long-awaited transition from proof-of-work (PoW) to proof-of-stake (PoS), dubbed The Merge, it might be interesting to think about potential impacts of The Merge on the crypto market prices, especially in the context of a potential extended bear market.
In short, The Merge will result in Eth2.0’s Beacon chain (the coordination mechanism of the new network) merging with the current Ethereum mainnet, signifying the move to a fully PoS chain. To secure the network, enormous amounts of ETH will be staked in addition to the ETH already staked in the Beacon chain, making all of this locked ETH illiquid. Combined with the EIP-1559 upgrade, which now burns 70-80% of the fees, The Merge is expected to cause the equivalent of 3 bitcoin halvenings, dropping Ethereum’s inflation rate to 0.43% and locking up a lot of ETH, potentially reducing sell pressure by up to 90%. In addition, the PoS mechanism will reduce Ethereum’s energy consumption by up to 99.95%.
So all is looking great for Ethereum and projects building on top of it, right? Possibly. However, there is still a decent chance that, given the current market conditions, ETH’s price pump might be short-lived, and would continue to drop, bringing down a lot of other projects with it.
The Potential Impacts of The Merge
There are two possible scenarios to look at when discussing the downside impact of The Merge on crypto prices:
The external effect would be caused by Ethereum sucking out liquidity from other PoS alt-L1s and the projects built on top of them (especially if they’re EVM-compatible), as one of the more critical selling points compared to Ethereum is environmental sustainability.
Beacon chain staked ETH unlocks, extended bear market, and poor treasury management of Ethereum-backed projects could see more capitulation events as HODLers and projects sell off their ETH to stay afloat as new investments dry up and stagflation looms.
1. Ethereum Sucks Liquidity From Other PoS alt-L1’s
By offering lower gas fees, fast transactions, and relatively high throughput at the expense of decentralization and economic sustainability, many PoS chains have attracted developers, investors, and NFT ecosystems to their networks away from Ethereum. Ethereum’s high demand (=high fees), poor L1 scalability, and the concerning PoW mechanism have severely limited its growth. (https://rpdrlatino.com) Understandably, regular people simply do not want to pay exorbitant fees when minting and trading NFTs, and developing inaccessible dApps on a network that is supposedly destroying trees and warming up the planet.
The environmental argument will be completely invalid after the merge. Coupled with the enormous innovations in Ethereum’s L2 ecosystem, which have already reduced transaction fees to sub-$1 with no signs of stopping, Ethereum is set to once again become the most sought-after smart contract development platform. As post-Merge buy pressure of ETH increases and scalability improves, alt-L1’s could struggle to offer any significant unique selling points, making new projects opt to build on top of the most secure, established and decentralized smart contract chain out there.
As more and more people flock to Ethereum, established projects might also decide to migrate to the platform with the most demand and upside potential, effectively sucking out liquidity from other chains, and leaving them dry with evaporated treasuries, limited runway, and reduced demand. The strategy of subsidizing transaction fees during a bull market when funds are plentiful will likely not work when no new investments are coming in during a bear market, and an exodus of users is reducing demand and network revenues.
Of course, there is plenty of room for growth in this space, and projects existing on other chains might not find it too beneficial to move to Ethereum even though short-term liquidity issues might prove challenging.
2. Beacon Chain ETH Unlocks in Extended Bear Market Cause Mass Capitulation
The Merge will unlock a lot of ETH, resulting in a potential aggressive selling spree that might have trickle-down effects on a lot of other coins, especially those that have tight correlation with their ETH pair, are ERC-20 tokens, or have been sitting on ETH treasuries to fund their development. A lot more downside risk due to a selloff is also a very real possibility for ETH and other coins simply due to bad timing (i.e. bear market – with recession slowly creeping into our daily lives due to central banks raising interest rates, supply chain issues, energy crises etc.), the unlocked ETH might serve as a critical lifeline for those who had confidently staked their ETH during the bull market.
During the bear market, investments will be scarce, and projects that during the bull market had made the decision to not convert their treasury ETH to stablecoins are now seeing their wallets drop in value significantly, forcing them to capitulate by selling at low prices to cover their expenses.
However, it is important to note that the ETH unlocked from the ETH staked on the Beacon chain will not be immediately available right after The Merge. Rather, this feature – EIP-4895: “Beacon chain push withdrawals as operations”, will be enabled during the Shanghai upgrade. It will probably be deployed much later after The Merge, with estimates ranging from a month to 6 months. This means that any amount of potential sell-off of unlocked ETH would come with a significant delay post-Merge, at which point it’s impossible to predict where the market might be in 6-12 months and how it will behave, with contradicting bullish and bearish narratives clashing against one another in an attempt to drive price in either direction.
This option does seem a bit far-fetched, however, and no one knows how much more pain we will have to suffer before the momentum shifts towards the upside, so it’s best to be prepared for both the upside and downside, and not fall prey to only bullish narratives.
Conclusion
As outlined in the two main points, post-Merge many alt-L1 coins could face a risk of crashing even further due to risks associated with reduced liquidity in a bear market (for non-Ethereum coins), liquidity that might flow towards the Ethereum ecosystem due to its established security, track record, and newly acquired environmental sustainability.
On the other hand, ETH and other ERC-20 tokens living on Ethereum also run a risk of crashing, if the post-Merge ETH unlock from the Beacon chain results in a mass sell-off of ETH, which could crash other coins and project treasuries.
As this will be the first time the crypto industry experiences a recession or a stagflation, there is a lot of uncertainty about how low the market could go and, most importantly, how long it could stay so low. This is uncharted territory, so making comparisons with past cycles might not be particularly useful. Nations and companies will keep tightening their belts, and spending will significantly decrease across the board, leaving risk-on markets such as crypto vulnerable to a continued mass exodus to safer investments.
The crypto market, together with stock markets and the global economy in general, have been experiencing a significant drawdown for the past 6 months, leading to a confluence of factors ranging from high inflation, rate hikes, supply chain issues, energy crisis, to geopolitical instability. This combination packs a powerful punch for any risk-on markets, such as stocks and crypto, forcing retail and institutional investors to exit their capital from markets during these uncertain times.
With Bitcoin currently at $20k, down 70% from its $69k ATH, and the total altcoin marketcap being down 72% from its ATH, it is hard to deny that we’ve entered a bear market. But one question remains – is this anything like the bear market of 2018 and will it last equally as long as the previous one? Let’s dissect the situation and understand if this time is truly different, or if this is just a small bump in the road before an accelerated bull market.
Check out our video comparing the crypto bear market now (2022) and in 2018- and more importantly, how to STILL make money during this downturn:
2018 Bear Market
2017 saw the first true mass influx of retail interest into the crypto space. Bitcoin saw a rapid increase in price, everyone’s friend and grandma were kickstarting their own ICOs to attract funds, and regular companies added the blockchain keyword to their names to increase their share prices. 2017 was the wild west, as there was even less regulation than currently, and the space was rife with opportunists spawning scam projects to extract money from ignorant first-time crypto investors.
But, as with any bubble, it eventually pops. The crypto space was heavily overheated, with investors throwing money at everything that moved, doing minimal to no due diligence, just to get on the crypto hype train. Come 2018, things were starting to cool down and people were beginning to feel the pain. In less than 6 months after the peak ICO craze, over 90% of all the projects were already dead, with many more to go down with them in the rest of the 18-month long bear market.
At the peak of the market, a lot of FUD (fear, uncertainty and doubt) was beginning to circulate. Fear of regulation due to the prevalence of scams, and with China/Korea considering banning cryptocurrencies, things were not looking great for the crypto space. Right around the peak of the market, the Chicago Mercantile Exchange (CME) launched their Bitcoin futures product, which allowed institutional investors to get their hands dirty with Bitcoin. And, naturally, they did just that. With all of the FUD circulating and the market waiting to release a lot of pressure, institutions began shorting the market, creating an enormous sell pressure that brought BTC down to $7k, which kept grinding down to $3k till mid-2019.
2022 Bear Market
After Covid-19 hit, the market experienced a tiny two-month recession. As everyone was locked inside, demand dropped and supply shrunk as well. But once central banks began printing more money to help businesses and people via stimulus checks, many found themselves with a lot of extra cash and no way to spend it, so they turned to investing. After the March crash, the rest of 2020 saw the crypto market boom, calling it the “DeFi summer”, with BTC increasing in price by 400% by the end of the year. After that, it just kept on going. 2021 was the year of the NFTs and Metaverse, i.e. GameFi, with numerous projects sprouting up to capture some of the value amid all the hype.
After reaching its peak in November 2021, the crypto market has kept on steadily grinding down. Those who had called the peak in November aptly understood that the markets were overheated, inflation was starting to get out of hand, and the only way for governments to keep that under control was to begin quantitative tightening through rate hikes. Unfortunately, many were still in denial about the onset of the bear market way into April, which has resulted in a lot of people holding bags that might or might not recover.
Now the path forward seems clear. The US Federal Reserve’s hawkish monetary policy is causing markets a lot of necessary and unavoidable pain. Because the money printing since Covid-19 has been at such an unprecedented level, the Fed is finding it hard to slow down the inflation without causing a lot of damage. The result currently is a looming recession at the same time as inflation is still running rampant and driving up the prices of everything, all the while people’s incomes are stagnating and their expenses increasing.
When is the Next Bull Cycle?
At the moment, there are no clear signs of central banks reeling in their hawkish monetary policies. It might possibly take at least several months if not until the end of the year for the dust to settle, the bottom to come in, and for us to be ready for the next bull cycle once the Fed eases monetary restrictions. Continued geopolitical turbulence aside, the next bull cycle will certainly come, but it’s difficult to say what will be the narratives driving the rapid market expansion this time.
The two most touted bull market catalysts are the long-awaited Bitcoin spot ETF and the Ethereum Merge, which will cause the Ethereum network to transition from its wasteful Proof-of-Work mechanism to Proof-of-Stake. However, as is common in life and in markets, the most obvious things tend not to be the ones to catalyze huge changes. Markets are irrational, and a confluence of new narratives that will be born only in 6 months might very well end up triggering the next bull run.
How to Still Make Money During the Crypto Bear Market?
With great pain come great opportunities, and this bear market is no exception. This is the time for learning, accumulating, and paying attention to the market. In our latest video about the current bear market, we outline a few strategies that you can use as an investor to maximize upside potential come next bull run:
1) Dollar cost averaging (DCA) into your investments – instead of trying to catch the generational bottom and investing your whole capital in one go, better invest 20% of your capital at a time during a longer time period, so that way you are more likely to get a great average entry price and reap the profits in the future.
2) Doing lots of research – fundamental analysis of projects is the best way to ensure you invest in projects that have a real potential, and this is the time to be doing just that. Many projects will die during this bear market, so it’s important to source trustworthy information and be critical of everything in order to position yourself properly during the next stage of growth.
3) Diversify your portfolio – as we’ve seen in the past months, there’s no such thing as too big to fail in the crypto space. Instead of going all-in on one project, spreading risk across several projects will ensure your capital is better protected from a few bad investments.
4) Shorting the market – this should not be practiced by anyone who doesn’t have experience trading, as without proper risk management things can get pretty ugly very fast. During a downtrend, a way to make money is by shorting an asset, which essentially means you’re betting on an asset to go down in value.
Of course, none of this is financial advice, and we implore our readers to do their own research and never invest more than they are willing to lose. It’s a highly volatile market and not for the faint of heart.
Spool is a Decentralized Finance (DeFi) protocol geared towards ordinary users who want to earn yield on their own terms in a simple and straightforward way.
Background
DeFi has been an exciting avenue in the field of cryptocurrencies. Based on the Ethereum blockchain, it uses smart contracts, which are automated agreements used to automatically enforce transactions without the need for a government or a bank.
A vast new set of Ethereum-based protocols have emerged, giving rise to decentralized financial products that automate loans, savings and even insurance. According to Nottingham Trent University associate professor of Cyptofinance and Digital Investment Jeremy Eng-Tuck Cheah, the total value locked up in DeFi contracts grew rapidly from US$2.1 million to US$6.9 billion from September 2017 to August 2020, and continues to rise.
Spool: Yield for the world, Fuel for DeFi
What is Spool?
Luke Lombe, a founding partner of Australian digital asset management firm Faculty Group and Spool contributor, describes Spool as DeFi infrastructure that allows users to create a fully diversified, yield optimised, auto-compounding and risk mitigated DeFi portfolio – in a simple and straightforward manner.
According to Lombe, these portfolios, called Spools, cover complex tasks such as risk evaluation, risk/reward based portfolio construction and rebalancing to deliver an investment’s most optimal yield from the custom strategies deployed based on the user’s indicated risk tolerance.
Arguably, Spool has three synergistic features. The first is accessibility. Its straightforward set-up won’t repel users who might not have otherwise delved into DeFi. The second is diversification. Spools allow diverse portfolio management automatically, easing workloads and reducing barriers for entry. Thirdly is economies of scale. With the automation, having more users simply makes Spool more cost effective to run.
How to set up a Spool?
With just one stablecoin deposit and five more steps done via a simple interface, a user can set a Spool up, which contributor Phil Zimmerer describes as a “vault”. And then the user kicks back as the Spool does the work. The steps are as follows.
Step One: Choose a preferred deposit currency
“We’re starting with stablecoins, essentially USDC, USDT or DAI. That will expand to capture more volatile assets like Bitcoin or Ethereum, which are all subject to DAO (Decentralized Autonomous Organization) vote,” says Lombe.
Lombe goes on to explain that Spool is by its very nature a DAO first and foremost, which will vote on various proposals, including choices of new currencies before they are enacted. Stablecoins are likely chosen because they are, well, relatively stable cryptocurrencies, as they derive their value from an underlying external asset, like a national currency or gold. USDC and USDT (also known as Tether) are pegged to the US Dollar, for instance.
How the Spool token works
Step Two: Choose a risk model
Lombe describes a risk model as essentially a set of criteria that a user would use to assess risk in DeFi. For example, a risk model could factor in Time on Market, as the longer a protocol has been around, the safer it’s likely to be.
From this, Spool creates a risk score for each protocol. For instance, Aave might get a 7.5 out of 10 or Curve a 6.8. This helps the user in figuring out how to diversify their portfolio. He goes on to explain how the nature of DeFi investment makes risk-assessed diversification crucial:
“I imagine people would understand DeFi risk as pretty binary. It’s either your money’s safe or your money’s gone (laughs). Generally it’s a matter of a smart contract failure as opposed to an exploit or a hack or potentially a rug pull.”
Step Three: Choose some protocols
Choosing a risk model allows a user to then select various protocols, such as the ones mentioned in the beginning of this article, that they can place their funds in.
“So Curve, Compound, Aave. All the ones we know generally are included in this list. More will be added subject to DAO vote. So you basically create your ideal portfolio based on the protocols that you like and know,” adds Lombe.
Protocols such as Compound and Aave allow users to trade loans and earn interest via smart contracts, while Curve allows for stablecoin transactions at optimised rates.
Spoolnomics in a nutshell
Step Four: Select Risk Tolerance
Next, a user chooses their Spool’s risk tolerance from a sliding scale. According to Lombe, Spool’s own protocol will factor in the selected risk tolerance level as well as the yield and risk for each of the chosen protocols and then dynamically shape a user’s portfolio and re-weight it according to the parameters set by the user.
“But it’s not static. As the yield changes (which it does on a daily basis), the algorithm will essentially rebalance your portfolio to ensure that you’re constantly getting the most risk-optimised or yield-optimised and risk-mitigated return.”
Spool’s adjustments do this under efficiencies. Ethereum’s gas fees, or the compensated cost of energy used to compute a transaction, can be quite high, as is the cost of rebalancing a portfolio to account for them. So Spool uses economies of scale to mitigate such costs. As Lombe states:
“For example, if your Spool algorithm says ‘move your funds from Curve to Compound’, and mine says ‘move from Compound to Curve’, a tracer smart contract simply reassigns the assignment, so the funds stay where they are. Just like if you’re transferring money to someone at the same bank, the bank doesn’t move anything, it just moves the number from one to the other.
Lombe adds that more likely, funds moving in the same direction will be batched together, sharing the cost of transaction fees. With numerous other efficiencies in mind, more users actually makes Spool more energy efficient.
Final Step: Name Your Spool
Finally, a user simply has to name their Spool and assign a performance fee, if desired. This fee sets how much the user is paid by anyone who uses their Spool to invest. Lombe states that:
“You can say, ‘I’ve created a fully diversified portfolio, it’s going to be automatically managed and optimised for you. All you have to do is click on this link’, and they deposit their funds and then you get a small fee, essentially. And that’s only a performance fee, so the user’s actual initial contribution won’t be diluted at all.”
By creating a Spool and sharing it with others, it allows people intimidated by DeFi choices to join in. This then increases economies of scale. Essentially, an end user becomes a kind of “sub-broker” within the Spool network. Major contributor to Spool Phil Zimmerer explains:
“There are going to be users who don’t want to do due diligence, are not able to or it’s simply not worth their time. They’re more likely to trust a person or a group or a friend. And I’m uncomfortable giving financial advice. I think this resonates with a lot of people. So you can create your own “vault” and front load all your decision making with your knowledge and then you can share that schooling with people.”
SDK
However, what’s really interesting about Spool is that on top of what it can already do is its potential to be used as an SDK, or a software developer kit. As Lombe explains:
“Essentially, it’s a DeFi middleware. Not only can you create these DeFi portfolios, you can fire an SDK useful as a backend for white label services. Essentially, use whatever user interface you have on the front end and create your own DeFi products.”
These third party DeFi products could be websites or wallet apps running Spool in the background unnoticed. This could mean a lot of development work saved on such products.
When combined with the ability to share Spools, the automation of diversification and yield optimization as well as the efficiencies that work on economies of scale, Spool looks to be a particularly powerful piece of middleware within the Ethereum ecosystem.
Perhaps more importantly for ordinary people, it allows for better governance of finance – a thing that traditional finance seems to be failing at. As Zimmerer states:
“Traditional finance is stacked against those who are uninterested in it. It’s sort of kept boring so that people don’t really care about it and don’t really know what’s happening. A very concrete example of this we can see is Covid hits the economy really hard, and then you would also assume that the financial markets should also tank. And what happens is central banks are printing a lot of money and obviously now as a lagging effect we are starting to feel it in terms of inflation.”
economy reeling because of Covid
Zimmerer sees inflation as a kind of tax on laypeople, where traditional finance’s lack of accessibility means fewer to offset the same inflation that will not affect traditional finance’s participants.
“For me, it’s because we kind of live in a world that forces you to think about the economy. We see a lot more, at least in my social circle, people getting interested in investing and managing their finances. And on a systemic level, even if you’re just a regular person with a regular job, it’s not just enough to dump it into a high-yield savings account, because those yield very little compared to the yields you can get in the rest of the financial market.”
Cheah notes that the pandemic has driven global interest rates even lower, stating that some jurisdictions, such as the Eurozone, are now in negative territory and others such as the US and UK could follow. Meanwhile Lombe also notes that central banks have had to print more money in the advent of economic collapse, and this drives inflation even higher, eating away at savings yields.
The people at Spool seem to have an understanding about how serious world affairs influence the lives of ordinary people, and seek to use DeFi to provide solutions to these specific problems.
In this climate, DeFi simply looks more profitable. Protocols such as Compound have delivered yields as high as 6.75% for those who save with Tether. But Lombe says that Spool’s role is different. Rather than try and be a new competitor seeking to dominate market share within the Ethereum space, he says Spool is more concerned with what can be seen as the greater good.
“What Spool is trying to do is essentially not try to compete with the other farms out there because we’re not a farm, we’re an aggregator of sorts. We’re not trying to take the piece of the existing pie. We’re trying to grow the pie.”
Spool Token Staking Guide
The purpose and benefit of staking SPOOL token is to obtain more SPOOL and the voSPOOL governance token. The voSPOOL tokens are distributed to stakers based on the amount of time continuously staked, capped at a maximum of the total number of SPOOL tokens staked. The distribution is calculated based on a weekly epoch up to a maximum of 156 weeks. However, if the staker stops staking their SPOOL tokens at any time, the calculation of the time spent continuously staking resets to 0- this means that their voSPOOL distribution will correspondingly be reset to 0. Here’s a step by step guide on how to stake your SPOOL tokens.
Step 1: Obtain the SPOOL token. $SPOOL can be purchased on exchanges like Uniswap. To get started with Uniswap, check out our Uniswap review and tutorial.
Step 2: Go to spool.fi and launch the Spool App on your web browser by clicking on the “Open App” button on the top right hand corner of the page.
Step 3: Click on “Connect Wallet” to connect your web3 wallet to the app. You can choose which wallet to connect such as Metamask, Ledger, Trezor, Coinbase Wallet etc.
Step 4: On the app, click the “Spool Staking” tab.
Step 5: On this page, you can see the amount of SPOOL tokens in your wallet and total SPOOL staked. You can also see the amount of claimable voSPOOL rewards earned and choose to either claim the rewards or stake these rewards. Furthermore, you can use your voSPOOL for voting on governance proposals on this page.
Step 6: To stake your SPOOL tokens, click “Stake” which will bring up a separate staking window.
Step 7: Input the amount of SPOOL tokens that you wish to stake, alternatively you can also click “max” which will stake the entirety of the SPOOL tokens in your wallet.
Step 8: Click “Approve” on both the app page and on your web3 wallet. This will allow the contract to interact and manage your SPOOL tokens.
Step 9: Click “Stake” to stake your SPOOL tokens and wait for the transaction to be completed. Note that this transaction will cost gas fees. Once your SPOOL tokens are staked, you can unstake them at any time.
Step 10: Once the transaction is completed, your $SPOOL tokens will be staked. We suggest you then refresh the page to see the updated amounts staked or remaining in your wallet.
Step 11: On the app, you can click on the “Platform Summary” tab to check the amount of $SPOOL tokens staked, the amount of voSPOOL accumulated, and the claimable staking emissions.
Step 12: On the app, you can also click on the “SPOOL Staking” tab to see the updated $SPOOL staking rewards.
Step 13: To claim all your rewards, click on “Claim All Rewards”. A pop-up window will then appear which shows both the SPOOL emission rewards as well as the voSPOOL emission rewards. Click “Claim” to claim these rewards.
Step 14: Wait for the transaction to be confirmed. Once completed, the SPOOL tokens will be sent to your web3 wallet. Note this will also cost gas fees.
Step 15: Clicking on “Stake Emissions Rewards” allows you to stake the rewards you have earned. A pop up window will appear and shows all the rewards that can be claimed and staked for both SPOOL and voSPOOL emissions. Click on “Claim and stake” to both claim your rewards and stake them in 1 transaction.
Step 16: Wait for the transaction to be confirmed. Once completed, the SPOOL tokens will be sent directly to staking and your balance will be updated. Note that this transaction will cost more gas than simply claiming the staking rewards.
Step 17: Once the transaction has been confirmed, it is suggested to refresh the page to see the updated amounts of staked or claimed SPOOL tokens.
Jeremy Eng-Tuck Cheah. 26 August, 2020. The Conversation. What is DeFi and why is it the hottest ticket in cryptocurrencies? (https://theconversation.com/what-is-defi-and-why-is-it-the-hottest-ticket-in-cryptocurrencies-144883)
Spool is a Decentralised Finance (DeFi) application that allows users to create a fully diversified, yield optimised, auto-compounding and risk mitigated investment portfolio – in a simple and straightforward manner. It is also middleware, and can be used to power other applications.
How is it used?
With just one stablecoin deposit and five steps done via a simple interface, a user can set up this automated DeFi portfolio, or Spool up. Choose a preferred currency, a risk model, some protocols to invest in, your risk tolerance, name the Spool and then set a performance fee to charge others than invest in your Spool (in that order). And then, just leave it alone to do its job.
Why use it?
DeFi yields currently seem to be doing better than traditional finance. Amid the global pandemic, inflation threatens to devalue returns from traditional savings. And while getting into Defi could be complicated, Spool is relatively simple and straightforward to use for beginners, and very easy to deal with for experts who are tired of manually managing their portfolios. As more users use it, the more stable it gets, and others can invest in your Spool without having to create their own for the said small performance fee.
Stablecoins are under the microscope right now following the collapse of Luna and UST, the stablecoin of the Terra ecosystem.
In this article, we look at the history of stablecoins, its pros and cons, why they are needed, and what are the risks are of utilizing them.
What is a Stablecoin?
A stablecoin is a cryptocurrency that maintains a fixed value because it is backed by reserves of other assets such as fiat currencies, securities, gold or precious metals, property, or any other assets as collateral.
There are four main types of stablecoins:
Fiat-Collateralized: Fiat-backed stablecoins are backed by real-world currencies such as US Dollars or British Pounds at a 1:1 ratio.
Commodity-Backed: Backed by precious commodities like gold, platinum, or real estate.
Crypto-Backed: Backed by other cryptocurrencies which are kept as a reserve to ensure price stability in the event of price fluctuations. Smart contracts can also be coded to ensure no trust is needed in third parties.
Algorithmic: These involve adjustments in the algorithm for controlling the supply and demand of stablecoins, usually in the form of two tokens: one a stablecoin and the other a cryptocurrency that backs the stablecoin.
Cryptocurrencies are decentralized and not controlled by centralized entities such as governments or regulatory bodies. They operate on supply-and-demand principles in a free market and can be volatile in nature.
Simply put, stablecoins allow investors and traders to ‘cash out’ of risky investments into another crypto coin that will not fluctuate wildly in value during times of market volatility.
History of Stablecoins
Stablecoins actually have a very long history, having been around since 2014 with BitUSD. BitUSD was created in July 2014 backed by the $BTS token and created by Dan Larimer and Charles Hoskinson, both pioneers in the cryptocurrency who went on to create EOS and Cardano ($ADA), respectively.
However, even the world’s first stablecoin was not without its issues. In late 2018, BitUSD lost its peg to the US Dollar, resulting in huge criticism from the cryptocurrency community. BitUSD is no longer commonly used, and many cryptocurrency exchanges no longer support this stablecoin.
The next stablecoin to be launched was NuBits in September 2014 and was functional for 3 years. Eventually, this stablecoin also fell- suffering 2 major crashes during which the peg was broken for an extended period of time. The first of these crashes was in 2016 when NuBits was depegged from the US Dollar for 3 months. This was likely because holders of NuBits suddenly sold their substantial holdings for Bitcoin, resulting in NuBits being unable to handle the large volumes of sell-offs and losing its peg. Surprisingly, after the 2016 crash, the marketcap of NuBits shot up by 1,500%. This was caused by people buying millions worth of NuBits in late December 2017 owing to concerns about the stability of Bitcoin, whilst the NuBits team was unable to print new coins to keep up with the demand, thereby driving up prices.
The second, and final major crash suffered by NuBits was in March 2018 which was caused by insufficient reserves of the coin, meaning that the NuBits team were unable to protect the coin when there was a dip in demand. Of course, large cryptocurrency holders immediately noticed the drop in NuBits prices and panic sold their positions, causing an even greater slide in price.
After the second NuBits depeg, the stablecoin had lost credibility with cryptocurrency investors. Some holders even threatened legal action against the NuBits team or went into Tether ($USDT) and/or TrueUSD instead.
Tether $USDT however has also weathered a few storms of its own, facing legal battles with the Securities and Exchange Commission (SEC), which also shook the confidence of the market. The legal action was eventually settled in 2021 with the parent company of Tether paying nearly US$60 million.
Despite this, cryptocurrency keeps evolving with each passing year as new innovations that were once met with speculation and distrust eventually become trusted by the market. Today there are many other stablecoin options out there such as USD Coin (USDC), Binance USD (BUSD), MakerDAO (DAI), Paxos Standard (PAX), and Gemini Dollar (GUSD) that provide alternatives to USDT.
Pros of Stablecoins
There are several reasons and numerous benefits to using stablecoins. In general, they are simply faster, cheaper, transparent, borderless, and programmable compared to fiat currencies. Some more benefits are listed below.
Stablecoins allow a quicker and easier way for investors to enter the crypto market by bridging fiat into stablecoins, which act like fiat currencies on exchanges.
Stablecoins are more efficient than fiat because they have the digital properties of other crypto tokens and can be moved around quicker and more efficiently than fiat money.
Stablecoins can be held as capital in non-custodial wallets such as Metamask, thus removing the need for third parties to intermediate.
Stablecoins allow for quicker, immediate peer-to-peer payments abroad that are semi-anonymous with much lower fees than fiat currencies.
Stablecoins can be used for holding, trading, borrowing, and lending abroad. When fiat-related regulatory processes are involved, even better.
Stablecoins can be staked to earn a higher yield than traditional finance in DeFi applications. When adding liquidity to protocols, they also minimize the risk of impermanent loss due to their price stability.
Blockchain data and tracking allows for a more transparent view of the market, giving investors more information on liquidity flows and thus greater decision-making power.
Many sectors of the economy and the unbanked population are benefiting from the use of stablecoins in remittance, escrow, payroll, settlement, and alternative banking that is self-custodial, cutting out intermediaries.
Cons of Stablecoins
Stablecoins used to be more controversial in the earlier days of crypto but have garnered more regulatory approval in recent years, minimizing many of the negative aspects.
Stablecoins usually require trust in a third party to ensure the coins are backed by the stated assets, which also means external audits are needed to ensure assets are accounted for.
There are lower yields on stablecoins in DeFi applications than on regular cryptos, however, these yields are still significantly higher than the interest rates offered by traditional banks.
Stablecoins utilized in DeFi applications are subject to the usual risks involved with unregulated cryptocurrency projects. The TerraLuna disaster was a perfect example of an extreme worst-case scenario for an algorithmic stablecoin.
Trial and error. Due to the relative infancy of stablecoins and the experimental nature of new technologies within crypto, there is still a risk when getting involved with newer projects or protocols.
Regulatory scrutiny. As the stablecoin market keeps growing and adding billions of dollars in value to the crypto market, it will generate increased interest from authorities. This can also be seen as a positive.
Conclusion
Stablecoins and their rapid proliferation across all blockchain protocols have brought more flexibility and adoption to the cryptocurrency industry. They are now embedded in the fabric of the market and are here to stay.
The onus remains on the individual investor to do your own research (DYOR) when deciding which stablecoin to hold. Find out who created it, whether it’s a trusted centralized business or a decentralized protocol managed by smart contracts. All the options are open to you when it comes to the safer management of risk in the crypto market.
One major question all new cryptocurrency investors ask is how to actually spend their cryptocurrencies. Unfortunately, cryptocurrency is just not as widely accepted as fiat currencies. Cryptocurrencies are also subject to huge price fluctuations and volatility. Therefore, to “lock in” the price of your cryptocurrencies and as a springboard to cashing out crypto to fiat, many have converted their cryptocurrencies to stablecoins instead. This allows one to keep their dollar-pegged coins in exchanges or cold/hot wallets, so when the moment to jump back into the bull run comes, they can do so within minutes without having to deal with fiat on-ramps. Alternatively, to easily convert their stablecoins to fiat currencies for spending.
Most have considered stablecoins to be a safe means of preserving their capital without experiencing volatility and having to leave the crypto ecosystem. After all, they’re… stable, right?
In most cases, they have been, but the most recent collapse of one of the largest and well-respected stablecoins, terraUSD (UST), and other less known ones, like neutrino USD (USDN) and DEI, has led people to question the stability of all stablecoins. But is this warranted? Isn’t there a bit more nuance to the mechanisms by which a coin retains its dollar or other fiat currency peg, each with their own risks and advantages?
Although a seemingly straightforward idea, stablecoins can be quite tricky to unpack and analyze, especially when talking about non-collateralized algorithmic stablecoins, which sound too good to be true, and in some cases, are. With this in mind, let’s take a look at stablecoins, what kinds are out there, how well they are doing, and what makes them tick.
Check out our latest video- Stablecoins: Are they safe? ($UST, $USDT, $USDC, $BUSD)
Stablecoins: Are they safe? ($UST, $USDT, $USDC, $BUSD)
Stablecoins – What Are They and How Are They Different?
Stablecoins are cryptocurrencies that are pegged 1:1 to the value of a fiat currency, meaning that, for example, every 1 USDT (USD Tether, the biggest market cap stablecoin) is worth 1 US Dollar. There are numerous stablecoins in circulation, with different coins having different mechanisms for collateralizing their stablecoins.
The most commonly used feature to categorize stablecoins is by looking at how each of them backs their tokens, e.g. their collateral/reserves. By doing that, we can focus on using more narrow criteria for evaluating and comparing stablecoins based on the risks and advantages that stem from the chosen collateralization mechanism. Broadly speaking, there are three main types of stablecoins: Fiat-collaterized stablecoins, crypto-collaterized stablecoins and algorithmic stablecoins.
Fiat-collateralized Stablecoins
By far the most popular type, fiat-collateralized stablecoins occupy the top 3 spots (USDT, USDC, BUSD) among stablecoins by market cap, accounting for roughly 94% of the total ~$155 billion stablecoin supply.
Their working principle is the most straightforward to understand. Each of these coins is backed by a combination of real USD cash reserves, US Treasury Bills, and commercial papers (liquid short-term debt issued by companies).
Crypto-collateralized Stablecoins
Similar to fiat-backed stablecoins, crypto-backed stablecoins use cryptocurrencies as collateral, and smart contracts and, typically, governance tokens to monitor price stability. Due to the volatile nature of cryptocurrencies, crypto-backed stablecoins are over-collateralized (150% for DAI, for example) to account for periods in the market when prices of the collateral assets keep going down. Learn more about DAI.
Compared to fiat-backed stablecoins, they’ve witnessed a much slower rate of adoption. However, based on data, it does seem that they are slowly starting to gain momentum and dominance over the past years, as people begin to develop trust in the previously experimental mechanisms, which is to be expected.
There are also hybrid collateral tokens such as Reserve Tokens (RSV) that are backed by both digital and fiat assets.
By far the most technically complex and technologically least mature, algorithmic stablecoins rely on on-chain algorithms to handle changes in supply and demand between the stablecoins and their sister tokens that back them by burning and minting them in both directions through a process called seigniorage, to maintain a dollar peg. This, however, only works while there isn’t a strong downward pressure on the peg that keeps stressing the mechanism, which can lead to a downward death spiral during which both tokens keep losing value as users keep panic selling at the same time as the algorithm tries to stabilize the price. Although not fully collapsed, neutrinoUSD and its Waves protocol have been experiencing extreme turbulence for the better part of two months, making users lose confidence in its stability, especially as its working mechanism is very similar to that of UST.
On the less extreme side of algo-stables lie hybrid stablecoins, or fractional-algorithmic stablecoins, such as FRAX, which is partly backed by collateral, and partly algorithmically by adjusting the collateral based on the deviation of FRAX from the $1 peg.
Learn more with our Ultimate Guide to Algorithmic Stablecoins:
https://www.youtube.com/watch?v=hdmotWPNVdQ
Criteria for Comparing Stablecoins
Decentralization
The impact of regional regulations can be a risk many would not find appealing. It’s completely reasonable to expect that the industry would be capable of creating largely decentralized stablecoins that are collateralized by one or more decentralized cryptocurrencies, and governed by a DAO. Such is the nature of MakerDAO and its DAI stablecoin, which has shown its peg strength throughout this year and especially during the most recent catastrophic UST collapse. There is a small caveat, however.
The largest crypto-asset backed stablecoin with a $6.5 billion market cap, DAI, is still heavily backed by the second largest market cap stablecoin, USDC, which itself is backed by fiat reserves, calling into question whether it truly is as decentralized as it purports itself to be. The reality is not as grim as it might seem. Even though USDC and USDP (another fiat-backed stablecoin) comprise 28.1% of the total DAI collateral, ETH and WBTC (Wrapped BTC) boast an impressive 58.6% collateral, tipping the collateralization balance in favour of decentralized digital currencies instead of centralized stablecoins. In addition, the Maker platform with the MKR and DAI tokens, together with all of its smart contracts, lives on the Ethereum blockchain, making it truly trustless and decentralized, even if a good portion of the collateral is not.
On the other hand, the decentralization of all stablecoins might not be necessary, or even desirable, as properly regulated stablecoins almost by definition require a legal entity or a consortium of entities with exposure to major governmental bodies (especially in the US) to be behind the stablecoins, so that there is little doubt about who is responsible for ensuring a full fiat backing of their stablecoins. However, this would imply heavy centralization of control over the stablecoin supply and the general mechanisms for issuance, governance, and, crucially, potential censorship.
A centralized stablecoin is a double-edged sword. On one hand, it gives unprecedented power over a vast supply of stablecoins that a decentralization-focused industry heavily relies on to do daily business. On the other hand, it allows for companies like Binance, who are behind the popular BUSD stablecoin, to prioritize user safety and regulatory compliance, giving users peace of mind about the safety of their assets.
Thus, a strong argument can be made to safely onboard millions of new users through reasonably regulated stablecoins. It’s important for this industry to appreciate the need to offer a wide range of stablecoin alternatives, from centralized to decentralized, for users with different risk appetites and technical competencies in order to accelerate crypto adoption worldwide.
Compliance & Transparency
Closely tied with the level of decentralization of a stablecoin, regulatory compliance and transparency are absolutely crucial for companies who are backing their coins with cash reserves, and who desire to find strong and growing support by institutions, companies, and investors looking to enter the space, but who have been apprehensive to do so due to concerns about a potential inability to redeem their tokens for dollars.
It’s important to note that regulatory compliance is largely a concern for stablecoins operated by corporations, as they are the ones operating mostly behind closed doors, with most of the details about their inner workings, decisions, and collateralization mechanisms being hidden from the end-users and legislators. In such situations, it is more than reasonable to expect a regulatory body to force at least some oversight over how exactly these companies are operating their stablecoins and whether they do possess the collateral they claim to have.
The same can’t be said about open-source, decentralized governance-powered, blockchain-native, crypto asset-backed, and over-collateralized stablecoins that are being operated completely out in the open, with every decision, piece of code, and capital relocation in smart contract escrow accounts being registered on-chain. For coins such as DAI, compliance and transparency are baked into the protocol, and it can be reasonably argued that the necessity for any kind of regulatory oversight is moot, as the community and the free market cryptoeconomic pressures have organically grown a robust and freely auditable stablecoin that’s fully backed by digital currencies.
For fiat-backed currencies, the two large-cap extremes in the range of transparency and compliance are BUSD and USDT. While BUSD has been extensively cooperating with the New York State Department of Financial Services (NYFDS), and showing that every BUSD is backed by an equivalent amount of cash, USDT has been under significant scrutiny over the past years regarding its executives and the USDT backing. These allegations, combined with the lack of transparency by Tether, have made many worry whether USDT is a house of cards about to crumble as the Chinese real estate bubble begins to pop.
Financial Sustainability
In addition to the existential risks posed by the type of collateral chosen for stablecoin reserves, another source of risk that can be analyzed for a project is its cashflow. Changes in the cashflow of a protocol can offer clues about the health of the ecosystem and its ability to withstand market shocks.
Understanding how a stablecoin protocol spends and, most importantly, earns its money, is key to making predictions about the long term sustainability of such projects. Without proper long term revenue models, protocols are left to come up with highly appealing but unsustainable practices such as incredibly high yields on stablecoin deposits (such as UST had) or very low to non-existent trading fees to make it appealing for users to use that stablecoin as their dominant medium of exchange. These kinds of practices sooner or later come back to bite them in the ass, as there is a very high probability that the high yields and low fees are paid for not from organic revenues, but rather from alternative revenue sources (as is the case for Binance), or from project’s treasury/VC investment money, in hopes that they would be able to subsidize the attractive rates for long enough to reach a critical mass of users to then eventually either lower the yields and increase the fees, or simply keep running a ponzi-like operation for as long as possible.
Risks are High, always DYOR (Do Your Own Research)
If something in crypto sounds too good to be true, it very likely is. The most recent example of this was the Anchor Protocol’s 19.5% yield for UST deposits, which should’ve been a huge red flag, and yet many, many individuals chose to deposit their life savings into a supposedly stable UST in hopes of an unsustainably high APY.
For a $50 billion project to go down to virtually nothing in a matter of weeks is nothing short of astonishing, and should serve us all as a warning to do our due diligence thoroughly, and ask uncomfortable questions, even if the whole market seems to be fully on-board with a project.
As the saying goes, “Follow the money.” If a protocol is promising unbelievable returns, if the company behind a stablecoin year after year refuses to prove their fiat reserves, and if a algorithmic stablecoin seems to have a fishy peg stabilizing mechanism that can only work in an up-only environment, then you should exercise caution. And as with everything, whether it be cryptocurrencies or stocks etc, ask yourself if you have really fully done your research and never put in more money than you can afford to lose.
KIRA Network ($KEX) is an interchain exchange protocol that allows users to earn block and fee rewards while staking any digital assets, such as cryptocurrency, stablecoins and non-fungible tokens (NFTs).
Background
KIRA is developed by a strong team consisting of full-stack developers, blockchain engineers, back-end developers, and technical architects. The team is led by Milana Valmont (CEO) and Mateusz Grzelak (CTO).
In the past, Valmont had held different roles which include being a blockchain consultant at Adcoin, as well as a strategy advisor at KNOKS. Grzelak had also held prominent positions in firms such as Settle Finance, Barclays, and Bity.
KIRA Network’s strategic partners include AlphaBit, TRG Capital, Swingby, and Math Wallet. In addition, the team also includes Roger Lim from NGC Ventures and Alssio Treglia from Tendermint.
What is KIRA Network?
KIRA Network is a blockchain-based protocol that brings liquid staking into the DeFi market. It enables access to all virtual currencies, digital fiat, and non-fungible tokens (NFTs) within a cross-chain ecosystem.
With liquid staking, liquidity providers can stake any digital asset. Consequently, they earn incentives emanating from new blocks and transaction fees.
The protocol’s idea of liquid staking stems from the current staking space. Here, centralized cryptocurrency exchanges provide crypto trading, acquisition, as well as act as a hub for a host of digital currencies.
Currently, a large number of those coins that are available for staking are found on centralized exchange platforms. For this reason, KIRA wants to change this by providing a decentralized platform that mirrors what traditional virtual currency exchanges offer.
As such, even small actors in the PoS ecosystem will have access to liquidity and evade security risks found on centralized platforms. Also, the protocol removes the cap on fee and block incentives for liquidity providers.
KIRA Network: 8 Key Pillars
To have a profound impact on the DeFi scene, KIRA Network is supported by eight pillars, which include:
Security
Using the Multi-Bonded PoS (MBPoS) consensus mechanism, the network can harness its security from staked assets. In addition, MBPoS helps remove the barrier as to which virtual assets can be staked and/or can attract rewards.
Utility
KIRA uses IXP (Interchain Exchange Protocol) to provide market access to the wide range of assets staked on the system.
Liquidity
KIRA supports liquidity provision through staking derivatives. The platform has a 1:1 ratio between staking derivatives and staked tokens.
Expansibility
The protocol uses validators to ensure the credibility of transactions. Also, the validators operate Initial Validator Offerings (IVOs) that allow investors to raise funds for new projects without affecting their liquidity.
Investors delegate their tokens to the validators while the validators mine new tokens. Correspondingly, the former earn block rewards.
Upgradeability
Upgrading the system relies on developers. Therefore, to drive development, the protocol uses an on-chain contracting system as an incentive scheme.
Sustainability
To ensure the platform has long term viability, it uses an on-chain governance structure. To elaborate, the governing body touches on the network’s economic aspects that include inflation and interest rates.
Scalability
KIRA tackles scalability by removing restrictions on the number of validators and the stake value. In turn, this makes it possible to introduce shards or zones.
The Network makes use of Polkadot, Cosmos, and other cross-chain systems to power liquid staking. Notably, this staking mechanism does not discriminate against cryptocurrency assets.
KIRA Token ($KEX)
KEX is KIRA Network’s native token. Apart from being used as a staking token on the network, KEX is also used as a base asset upon which other currencies are valued.
Additionally, KIRA’s native currency is a requirement when participating in the system’s governance issues. Moreover, it’s used to reward holders, delegators, and validators. Note that KEX holders are rewarded by being offered low transaction and exchange costs.
In contrast, delegators earn almost 99 percent of all block rewards and close to 50 percent of all network fees. Validators, on the other hand, earn a commission depending on their configuration and sit on the system’s governance table. Their earnings could go up to 50 percent network fees.
KEX is allocated to developers/team (15%), advisors (7%), the KIRA Foundation (20%), as well as reserve and liquidity (26.6%)
KEX token is not available to trade yet and the public sale is soon to be announced. KEX will be launching ERC-20 KEX token on Ethereum network before KIRA Network is launched with the initial supply of 300,000,000 KEX token. Users will be able to swap for the native KEX token with the equal amount of value once the mainnet is launched.
KIRA Network has raised 3.6M during the seed (priced at $0.025) and private sale rounds (priced at $0.05), with a vesting period of 18 months starting at mainnet launch. All seed and private round participants will receive approximately 2.5% of their token after finalization of all stages of the public round distribution.
Public round has a $400k cap, token price at $0.075. Find out more here.
Governance on KIRA Network
The protocol uses a governance structure that slowly hedges away from full dependency on stake and or wealth distribution.Governance is guided by rules that exclusively put whitelisted actors to execute on-chain actions that are cleared for execution.
On top of these rules are parameters and individually assigned permissions. The network puts checks and balances on its governance model through operators, a voting council, an electorate council, and a proposal council.
Notable KIRA Network Partnerships
To drive the adoption and usability of the KIRA protocol, the platform has partnered with notable players in the DeFi Space. Some of the most conspicuous are:
KIRA and Finance.vote – The partnership enabled KIRA to provide liquidity to Finance.vote’s social trading layer. For this reason, it opened a new revenue stream forFinance.vote users by allowing them to conduct yield farming using digital assets in their portfolios.
KIRA Network and Math Foundation – Here, theMath Foundation benefited from staking KEX (KIRA’s native token) tokens and the interaction with KIRA’s MBPoS.
KIRA Network and Swingby – Thepartnership brought staking functionalities to Skybridge users. Skybridge is a decentralized inter-chain asset bridge.
KIRA and Blockparty – This partnership madeBlockparty one of KIRA’s validators.
Conclusion
From crucial partnerships to using a new consensus mechanism, KIRA Network is keen on expanding the possibilities in the DeFi space for liquidity miners and yield farmers. Furthermore, the protocol’s eight pillars help it to enhance security, sustainability, utility, scalability, among other functionalities that are key in driving DeFi adoption.
Decentralised Finance (DeFi) series: tutorials, guides and more
With content for both beginners and more advanced users, check out our YouTube DeFi series containing tutorials on the ESSENTIAL TOOLS you need for trading in the DeFi space e.g. MetaMask and Uniswap. As well as a deep dive into popular DeFi topics such as decentralized exchanges, borrowing-lending platforms and NFT marketplaces
More videos and articles are coming soon as part of our DeFi series, so be sure to SUBSCRIBE to our Youtube channel so you can be notified as soon as they come out!
Disclaimer: Cryptocurrency trading involves significant risks and may result in the loss of your capital. You should carefully consider whether trading cryptocurrencies is right for you in light of your financial condition and ability to bear financial risks. Cryptocurrency prices are highly volatile and can fluctuate widely in a short period of time. As such, trading cryptocurrencies may not be suitable for everyone. Additionally, storing cryptocurrencies on a centralized exchange carries inherent risks, including the potential for loss due to hacking, exchange collapse, or other security breaches. We strongly advise that you seek independent professional advice before engaging in any cryptocurrency trading activities and carefully consider the security measures in place when choosing or storing your cryptocurrencies on a cryptocurrency exchange.
Aavegotchi ($GHST), powered by Aave, is the combination of DeFi staking and non-fungible tokens (NFT) that possesses three attributes, determining their value and rarity: collateral stake, traits, and wearables.
Aave, one of the biggest DeFi protocols today, developed NFTs that function within the DeFi framework. The project shows a promising alternative to the way many stakers perform yield farming.
Launched in July 2018, the team behind Aave created Aavegotchi to offer new alternatives for yield farming. This project puts entertaining gaming mechanics on the platform to support a new type of DeFi experience for its users.
Daniel Mathieu, the lead developer for Buillionix.io, and Jesse Johnson, co-founder at Bullionix, lead the team of builders working for the Aavegotchi team. Their work centers on the main goal of “gamifying DeFi experience” through NFTs.
Aavegotchis are Ethereum-based crypto-collectibles powered by NFT technology. The Aavegotchi NFTs follow a similar set-up that other blockchain-based games such as Cryptokitties implement on their own gaming economies.
What Aavegotchi offers to the blockchain gaming space are DeFi models such as collateral staking, dynamic rarity, rarity farming, decentralized autonomous organizations (DAO), and smart contract implementations. Simply put, the objective is to use DeFi and yield farming concepts in creating NFTs that can hold value and appreciate over time.
The team behind Aavegotchi sought to liken the project to the Tamagotchi. Aavegotchis can be considered as the blockchain counterpart of digital pets that we play within Tamagotchi. Aavegotchis are playable NFTs that can hold digital economic value.
There are three elements to the Aavegotchi NFT that help define its value and rarity. They are:
Spirit Force – Putting it in DeFi terms, this means “collateral stake.” Aavegotchi has an escrow account where every owner’s Aave-backed ERC20 tokens are held as collateral. These collateralized tokens are called “aTokens,” and are accessible to Aave’s lending pool. Since these are assets can generate yield over time, this helps increase the value of aTokens kept in Aavegotchi’s escrow account. Today, there are many aTokens supported by the platform such as aDAI, aLEND, aLINK, and aUSD, among others.
Traits – Aavegotchis can have different attributes that make up their identity as NFTs. These traits affect their rarity, performance, and compatible wearables. While most of these traits are given to Aavegotchis randomly the moment they are created, they can be affected by user interactions that their holders make.
Wearables – Through the ERC-998 composability standard, Aavegotchi can be used to manage child NFTs as well. These child NFTs back the wearables that users can attach to Aavegotchis. If worn on compatible Aavegotchis, they can affect their traits and value.
Where do Aavegotchis gain value?
Aavegotchis derive their value from two sources: intrinsic value and rarity value.
Their intrinsic value originates from the amount staked by users on the NFT behind the Aavegotchi. The collateral stake, along with the interest it has accrued from Aave’s lending pool, becomes an Aavegotchi’s intrinsic value. For example, a 10 aLEND stake in an Aavegotchi will mean that it can hold that value as well, along with the interest accrued.
As of now, the only collaterals that can be staked on Aavegotchis are ERC-20 tokens listed on the Aave platform. As soon as the AavegotchiDAO is launched, the number of acceptable collaterals can be expanded. (lakeforestgc.com)
Rarity Value
The rarity of an Aavegotchi influences its value as well. This introduces the concept of “rarity farming” on the ecosystem as well. Users get rewards for training rare Aavegotchis and trading them with other players on its platform.
Aavegotchi Ecosystem
Portals
Users can only summon or create Aavegotchis through the Portal. This is backed by a smart contract that allows for the creation of new NFTs. Portals can be bought from the Aavegotchi dapp or from an external marketplace.
In claiming Aavegotchis, users have to stake the collateral required for it. Portals can only support the summoning of one Aavegotchi.
What is $GHST Token?
$GHST is the native utility token for the Aavegotchi platform. They can be used as a medium of exchange, fees payment for purchasing stuff like portals and wearables, voting functions, and rarity farming. $GHST is also required to mint REALM.
$GHST’s can be freely transferred to other users or swapped with supported tokens on the Aave platform.
$GHST Tokenomics
$GHST will be distributed in 3 main phases – i) Initial token distribution event, and ii) Governance rewards and iii) Rarity farming.
The Token Distribution Event is planned to begin in late Q3 2020 or early Q4 2020, split into 3 phases: Private Round, Pre Sale Round, and Token Bonding Curve.
Private Round – 5,000,000 GHST tokens will be distributed, at a price of 0.05 DAI / GHST. Open to participants with KYC validation with a minimum of 20K DAI to be redeemed for GHST tokens. The total vesting period is 365 days, with an initial release of tokens on the 180th day after the close of the pre-sale round, followed by a release over the subsequent 185 days thereafter.
Pre Sale Round – 500,000 GHST tokens will be distributed, at a price of 0.1 DAI / GHST. Open to participants with KYC validation with no minimum contribution. The vesting period is the same as the Private Round. Funds raised during the Pre Sale will be used as liquidity in the Token Bonding Curve reserve pool.
Token Bonding Curve (TBC) – Open to participants with KYC validation with no minimum contribution. No maximum supply of GHST distributed via the bonding curve. No lockup or vesting period.
During the Pre Sale Round, $GHST will also be created and distributed to the Ecosystem Fund (1,000,000 GHST) and Team Fund (1,000,000 GHST). Both funds are locked according to the same schedule as the Private Round.
The community-governance model of the platform will be supported by the AavegotchiDAO. This protocol will allow the users to decide on the list of collaterals that can be staked in NFTs, amend gaming parameters, and even limit the number of Aavegotchis that can be created in the future. To incentivize token holders on community governance, they are rewarded with GHST.
Aavegotchi Realm
This refers to the metaverse for Aavegotchis. The Realm is the digital world where Aavegotchis can interact with each other and join games, execute smart contracts, and call for governance functions.
Users can purchase parcels of land, or REALM, in the Aavegotchi world by staking GHST tokens. Aavegotchi’s Realm is also the social layer for the AavegotchiDAO, aimed at creating a more visual experience for community voters. Within this digital experience, Aavegotchis convene in a 2D town square to discuss platform proposals and cast votes.
Conclusion
The DeFi space seems a bit too complex for many newbies. This reality can be daunting for someone who is just newly-introduced to the world of blockchain, which unfortunately presents psychological barriers to adoption. Platforms that help users ease themselves onto DeFi could be helpful additions to the crypto space in general.
Aavegotchi is a valuable concept on that end since it has a promising model in making it easier for anyone to participate in yield farming. Gamifying the DeFi space for anyone who wants to dip their toes on interest-earning products is likely to help foster adoption later on. Overall, the project shows huge potential in proving the capacity of different blockchain innovations, such as NFTs and collateral staking, to provide reliable financial products and services.
Disclaimer: Cryptocurrency trading involves significant risks and may result in the loss of your capital. You should carefully consider whether trading cryptocurrencies is right for you in light of your financial condition and ability to bear financial risks. Cryptocurrency prices are highly volatile and can fluctuate widely in a short period of time. As such, trading cryptocurrencies may not be suitable for everyone. Additionally, storing cryptocurrencies on a centralized exchange carries inherent risks, including the potential for loss due to hacking, exchange collapse, or other security breaches. We strongly advise that you seek independent professional advice before engaging in any cryptocurrency trading activities and carefully consider the security measures in place when choosing or storing your cryptocurrencies on a cryptocurrency exchange.
