DeFipedia Blog
Our DeFi experts demystify and explain decentralized finance, how it works, and how to capitalize on its growth potential.
Decentralized financeExplaining Optimism—One of the Biggest Layer-2 Ethereum ProtocolsEthereum has been rapidly growing over the last couple of years—in fact, it's currently the second largest blockchain, only after Bitcoin. As a project, Ethereum is absolutely massive as it's the backbone of the DeFi industry and is paving the way for emerging technologies like NFTs, smart contracts, and virtual environments like the Metaverse. However, Ethereum has some problems that haven't been solved yet like gas fees, efficiency problems, and scalability issues. To solve this, new blockchains called layer-2 (L2) solutions have been appearing.
One of the biggest L2 protocols is Optimism—a blockchain designed to extend Ethereum's current limitations and make working with it easier. Users can enjoy benefits like lower gas fees, faster transactions, and overall improved scalability. Now let's dive deeper and discover how Optimism might improve Ethereum.
What is Optimism?
Taking its first steps in the world of blockchain in June 2019, the Optimism protocol has one goal—to make Ethereum more scalable while promoting a faster, cheaper, and safer experience for the users. Optimism is an L2 solution, meaning its entire network is built on top of the existing one of Ethereum. Therefore as a protocol, Optimism doesn't seek to replace Ethereum but just to improve its already-existing features.
In addition to Arbitrum and Polygon, Optimism is among the largest L2 solutions with a protocol valued at over $200 million. But Optimism isn't just a protocol built for improving Ethereum—it's also a cryptocurrency project, as it has a native token under the label OP. So, how does the protocol work exactly? Let's find out.
How Does the Optimism Protocol Work?
If you've ever done research about L2 solutions, you've probably heard that these networks use rollups i.e., bundles of data that contain all of the details about hundreds of transactions. There are two types of rollups: optimistic rollups and zero-knowledge rollups (ZK rollups).
As you can already guess by the name, the Optimism protocol uses optimistic rollups, which assume that the transactions are always valid and only runs a security check if something looks incorrect. Within the Optimism protocol, this approach is called "valid until proven false"—or better known as innocent until proven guilty.
The OP Token
The OP token was launched in late April 2022 with an airdrop, where the project leaders sent free tokens to encourage wider adoption. So, what is the OP token used for? Well, in addition to being used for securing the network, OP tokens are also used for governance. Optimism is a decentralized protocol, so the users (i.e., the holders of the token) have the right to vote and choose how the protocol will work in the future.
The protocol's governance is done through a two-level governance system that consists of the Token House and the Citizens' House. As of September 2022, the Citizens House still hasn't launched, but its future role will consist of managing public funding. The Token House was launched together with the OP token and is primarily used for determining the future state of the protocol i.e., the direction it will go in through updates and upgrades.
OP's Last Airdrop
Regarding the specifics of the token's launch, it had the following allocation ratios on its last airdrop:
25% for the ecosystem20% for funding public goods19% for user airdrops19% for the contributors to the project17% for investors
Still, it's worth mentioning that the OP token had a somewhat problematic launch. On the day of the airdrop, the Optimism protocol was briefly shut down because of too much activity, while the token experienced massive sell pressure. Unfortunately, this sell pressure pushed the price down from $4.50 at launch to nearly $0.50 in a week. Eventually, the token rebounded and stabilized at around $1.
Despite this unsteady start, the blockchain behind the token didn't suffer from any security issues, so the protocol is now functional and thriving. Moreover, Optimism is set to have more airdrops in the future, and they'll likely be much more cautious regarding how they handle the situation. The project's first airdrop only gave away 5% of the total supply.
Final Thoughts
All in all, Optimism seems to be a great L2 solution that might just fix most of Ethereum's problems. Despite the protocol's difficult token launch, the project is still one of the largest protocols designed to make Ethereum better for users. The only problem is that, with L2 solutions, the competition is truly fierce. Projects like Polygon, Arbitrum, and Loopring are promising to solve the same problems as Optimism—only their launches were more stable.
Nevertheless, we'll see what the future holds for the Optimism Protocol. It's safe to say that the project has great fundamentals, with simplicity, pragmatism, sustainability, and optimism as its main pillars. Only time will tell how the Optimism Project will unfold, and we'll see whether or not the protocol is stable on its next airdrop.
Decentralized financePolygon: Scaling Ethereum with ZK TechnologiesOriginally named the "Matic Network", Polygon is a blockchain solution on Ethereum, allowing both users and developers to connect and scale. The project was launched in 2017 and its primary goal is to increase the scalability, flexibility, and efficiency of projects built on the Ethereum blockchain.
The creators of the network believe that Ethereum has a big scalability issue because the executions of transactions are too slow and too expensive. As a blockchain, Polygon seeks to resolve this issue by handling all transactions on a separate network that's compatible with Ethereum.
How Does Polygon Work?
To understand how Polygon works, you need to know a bit about Ethereum's architecture. The Ethereum blockchain has two layers:
The first layer is the "base layer", which consists of the actual blockchain and its transaction historyThe second layer is the "application layer", where users can create decentralized apps (dApps)
The base layer is responsible for handling all the transactions and smart contracts on the Ethereum network. The problem is that this layer can only handle 15 transactions per second (TPS). This might not seem like a big issue, but when you compare it to other payment processors like Visa (which can handle up to 24,000 TPS), it's clear that there's a big scalability issue on Ethereum.
This is where the Polygon network comes in. It consists of a series of "side chains" that are connected to the Ethereum blockchain. These side chains are responsible for handling all the transactions that take place on the Polygon network. So instead of having all the transactions go through the Ethereum blockchain, the transactions are routed through the Polygon network (which can handle up to 65,000 TPS). Moreover, the network uses zero-knowledge (ZK) scaling to prove the validity of transactions by batching them together, improving the overall capacity of the network.
Polygon: A Multi-Sided Approach to ZK Scaling
ZK technologies, also known as ZK rollups, are scaling solutions that lessen the congestion of the Ethereum main network by moving some transactions and data off the chain. These so-called "Layer 2 solutions" can handle data by processing it in batches, so the validator can verify the validity of a transaction without having to run through and know about each one—which is where the term "zero-knowledge" comes in.
ZK rollups are automatically managed and executed with the use of smart contracts. Executing a transaction on the Ethereum mainnet will be slower and more expensive, and would have to be validated by other network nodes. On the other hand, ZK rollups move some data off the chain and occasionally commit the data on the chain—but only when congestion is low. With Polygon's ZK rollups, the validators verify transactions in bundles on the rollup chain, where the process is a lot quicker and cheaper.
Why Use Polygon and ZK Scaling?
In addition to increasing scalability with ZK technologies, the Polygon network also offers a number of other benefits.
Reusability of Existing Smart Contracts
Since the network is built on top of Ethereum, it's compatible with all the existing dApps and smart contracts that are already on the blockchain. Therefore users and developers don't need to utilize new dApps or smart contracts specifically for the Polygon network—they can continue using the existing ones.
Cost-Efficiency
The Polygon network is much cheaper to use than Ethereum, which is partly thanks to ZK rollups. With Polygon, transaction fees are paid on the side chains instead of the Ethereum blockchain, resulting in a network significantly cheaper than Ethereum.
However, keep in mind that Ethereum might fix this issue with the upcoming "Ethereum Merge" to transition to ETH 2.0, where the network might switch from a proof of work (PoW) consensus to a proof of stake (PoS). If the Ethereum merge is successful, there would rarely be a need for ZK scaling.
Flexibility
The Polygon network is more flexible than Ethereum. This is because the side chains can be customized to meet the specific needs of each project. For example, a project might require the use of a side chain that's optimized for speed or one that's optimized for security.
Downsides of Polygon and ZK Scaling
Although Polygon seems like a quite promising project, it has some downsides too.
The Network Is Dependent on Ethereum
The truth is that Polygon won't reach a higher level of adoption unless Ethereum evolves with it. There's an inherent problem with this. If Ethereum fixes its current scalability issues, there would rarely be a use-case for Polygon and its ZK scaling feature.
ZK Scaling Could Still Be Improved
Although ZK scaling seems to be quite promising, it still has some flaws. Many blockchain experts believe that ZK scaling doesn't fully prove the validity of transactions, making room for fraudulent ones. Still, this is a fixable issue, which is why additional fraud proofs have been implemented to properly filter transactions.
Conclusion
It seems like Polygon has a bright future ahead of it. Even though the project is relatively young, it has successfully fulfilled everything it has promised so far, and has even managed to implement ZK technologies on its main chain.
Although the project has plenty of competition regarding Ethereum scalability, most blockchain experts would say that it's successfully executed in almost every department. However, ZK scaling has a questionable future and might need further improvements.
Decentralized financeIs THORSwap the Solution to Cross-Chain's Centralization Dilemma?As blockchain technology evolves, teams of developers are building different projects that are seeking to solve different problems. However, with this abundance of projects, users occasionally face issues regarding cross-chain operations. If you move the assets you have on one network to another, you will definitely encounter some difficulties.
Build a Bridge
One of the most popular ways to manage this is bridging. A bridge is a network connecting two different blockchains to enable them to interact. If you have some Ethereum and would like to engage in some activity on another network, you can use a bridge without having to sell your assets on the ETH network.
However, bridges aren't a one-stop solution, as they have inherent limitations. When using bridges, the safety of your assets depends on the safety of the bridge—and many bridges have had security exploits. Bridges also have a limited capacity, so if a bridge is overloaded, your assets are stuck between networks.
One of the most popular solutions to connect different blockchains is the THORChain aggregator, commonly known as THORSwap. This aggregator connects various networks without requiring bridges, in addition to having other features. Now, let's dive deeper into what THORSwap is and undercover how it works.
What Is THORSwap?
So, THORSwap is a decentralized liquidity aggregator that uses the THORChain protocol to power its features across multiple chains. Unlike other protocols, this protocol was designed with security and user-friendliness in mind, as it doesn't require any custodians or third parties to hold your assets.
The goal of THORSwap is simple—it allows you to trade your assets on different blockchains without having to first convert them into another asset. For example, if you have some BTC and would like to buy some ETH, you can do so directly through THORSwap.
This is made possible by the aggregator connecting different liquidity pools and providing users with the best price from them. In addition, THORSwap doesn't have any limit on the amount you can trade, so you can use it to move large sums of money between blockchains effectively.
THORSwap: Solving Cross-Chain's Centralization Problem
THORSwap connects different liquidity pools and allows users to trade their assets directly between them. For example, if there is a liquidity pool that offers the ETH/USDT pair at a 1:2,000 ratio and another pool that offers the same pair at a 1:2,050, THORSwap will automatically execute the trade from the pool with the best returns for the user.
To further complement this, the protocol features a built-in loss protection mechanism. This means that if for some reason the price of the asset you're trying to buy drops below the price when you initiated the trade, your transaction will automatically be canceled and your funds refunded. This ensures that you don't have to worry about the market crashing while you're in the middle of a trade, as you'll always get the best possible price from the best liquidity pool.
Moreover, THORSwap is also relatively user-friendly, as it doesn't require any registration or KYC. This means that you can start using the protocol immediately after installation without having to go through any lengthy verification process.
The protocol is also quite fast and usually executes trades in under a minute. This is made possible by the fact that THORSwap uses the Binance Chain for its transactions, which is currently one of the fastest blockchains available.
How Can I Invest in THORSwap?
Currently, the protocol's native token (THOR) isn't available on too many centralized exchanges, but you can still buy it at some decentralized exchanges. The THOR token's current available markets are CoinEx, SushiSwap, and the THORChain—the token's native protocol.
As of August 2022, the token is trading at around $0.30, with an all-time high of $3. So, if THORSwap ever reaches its all-time high again, you're looking at a 1,000% return on your investment. Nevertheless, keep in mind that THORSwap is a great project, but it has a long road to go.
Conclusion
Overall, the team behind THORSwap has made an incredibly ambitious project real. Cross-chain operability has always been a problem for users of multiple blockchains, and THORSwap has the potential to solve this issue once and for all without using bridges.
However, keep in mind that THORSwap is not perfect either. The majority of experienced crypto users still prefer using bridges, as the security of the THORChain network hasn't been fully proven yet. Still, the project has a bright future ahead of it as long as its team continues working persistently.
Decentralized financeEverything You Need to Know About Hedera HashgraphHedera Hashgraph is a crypto network with the ultimate goal of providing a safe platform for anyone to make transactions and deploy applications. At the same time, a group of businesses oversees the software.
What Is Hedera Hashgraph?
Hedera Hashgraph is a distributed ledger technology that is an alternative to the typical blockchain technology. The technology is patented, and the only authorized ledger is Hedera. The native token is known as HBAR.
The fully open-source public distributed ledger uses fair, quick, and safe hashgraph consensus. Network services include Solidirty-based smart contracts, native tokenization, and consensus services. All of these helpful service features are used to create decentralized applications (DApps).
Hedera Hashgraph separates itself from blockchains in multiple ways. Firstly, Hedera can effortlessly handle hundreds of thousands of transactions each second. Secondly, the network is fairer than a blockchain, as miners can choose the order of transactions, delay them, or stop them from entering the block. Finally, transaction fees are low. This trifecta of safety, speed, and affordability appeals to many members of the community.
Hedera Hashgraph's combination of low costs and high speeds is building quite the reputation for this technology, and it could even be considered a potential competitor of Ethereum by some. Hedera Hashgraph's future appears to be bright, and growth is expected. Ongoing developments happening in the HBAR ecosystem during 2022 and onward may push HBAR to new heights. Only time will tell.
Hedera Hashgraph Consensus
Hedera uses the hashgraph consensus mechanism, which is powered by two varieties of nodes. Consensus nodes determine ordering and history, while mirror nodes relay this information to stakeholders within the network. Using a limited number of nodes to determine transaction history ensures that transactions will not be undone or removed later. This model is different from standard blockchains.
Hedera Hashgraph Governance
The Hedera Hashgraph network is governed by the "Hedera Governing Council". This council is responsible for running consensus nodes that determine transaction ordering.
The Hedera website states that "up to 39" enormously diverse organizations lead the network. Some names are highly regarded, such as Google and IBM. The council manages the software, votes on updates and changes to the network, ensures all funds are appropriately allocated, and guards the network's legal status.
Each member is allowed two consecutive, three-year maximum terms. This means that the space isn’t permanent for these council members, and they’ll only have power over decisions and votes during the time they serve.
Hedera Hashgraph Key Features
Beneficial Services and Features
Hedera offers various services at affordable prices and lightning-fast speeds including:
Consensus serviceToken serviceFile serviceSmart contract service
Hedera makes it easy, fast, and cheap to cross tasks off your to-do list, such as deploying smart contracts in popular languages, filing important data, minting and managing NFTs, and recording or tracking information.
In addition, users have access to extra features like multi-sig transactions, atomic swaps, scheduled transactions, and token-level KYC.
Functional use-cases for Hedera Hashgraph include:
PaymentFraud mitigationData complianceTokenized assetsPermissioned blockchainIdentity and credentials
Hedera Hashgraph is truly a leader in the future, growth, and development of public ledgers. The combination of high throughput, remarkably fast speeds, and low transaction fees are groundbreaking for the crypto space.
Hedera also claims to be much more sustainable and energy-efficient than Ethereum 1.0 or Bitcoin. For example, BTC uses 885 kWh, Ethereum uses 120 kWh, while Hedera only uses a meager 0.00017 kWh. The network has also made environmental sustainability a priority, going as far as committing to carbon-negative operations.
Concerns Regarding Operation
The above positives seem to capture the innovation and outside-of-the-box thinking that Hedera is built upon. However, there are still a few concerns:
Not decentralized enough for some Queued transactionsThe signature size is too largeShort history, not as established as other networksRelatively similar services compared to other public ledger networksIsn’t incredibly compelling
Hedera will likely see growth as time moves forward, but it may not be rampant enough to attract larger investments. The strong aspects of the network are indisputable, although some claim Hedera suffers from poor economics in general. Hedera may not be able to exceed Bitcoin or Ethereum in the long run because of these shortcomings.
On the other hand, Hashgraph's efficiency in handling thousands of transactions and verifying millions of signatures per second is remarkably valuable. Some call Hashgraph the new generation of blockchain technology. If Hedera Hashgraph is able to prove its value and worth over the next few years, it may have the opportunity to surpass blockchain technology.
Decentralized financeThe Evolution of BNB ChainBSC, Binance’s layer-1 blockchain, announced merging the BSC and the Binance Chain, forming the new and improved BNB chain. The idea is to link Binance’s layer-1 to the protocol’s token, BNB, to further expand, support, and facilitate decentralization.
BSC is typically considered a part of Binance—after all, it’s right in the name. CEO Changpeng Zhao has stated, "We’ve done a lot of work to decentralize it and hope to make BNB go far beyond Binance."
Binance has invested over $1 billion in the BSC ecosystem. These investments amplify the rivalries between Ethereum and other layer-1 blockchain systems and are intended to stop the criticism surrounding BSC being "too centralized".
BNB wants to be a token for the BSC ecosystem. This ecosystem serves multiple sectors, including the NFT industry and GameFi. Doing all of this should help BNB become more relevant and beneficial concerning the development of MetaFi.
BNB: Built Better
As Binance rapidly grew in popularity, so did BSC. The Binance smart chain was created about the same time the DeFi movement took off. Public interest grew over time, along with financial solutions gaining interest. Blockchain technology was also rising in popularity, and the stars seemingly aligned for BNB.
The BNB token was created as an ERC-20 token on Ethereum in 2017, continuously evolving and transforming. The token switched to the Binance Chain in 2019 and supported the BSC network, which launched in September 2020. BNB is the current token for the BNB Chain.
After the BSC name change, several improvements were made accessible to project owners, developers, and users connected to the BNB Chain community. The chain plans to incorporate more prominent applications like GameFi, Metaverse, and SocialFi.
A few key improvements to the BNB chain include:
The introduction of on-chain governance mechanismsBoosted BSC throughputOne-chain to multichain scalingOverall improved scaling solutionsExpanding the BSC validator set, including 20 validators acting as block producers
What Should Users Expect From BNB?
According to CEO Changpeng Zhao, BNB is an acronym for "build n' build". One of Zhao’s tweets stated that BNB also metaphorically translates to "build the community, and let the community build, build, n’ build".
Freedom, lack of limitation, and general empowerment are what BNB is all about. It also ties into interoperability and development of the world's "parallel virtual environment", pushing Binance forward in regard to the MetaFi movement.
Here are some of the key features of the BNB Chain:
DecentralizedOpenPermissionlessMultichainA space for creators and investors alikeBigger than Binance
Besides a heightened focus on MetaFi, the BNB Chain also stated a few more technological advances are underway for 2022 and onward. This includes the introduction of BSC Application Sidechains and BSC partition chains.
How to Utilize the BNB Chain
The BNB Chain suggests use-cases for BNB on their website. They include travel, payment, entertainment, service, and finance. Perhaps the most popular reason is paying transaction fees. Binance claims that around 2 million users have used the trading platform to pay for trading fees totaling 40 million BNB on over 127 billion deals.
Each trade made on the exchange will incur a 0.1% fee, payable via traded assets or BNB. In addition, traders who rely on Binance are encouraged to purchase BNB to save more on transaction fees.
BNB can be used to:
Pay for goods, buy virtual gifts, and more. Integrations include Monetha, CoinGate, and Pundi X.Book hotels and airfare, among other travel amenities, via Trip.io, Travala.com, or TravelbyBit. Purchase entertainment. Integrated platforms, such as VIBE, allow users to earn BNB from games. You can also use BNB to purchase the copyright to music through MachiX and others. Pay for services such as hiring freelancers, creating smart contracts, and paying for web or cloud subscription services. Obtain financial services such as trading stocks, taking out loans, and purchasing investments.
BNB Pros & Cons
No applications, platforms, projects, or people are perfect. The BNB chain is no exception. While fast adoption, low fees, a bridging feature, plenty of funding, and localization are all positives about BNB, there are also a few concerns.
For example, a portion of the community worries that the chain is too centralized and over-complex, and has resource-consuming operations and processes. Also, similar innovations are already occurring on Ethereum instead of its designated network.
The future is decentralized, and that is something we can almost count on. The rapid interest in the crypto and DeFi space is indisputable. This industry is gaining new traction daily, with more developers, creators, and users reaching new heights and breaking glass ceilings. We can see this in the differences between Web2 and Web3, and we will likely see this pattern continue.
Decentralized financeOverview of the Polkadot EcosystemPolkadot’s first proof of concept design and its beginning stages of development emerged around four years ago. The DOT ICO occurred in October 2017. Since then, it has raised over $145 million in ETH.
Today's live price is $8.77 with a 24-hour trading volume of $719,397,341.
Polkadot Funding History
DOT’s initial supply of 10 million was divided and sold in two rounds: one half to public investors for $2.25 million and the other half to private investors for $2.75 million. The price per token came in at $28.80.
Code Vulnerabilities Discovered
Two weeks later, about $90 million of the coins raised during ICO were permanently frozen because of a vulnerability exploited in Polkadot’s crypto wallet code. However, not long after the attack, Polkadot announced that the remaining funds would be enough to move forward with development, despite losing so much.
This chaotic event was the second time Polkadot’s wallets were hacked over a code vulnerability. Their first hack occurred in July of that same year. This time, $33 million in Ethereum was pilfered before anyone could stop it.
Polkadot Reached Top 10 List
Polkadot held another private funding round at the beginning of 2019 to gather lost funds from the DOT ICO. They sold DOT tokens at an increased price of $120 each. Polkadot sold 500,000 DOT tokens and raised over $60 million.
In July 2021, another round of private funding was held. They sold slightly under 350,000 DOT tokens, each of them for $125. This private funding raised another $43 million. So, the grand total of raised funds for Polkadot sits at over $250 million.
Polkadot’s bouts of extensive funding from private and public investors paint a picture of its glowing reputation. Moreover, the Polkadot ecosystem is a melting pot of skilled architects, talented developers, and expert project leaders—which is why it's on the list of the top 10 most valuable cryptocurrencies in 2021.
Ongoing developments in the Polkadot ecosystem and the crypto space, in general, may push DOT to new record heights.
How Does Polkadot Work?
Polkadot is a complex cryptocurrency, with some articles dedicated to explaining various network elements and their functions.
Polkadot is a vast ecosystem of blockchains. The core blockchain is called the "Relay Chain". The blockchains that are all connected to the core relay chain are "parachains". Parachains may have custom tokens, consensus mechanisms, and structures.
The relay chain can support around 100-250 parachains. If a parachain were to connect to the relay chain, it must first win a candle-style parachain slot auction via bonding DOT.
Here are 11 examples of Polkadot parachains:
AcalaMoonbeamAstar NetworkParallel FinanceClover FinanceEfinityComposable Finance CentrifugeHydraInterlayNoodle
Soon-to-be parachains often raise DOT through their community in exchange for native tokens. During the candle auction, parachains with the most bonded DOT will win the slot. These selections are made at random times. Once the lease ends, the lender’s bonded DOT is returned.
The relay chain is built using substrate, therefore parachains built using substrate can also easily connect to the relay chain. External blockchains, like Ethereum or Bitcoin, will require a bridge if they are to connect to the relay chain. "Substrate" is a building tool for blockchains engineered by Parity Technologies.
Polkadot Consensus Mechanism
The Polkadot network uses a hybrid consensus mechanism: the relay chain consensus mechanism is a variety of proof-of-stake, and the attached parachains use a version of proof-of-work.
Polkadot Validators & Nominators
Validators must stake DOT to be eligible to participate. Nominators on the blockchain delegate their DOT tokens to validators. Nominators may nominate up to 16 validators and receive a portion of block rewards.
Polkadot Collaters
Polkadot collators create blocks on parachains that are attached to the relay chain. These blocks contain updated transaction records that have occurred on that specific parachain.
Polkadot Fishermen
Polkadot fishermen monitor the behaviors of validators and collators. Fishermen must stake a small amount of DOT to be eligible.
Polkadot Governance
The governance structure consists of three elements: a council, a technical committee, and regular DOT holders. The council involves 13 elected members of the network, all of which are required to stake DOT to be eligible. These members decide how treasury funds are spent.
The technical committee includes three entities involved in the development of Polkadot. Web3 Foundation has snagged one of these three seats. This committee pushes proposed changes or updates to the network in emergency scenarios where time is money.
Council and DOT members are the only groups permitted to bring proposals to the table, and the number of votes to pass a proposal depends on the voter turnout.
Decentralized financeAAVE: Reviewing and Evaluating Leading Crypto Lending and Borrowing ProtocolAave offers various lending pools where users can earn interest on their existing digital assets. However, traditional institutions have stringent regulations and guidelines that you must meet when applying for a loan. These high standards can make it difficult for some individuals to get loans for the money they require.
On the other hand, the decentralized nature of crypto lending platforms allows for a seamless process with fewer factors preventing you from qualifying for a loan. So, what is Aave, and why does it matter for those lending or borrowing?
What Is AAVE?
AAVE is the native crypto of the Aave lending platform. On Aave, users can borrow various types of crypto assets or lend their assets out in exchange for interest payments. All of this crypto lending and crypto borrowing is executed in a decentralized manner, without intermediaries.
The platform became the leader in 2021, AKA total value locked. Total value locked is the full value of crypto assets deposited in a DeFi protocol. This metric is commonly used to gauge interest in that project. Aave climbed to the top for lenders and borrowers across the map.
You can find the native token on Coinbase for users in the United States or on Binance for international users. Decentralized exchanges are also an option, such as Uniswap.
How Does AAVE Work?
Aave keeps reserves that are used as a security net. These insurance-type reserves ensure lenders are protected, and their assets are safe from crashes or volatility. Individuals interested in lending can relatively simply connect their Ethereum wallets to the Aave platform and then select the assets they’d like to lend.
Once you enter the details regarding the amount you will be lending and the funds are added to the liquidity pool, users can earn interest on them. When you lend on Aave, you earn interest. When you borrow on Aave, you pay interest. If you’ve borrowed or been a lender on other crypto platforms, using Aave shouldn’t be a challenge.
Currently, you can deposit 26 and borrow 25 different types of crypto. Some options include LINK or ETH, but most of the options available on Aave are stablecoins. Each cryptocurrency possesses different rates for lending or borrowing.
An algorithm is used to determine current rates based on utilization rate, or the ratio of the current supply versus the amount borrowed. If most of the crypto in an existing pool is lent out, the interest rate will be appealing and high enough to entice depositors, ultimately bringing in more crypto to that pool. On the other hand, if no crypto is being used, the interest rates will be pretty low, encouraging more people to borrow.
Why Is AAVE Popular?
Aave is a popular lending protocol in DeFi, and it’s one of the most popular platforms for those looking to earn passive income by lending their assets. This project allows users to borrow virtually any kind of cryptocurrency without the need for any middleman: no banks, brokers, or financial institutions. The native token available, AAVE, is a good choice for users who want to invest in the DeFi market space. Purchasing this token supports the technology and methods that will change how we look at lending.
AAVE is the most sought-after DeFi token on the market at the moment. Take a look at this info:
Price:
$102.87
All-Time High:
$661.69
Circulating Supply:
13,983,282.33
Max Supply:
16,000,000
Aave is also a non-custodial platform, meaning it doesn’t hold your assets directly. Instead, you retain ownership of your assets. As a result, non-custodial platforms are more appealing than custodial platforms. This reduces your risk of hacking.
What’s the Story Behind Aave?
Aave protocol initially hit the industry in 2017 but was known as ETHLend. Stani Kulechov created this project in Finland. The idea was peer-to-peer lending, where users can lend and borrow crypto by simply posting requests and offers in a designated spot.
ETHLend, unfortunately, hit some snags. Lack of liquidity and problems matching loan requests with the proper lenders caused the project to disintegrate one year later in 2018. However, this didn’t discourage the developers of ETHLend—it did quite the opposite.
Fast forward one year, and the project is overhauled from a peer-to-peer model to a peer-to-smart contract model, followed by a rebranding to the name "Aave". This word means "ghost" in Finnish, hence the project's logo. The idea came from the anonymity that comes with using this protocol. There are no banks, and there is no sensitive information shared about the lenders or the borrowers involved.
Decentralized financeTransitioning to ETH 2.0: What Will Happen to Miners?That’s the central question right now in the DeFi community, a question that’s worth 19 billion dollars. If the plan proceeds smoothly without hang-ups, the merge should occur towards the end of September. So what does this merge mean for Ethereum miners?
This transition has sparked debate within the community, with many comparing the pros and cons of proof of work (PoW) and proof of stake (PoS) as September grows closer.
The Importance of Blockchain Consensus
Two primary elements of blockchain technology are immutable records and, of course, decentralization. Hence, this database in which computers on the network, referred to as "nodes", maintain a shared manner.
All of these nodes are ledgers of information. They contain all of the transaction history within that blockchain. Blockchain technology is also a type of DTL, or "distributed ledger network". You cannot destroy this network by taking out a central server. Blockchain technology achieves decentralized security and reliability in various ways.
Blocks are linked through a protocol where no existing block can be edited or removed. Adding new blocks is virtually the only way to modify the blockchain. Any node can do it automatically without any type of central authority.
A consensus mechanism is required to prevent non-compliant nodes that may cause frequent hard forks. This mechanism also guards against false transactions like double-spending and DDoS attacks.
Key Takeaways:
A consensus mechanism is a method of validating entries into and keeping the database secure. The consensus mechanism chosen (either PoW or PoS) will heavily impact how and who keeps that database secure.
What Is the PoW Method?
Mining is a competitive process that adds and verifies crypto transactions that use the PoW method. This mechanism will require network members to solve an arbitrary puzzle to prevent attacks on the database. This puzzle is said to be updated every two weeks to keep optimum security.
PoW also requires participant nodes to prove that the work has been completed and submitted. Doing so qualifies them to add new transactions to the blockchain. The participants needed to verify these transactions are known as "miners". Thus the transaction verification process is commonly called "mining".
Miners also earn crypto without putting money down and are rewarded for completing blocks of verified transactions and adding them to the blockchain.
What Is the PoS Method?
PoS differs from PoW because it involves nodes that willfully stake their crypto for validation purposes. These are referred to as "stakers", while the process is commonly called "staking". The larger the stake and the longer the length, the better chances of that staker being allowed to validate transactions.
That being said, cryptocurrencies within this network are already created, meaning no "mining" is taking place. Therefore, there’s also no need for puzzles. This is a big debacle for ETH miners because what once earned them passive income will no longer be an option.
Stakers can earn money verifying transactions, but they will be chosen algorithmically based on what they have staked in collateral.
Why Is This Causing Concern Among the Community?
The competition between miners to solve that cryptographic puzzle to validate transactions helps them earn relatively effortless rewards. Moreover, these miners don't have to put any assets down to participate in this process.
PoS utilizes algorithmically chosen validators and compensates them with those crypto rewards. To stake on ETH 2.0, these individuals will need to "stake" assets to qualify to be selected to validate transactions on the blockchain.
PoW is well-established and tested. It has been used in many cryptocurrency projects in the past and present. On the other hand, high-energy costs strain the environment, along with increasing centralization of mining operations, and low transaction throughput will probably make it obsolete when considering the bigger picture.
The PoS algorithm offers a more scalable blockchain and higher transaction throughput. However, many users question the effectiveness of its security compared to completely decentralized PoW algorithms.
What Will Miners Do Once ETH Transitions to PoS?
One option is for miners to sell their GPUs to gamers on eBay or other platforms and become a validator on the Ethereum network. Validator nodes only require a stake of 32 ETH minimum, opening the door to rewards, tips, etc. This may be a good tactic before September rolls around.
Miners who may not be able to afford running a validator node have the option of staking their ETH in the pool, earning rewards through a different means.
Graphics processing units (GPUs) are the most common method of mining crypto, being able to hook up 9 GPUs when crypto mining. Yes, we are talking about the same GPUs used in PC gaming. CEO of BitPro, Michael D’ Aria, estimated that around 90% of miners are GPU-based, the remaining 10% being ASIC-based.
GPU mining of PoW coins will surely collapse if the merge is successful. The GPU-mineable coin market cap, excluding ETH, sits slightly above $4 billion, about 2% of Ethereum’s cap. PoW coins will only be profitable for a small portion of miners who can access cheap energy sources, but moving to an alternative consensus PoW blockchain might be the choice for some.
Larger-scale miners with the knowledge, time, and assets may be able to switch over to high-performance node operators for Web3 protocols or high-performance data centers. Miners may also utilize their existing GPUs for platforms like LivePeer, Akash, or Render Network.
Decentralized financePerpetual Contracts in Crypto: All You Need To Know!If you've been around in markets like forex, stocks, or crypto for a while, you've probably heard about different types of contracts being used. Whether it's a contract for difference (a CFD), a futures contract, or a perpetual contract, they are all necessary tools to navigate the markets.
In traditional finance, perpetual contracts refer to financial derivative contracts that have no expiration date. When signing the perpetual contract, both parties agree that there will be no expiration date nor settlement details, allowing the contract to go about indefinitely.
You might ask, why have an indefinite contract? Well, there are a number of reasons why perpetual contracts are used. Namely, they offer a lot of benefits in the world of investing, as they allow traders to hold positions without an expiration—even if the position is leveraged. Traditionally, these contracts were used in the stock market and the foreign exchange market, but now, with the rise of DeFi, they have become popular in crypto too.
What Are Perpetual Contracts in Crypto?
As we mentioned above, a perpetual contract in crypto is a derivative financial contract that has no fixed expiration date or settlement. Before crypto, the most popular type of perpetual contracts were USD-denominated contracts, which are settled in US dollars. If you've used popular margin trading platforms, you've probably encountered perpetual contracts at least once. Now, there are also crypto-settled perpetual contracts, which are denominated and settled in cryptocurrencies.
Crypto-settled perpetual contracts were first introduced on BitMEX in 2016 and have since become increasingly popular. The main benefit of these types of contracts is that they allow traders to take advantage of price movements without having to actually own the underlying asset.
For example, let's say you wanted to trade Ethereum but didn't want to actually own any ETH. With a crypto-settled perpetual contract, you can trade ETH without having to hold any of the cryptocurrency—and you can do it indefinitely, as these contracts have no expiration date. Additionally, thanks to the level of development blockchain technology has reached, you could even make a perpetual contract with smart contracts. Although it's still a relatively uncharted space, there are different types of smart contracts, so legally binding smart contracts could be the future of perpetual ones.
How Do Perpetual Contracts Work?
Now that we know what perpetual contracts are, let's take a look at how they work. The key feature of a perpetual contract is that it's margined. This means that when you open a position, you will only have to put down a small percentage of the total value of the contract as collateral.
The amount of collateral you have to put down is called the margin. For example, if you're trading a perpetual contract with a 50x leverage, that means you only have to put down 2% of the total value of the contract as margin.
This is one of the main benefits of perpetual contracts—they allow you to trade with a lot of leverage, which can drastically magnify your profits. However, keep in mind that perpetual contracts do not offer risk-free returns like dApps in DeFi do. If you're looking into risk-free returns, consider researching the best dApps for making money.
Basis Swaps
Diving deeper into perpetual contracts, a key feature they have is that they use a funding mechanism to keep the contract price stable. This funding mechanism is what's known as a basis swap. In a basis swap, both parties agree to exchange the difference in interest rates between two assets.
For example, let's say you're long ETH and short BTC on a perpetual contract. If the interest rate of ETH is higher than the interest rate of BTC, you will have to pay funding to the party you're trading with. If you've read about futures, then this might sound familiar, which is why we'll now explain the differences between perpetual vs. future contracts.
The Difference Between Perpetual and Future Contracts
The main difference between these two types of contracts is that future contracts have a fixed expiration date, while perpetual contracts do not. This means that with a future contract, you will have to close your position before the expiration date—otherwise, you will be forced to take delivery of the underlying asset.
With a perpetual contract, on the other hand, you can hold your position indefinitely. This is one of the main benefits of these types of contracts—they allow you to trade without having to worry about an expiration date.
Exchanges That Offer Perpetual Crypto Contracts
There are many crypto exchanges offering perpetual contracts, but you won't go wrong sticking to big and reputable ones. Consider checking out one of the following exchanges for perpetual contracts:
BinanceBlockFiCoinbaseBybit
Many of these exchanges also offer automated trading, where you could get into trading cryptocurrency algorithmically. If you're looking into passive income, then algorithmic crypto trading is a great choice for you.