DeFipedia Blog

Our DeFi experts demystify and explain decentralized finance, how it works, and how to capitalize on its growth potential.
Improve Your Spot Trading Strategy—Here's How!

General Discussions About Decentralized Finance

Improve Your Spot Trading Strategy—Here's How!
Cryptocurrency spot trading is the buying and selling of digital currencies at the current market price. In other words, it's the immediate purchase of a cryptocurrency, often used to get around the long waiting times associated with taking part in a crypto exchange. Regarding having a spot trading crypto strategy, it’s often a trading style that has a specified date and time requiring specific market conditions to be executed. Let’s take a look at a simple example. Let’s say that you want to buy Bitcoin but don't want to wait for an order to be filled on an exchange with the current market conditions. So, you go to a website that offers spot trading and buy it there instead. Because there's no middleman (like an exchange) involved in this process, it's oftentimes seen as more convenient—though it can also be more expensive. Now, let’s take a look at how spot trading works in depth. Best Spot Trading Strategies All in all, spot trading can be a convenient and profitable way to trade cryptos. However, it's important to remember that spot markets can be more volatile and expensive than exchanges, so make sure you're comfortable with the risks you’re taking before you start. Also, keep in mind that not all cryptocurrencies are available on spot markets, so you may need to use a less popular exchange. When it comes to the best spot trading crypto strategy, it’s worth mentioning that there is no one-size-fits-all approach. The best spot trading crypto strategy for you will depend on your personal goals and risk tolerance. However, here are a few general tips to keep in mind: Start trading with a small amount of cash As you learn and optimize your spot trading crypto strategy and learn to manage the risks, you can gradually increase the amount you’re trading with.Minimize losses Make sure to set stop-loss orders to limit your losses in case the market turns against you.Take profits Take profits when you can to lock in your gains. Make sure you have clear goals and never sidestep them.Practice patience Don't let emotions dictate your trades. If your emotions are having a big impact on your trades, consider trading cryptocurrency algorithmically instead. How to Spot Trade Crypto Now, let’s take a look at the necessary steps to take so you can start spot trading cryptocurrencies. Find a spot trading platform that supports the cryptocurrencies you want to tradeCreate an account and deposit funds on the platformBuy the cryptocurrency you want to trade at a specific market priceSell the cryptocurrency when you want to cash outWithdraw your profits to your personal wallet Best Coins for Spot Trading Bitcoin (BTC) The most popular cryptocurrency in the world and it's also one of the best coins for spot trading. This is because Bitcoin has a high level of liquidity, with a large number of buyers and sellers always ready to trade. BTC is also supported by most major exchanges, making it easy to buy and sell at a moment’s notice. Ethereum (ETH) The second-largest cryptocurrency by market capitalization and it's also a good choice for spot trading. Just like Bitcoin, ETH is highly liquid, and it's supported by a number of major exchanges. The main downside to trading ETH is that it can be quite volatile—more volatile than BTC, in fact—so make sure you're comfortable with the risks before you start. ETH is one of the biggest players in the DeFi space, so consider looking in the DeFi pulse index if you'd like to have bigger exposure to decentralized finance in general. Ripple (XRP) Another cryptocurrency with a considerable market capitalization which makes it a good option for a spot trading crypto strategy. XRP is less volatile than ETH, so it can be a good alternative for traders that prefer lower risks. The main downside to trading XRP is that it's not as widely available as BTC or ETH, so you may have to use a less popular exchange. Bitcoin Cash (BCH) and Litecoin (LTC) BCH and LTC are wo of the most popular forks of Bitcoin and make for decent spot trading options. They are both highly liquid, which is crucial when optimizing your spot trading crypto strategy, and they have a large number of buyers and sellers always ready to trade. BCH and LTC are also supported by most major exchanges, so they are easy to buy and sell as well as long as your trading strategies are well-put. Advantages and Disadvantages of Spot Markets Advantages The ability to quickly take advantage of opportunities as they ariseNo need to wait for settlement periodsGreater price transparency compared to other types of marketsTypically lower transaction costs when compared to other marketsSpot trading markets are some of the best markets to do high-frequency trading Disadvantages Higher risks due to volatile pricesLess time to make precise decisions about tradesThe need for quick execution of trades Differences Between Spot Trading and Margin Trading While spot trading is the buying and selling of cryptos at the current market price, margin trading is the buying and selling of cryptocurrencies with leverage. In other words, when you margin trade, you're effectively borrowing money from a broker in order to trade more than you could with just your own capital, and you’re using leverage. This can drastically increase your profits if things go well, but it can also amplify your losses if things go wrong. It’s worth mentioning that margin trading is generally not available on spot trading platforms—instead, it's offered by specialized exchanges and brokers. In most cases, margin trading platforms will require you to open an account and deposit a specific amount of funds before you can start trading.
Interest Rate Swaps in DeFi: Benefits, Risks, and Challenges

General Discussions About Decentralized Finance

Interest Rate Swaps in DeFi: Benefits, Risks, and Challenges
You may have heard the term “interest rate swap” before, but you may not understand it. In traditional finance, an interest rate swap is a derivative contract between two parties agreeing to swap one series of payments for another. So, what are the benefits and risks of interest rate swaps? What Is an Interest Rate Swap? When cash flows are fixed rate and floating rate interest, the swap is referred to as an interest rate swap. This translates to an unfunded option to receive interest-rate exposure. These swaps are a relatively straightforward tactic to capitalize on a position or hedge against interest rate risks. There are two parts to this trade, hence the term “swap”: One part is the borrower The borrower pays a fixed interest rate and earns payment based on a floating rate. The other part is the lender The lender receives the fixed interest and pays based on the floating rate. How Interest Rate Swaps Work Interest rate swaps involved swapping a variable (floating) interest rate for a fixed rate. The idea is that one party reaps the rewards of hedging the risk associated with their security, while the other can benefit from the potential earnings. Regardless, if one party is winning, the other is losing. So, while interest rate swaps can neutralize and mitigate some risk, one of you will be losing money at some point. Interest rate swaps are traded OTC on crypto lending platforms; if your company opts to swap interest rates, the two parties involved must agree on two pressing issues: Duration of the swap Establish a beginning date and an expiration date for the swap.Terms and conditions of the swap Be clear about your terms before you agree. Benefits of DeFi Interest Rate Swaps Some of the reasons why you’d want to engage in an interest rate swap include: Commercial reasons Some companies need to meet specific financing requirements, and interest rate swaps can help managers meet their goals. In addition, banks and speculative hedge funds may be able to benefit (and profit) most from these swaps. Comparative upper-hand Companies can sometimes receive fixed or floating rate loans with better rates than most borrowers. It may not be perfect or exactly what they are looking for, but they may be able to come out on top after an interest rate swap and fulfill those preferences they were seeking. Swaps allow banks, investment funds, and companies to capitalize on loan types without breaking the rules concerning their liabilities and assets. If you want to earn interest from your assets without opening a trading position, crypto margin lending is the right choice. This is a big difference concerning interest, loans, or lending in DeFi and TradFi. Traditional finance is often much more restrictive and unbending. DeFi also typically offers lower interest rates in general compared to traditional finance. These are all reasons why you should borrow crypto, as well as lend it. In addition, many opt to borrow crypto with compound as it supports a variety of cryptocurrencies. Risks and Challenges of DeFi Interest Rate Swaps While interest rate swaps can be an excellent opportunity for some companies, they also come with risks that users shouldn’t ignore. Those risks include: Unpredictability Floating interest rates are inherently unreliable and create a risk for both parties involved in the swap. One party will almost always come out ahead in an exchange, and the other will lose out. The party obligated to make floating rate payments will profit when the variable rate drops but will lose when the rate increases, and vice versa.Counterparty risk This risk adds another layer of complexity to the scenario. This risk is usually low. If one party defaults, they won’t be able to make payments. Legal action to recover that money is costly and counterproductive. How to Invest in Interest Rate Swaps If you’re looking to get your foot in the door and start swapping interest rates, do your research, and ensure that you know what you’re getting into before you agree to anything. Users can expect that two parties will trade, or “swap”, a fixed rate for a variable interest rate. Details beyond this will depend on your specific situation, terms and conditions, and with whom you are swapping interest rates.
UMA vs. Synthetix: Which Is Better?

Defi derivatives

UMA vs. Synthetix: Which Is Better?
UMA, also known as Universal Market Access, is an Ethereum-based protocol that has been around since 2018. Namely, the protocol allows users to create synthetic assets in the crypto space. These assets directly represent other real-world assets and mimic their price and market movement. For example, synthetic Bitcoin has the same value as Bitcoin; only it exists virtually on the UMA protocol. So, why is there a need for a synthetic Bitcoin? Well, with it, you can digitize financial derivates and process contracts like CFDs and futures. You can effectively put a position on synthetic Bitcoin and earn the same profits as if you would on regular Bitcoin. Synthetix (going under the symbol SNX) works similarly to UMA. It's also a decentralized protocol that runs on the Ethereum blockchain, offering synthetic variations (known as synths) of crypto and non-crypto assets. Just like UMA, Synthetix's assets provide an alternative to the real ones, tracking the same market movements as the original assets without requiring you to inherently hold them. However, unlike UMA, SNX also offers access to a broader market, not just limited to the cryptocurrency space. Still, there's much more to talk about regarding Synthetix and UMA. Continue reading to learn everything about them. Key Features of UMA and Synthetix If you've read the basics of UMA and Synthetix, they might appear to be offering more or less the same things. They are both protocols offering synthetic assets, and both are a part of the DeFi pulse index. However, they have some key features that distinguish them. Let's take a look. UMA Asset customization UMA's smart contracts allow for the creation of almost any kind of synthetic asset. This means that you can create an asset to represent pretty much anything—but there has to be a market for it.Decentralized oracles UMA uses decentralized oracles to price its assets. These are feeds of real-time data that help determine an asset's value. By using decentralized oracles, UMA makes sure that no single party has direct control over the pricing of its assets.Highly liquid UMA's assets are very liquid, as they can be traded on decentralized exchanges (DEXs). This means that your positions will almost always be executed. Synthetix A broader market Synthetix offers access to a more comprehensive range of assets than UMA. This includes not only cryptos but also fiat currencies, commodities, and even stocks.Synthetic stablecoins In addition to regular synths, Synthetix also offers synth stablecoins. Just like regular stablecoins, these are synthetic assets whose value is pegged to that of a real-world asset, such as the US Dollar. This makes them much less volatile than regular synths and, therefore, more suitable for use in everyday transactions.Flexible platform Synthetix's platform is very flexible, meaning that it can be easily integrated with other protocols and wallets. This makes it easier to use than UMA, which can be a bit complicated for newcomers. Pros and Cons of UMA Pros Offers complete asset customization, as long as there is a market for that assetDecentralized oracles help ensure that pricing is transparent, which is crucial as one of the key features of DeFiAssets are highly liquid, as they can be traded on DEXsIs an important part of DeFi in the Ethereum network Cons The platform can be pretty complicated for newcomersNot as wide a range of assets as Synthetix Pros and Cons of Synthetix Pros Offers access to a broad range of assets, including fiat currencies, commodities, and stocksHas synthetic stablecoins that are less volatile than regular synthsIs a flexible platform that can be easily integrated with other protocols and wallets Cons The decentralized oracles used to price assets are not as transparent as UMA's UMA vs. Synthetix: Which Is Better? The answer to this question depends on your needs and preferences. If you're looking for a platform that offers complete customization, then UMA is the better choice. However, if you're looking for a platform that offers a broader range of assets and is easier to use, then Synthetix is the better choice. Both of them are a good investment and are a part of the DeFi pulse index, which represents the best projects in the decentralized finance space. If you want to invest in both of them, consider reading how to buy DeFi pulse index. How to Change From Synthetix to UMA If you're looking to change from Synthetix to UMA, the process is quite simple. All you need to do is transfer your synths to the UMA protocol. This can be done using any decentralized exchange (DEX) that supports both Synthetix and UMA. Once you've transferred your synths, you'll be able to use them on the UMA platform. However, keep in mind that your synths will now be subject to UMA's liquidity rules. This means that you may not be able to sell them all for cash immediately—instead, the liquidity will depend on UMA's market.
Benefits of Asset Management Protocols for DeFi & DeFi 2.0

General Discussions About Decentralized Finance

Benefits of Asset Management Protocols for DeFi & DeFi 2.0
The DeFi space is full of noise. You’re often met with confusing terminology and words that may leave you scratching your head. Multiple protocols and projects come at you from every direction; it’s a hard decision. Knowing which one to invest in can be confusing and daunting; the same goes for buying crypto. However, understanding asset management protocols and the key features of DeFi can help clarify quite a bit. What are asset management protocols? Let’s discuss. Why Are DeFi Asset Management Protocols Important? Asset management protocols are the consistent management, planning, and controlling of the asset lifecycle. They are essential because they offer a unique alternative to traditional methods. For example, asset management products in decentralized finance don’t require users to share their private keys or transfer funds. They are also automated, so anything needing to occur, such as collateralization, liquidation, etc., will occur efficiently. DeFi protocols are unique, special automated programs created to tackle the concerns with the traditional finance space. Blockchain technology offers users increased financial transparency, security, and rich data analysis. In addition, anyone with a crypto wallet and an internet connection can participate, so there are no harsh, unyielding requirements, unlike traditional finance methods. The DeFi protocol allows more people to do more with their money and make more of it. Let’s Talk Protocols & Defi 2.0 Protocol-owned liquidity (POL) is an element of the DeFi 2.0 movement. Olympus DAO created this to solve the mercenary capital issues of Defi 1.0. Unfortunately, protocols seeking to incentivize users via trading fees or LP tokens make the mercenary capital problem wreak havoc on DeFi 1.0. Mercenary capital is a form of self-serving capital provided by investors as a way to earn from short-term incentive programs. Incentivising users to add value to your protocol sounds beneficial. However, users can easily change to the protocol offering better incentives, creating a domino effect for protocols as they increase their supply of governance tokens and ultimately decrease their value. Offering protocol-owned liquidity takes the necessary steps to address these issues. Key Characteristics of Asset Management Protocols Some of the key features of DeFi asset management protocols include the following: Automation Allowing for simple collateralization, liquidations, and rebalancing without intermediaries.Composability Some of the best management protocols can integrate with various DeFi projects, giving users the full-blown DeFi experience.Accessible Available to virtually everyone regardless of income level or background. Non-custodial The underlying asset’s ownership will not be revoked and typically stay secured in the user’s wallet. Pseudo-anonymous Frequently connect via a wallet address, implying that sharing your identity is optional. Best Asset Management Protocols Asset management protocols are unique, meaning different protocols offer different solutions. There are asset management protocols for private groups and users, meaning they assist private groups in specific actions or activities like investing, pooling, or managing funds. Public asset management protocols are designed to assist users when developing investment strategies and proceed to make them available to the public. Here are some of the top protocols in the DeFi ecosystem: AaveUniswapSushiswapSynthetixCompoundKyber NetworkBabylon FinanceSet ProtocolBalancer There are many options if you’re looking for well-established and trusted protocols; you will simply need to find one that best suits your needs and desires. Looking for a more in-depth comparison? Read Aave vs. Compound to learn more. Conclusion: Why DeFi Asset Management Protocols Are Essential DeFi protocol uses smart contracts, which run on the blockchain network. The source codes for most projects in the decentralized finance space are public; for anyone to review or audit. DeFi protocols offer a heightened level of transparency and reliability to its users around the globe. The automated element of protocols is valuable and simplifies collateralization, rebalancing, and liquidation. These protocols also prioritize financial growth and opportunity for individuals from all walks of life.
Algorithmic Stablecoins: Here's Why They're So Risky

General Discussions About Decentralized Finance

Algorithmic Stablecoins: Here's Why They're So Risky
Stablecoins typically maintain a 1:1 peg with the tracked currency with a collateralized mechanism and are backed by cash or other assets. Algorithmic stablecoins function differently, utilizing specialized algorithms to maintain the tracked peg. These unique algorithms inspire investor trends and behaviors, which help stabilize the coins' price. While algorithmic stablecoins are pegged to the value of certain tangible assets, they are not backed by them like traditional coins are, and thus come with certain risks. Potential Risks Involved With Algorithmic Stablecoins There are some risks involved with algorithmic stablecoins, including the following: Demand can change drastically and remarkably quicklyHaving no collateral may make the coin value less stableSome algorithms have a weak system and may not be worth your investmentProne to devaluation riskProne to speculative targeting If enough capital is available, there’s an inherent risk of manipulation How Algorithmic Stablecoins Work Algorithms are essentially codes that trigger a process. For example, think about when you log into your social media accounts. What you see surfacing on your feed is determined by the algorithms of said platform; they are unique to you and your online trends and habits. The algorithm simply translates to code segments on a blockchain encoded in smart contracts in crypto. Algorithmic stablecoins rely on dual tokens, one stablecoin and another form of crypto that backs said stablecoins. The algorithm, AKA the smart contract, manages the link between the two. Most assets fluctuate in prices, such as real estate and stocks. Cryptocurrency is similar, as it depends heavily on market supply and demand. Stablecoins are freely traded within the market. Therefore, this applies to these coins as well. When many people want something but there is simply not enough to go around, the price of the asset increases, and vice versa. Algorithms also help regulate supply and demand; this may prevent the value of a stablecoin from depegging. The whole goal of the algorithm is to keep all of this maintained and regulated. Key Features of Algorithmic Stablecoins Algorithmic stablecoins help traders get their feet wet regarding crypto trading. Here are some of the critical features of algorithmic stablecoins: Limited Volatility Stablecoins are associated with limited price volatility and convenience. That said, you can readily and simply leverage stablecoins for cross-border transactions. In addition, stablecoins also divulge collateral diversification, creating more aversion to hyperinflation and instability. Market Reaction Algorithms have parameters hardcoded into the smart contracts associated with them. These parameters ensure automatic reaction and response to current, up-to-date market data. This aspect of algorithms helps manage supply and demand for these tokens, as they react to the underlying market conditions and adapt to them without needing a person to execute the required tasks. Security Stablecoins are stored in a virtual wallet with a private key. The stablecoin holder is the only individual permitted to access the assets/funds in that wallet and the only one with the private key. Algorithmic Stablecoins: Best Options If you’re looking for a platform that offers the option of algorithmic stablecoins to make money from, consider checking out some of the following exchanges. DeFi Dollar (DUSD)Empty Set Dollar (ESD)Frax (FRAX)Ampleforth stablecoins (AMPL) Many investors plan on earning passive income via algorithmic stablecoin yield farming. Using yield farming strategies, users can earn interest on otherwise idle crypto assets. The concept behind yield farming stablecoins is that lending your digital assets to a liquidity pool ultimately results in appealing APY. Hwever, you must be aware of the risks of yield farming. Conclusion: Algorithmic Stablecoins Algorithmic stablecoins don’t seem to be a viable option for most investors because of the risks they carry. In addition, since they aren’t backed by dollars and are using a complicated arbitrage system to maintain the value of the coins—some experts claim that this makes algorithmic stablecoins innately unreliable. Investing in algorithmic stablecoins, whether for yield farming or not, should know that risks are involved. So do your research, empower yourself with knowledge, and go into investments with a clear head and a comprehensive understanding of what you are committing to. Being prepared is a great way to minimize risk.
Underlying Assets in Derivatives: Functions and Types

Defi derivatives

Underlying Assets in Derivatives: Functions and Types
Crypto derivatives give users a new option, not holding the physical asset. By using derivatives, it allows individuals to avoid navigating wallets and other complications concerning the market. First, let’s discuss and explore underlying assets in derivatives. What Is an Underlying Asset? So, what is an underlying asset? Is it one of the key features of DeFi? In specific scenarios, crypto tokens may give the holder interest in an underlying asset. Underlying assets typically come in commodities like gold, wheat, or oil, intangible assets like licenses, stocks, or patents, and other miscellaneous assets like artwork, real estate, etc. Underlying assets influence the value of the derivative security. The rise and fall of the derivative security value usually go hand-in-hand with the value of the underlying asset involved. When deciding to invest in the derivatives market, you must clearly understand how market conditions will impact or influence the value of underlying assets. How Underlying Assets Work Underlying assets influence the value of a derivative security, such as bonds, stocks, interest rates, and currencies. There is an essential link between the derivative and its underlying security. Price movements or fluctuations are directly related to the trends and changes concerning the underlying assets. A comprehensive understanding of the underlying assets will be essential if investors engage in trading derivatives. However, derivatives trading is somewhat complicated, and losses can be substantial if you aren’t careful. Types of Underlying Assets in Derivatives You can typically break down derivatives into four different types. Which type it ends up being will rely on the smart contract's conditions. These four forms include: Options Options contracts give traders a choice, but not the obligation, to purchase/sell underlying assets at a designated future date and cost.Futures Futures contracts are legal agreements between two parties to purchase or sell underlying assets at a designated price and date in the future.Perpetual Perpetual contracts are different as they have no expiration or settlement date requirement. Some circumstances enable traders to keep their positions open-ended.Swaps A swap contract is held between two parties to exchange cash flows later, according to a particular formula. These are OTC contracts and are not traded on exchanges. Hedging & Speculation Underlying Assets in Derivatives Derivatives are commonly utilized for either speculation or hedging. Let’s quickly go over both. Hedging Hedging protects your crypto portfolio from unwanted market changes. Hedging involves opening positive and negative positions correlating to any existing positions. Futures can protect investments without compromising current holdings, allowing you to hedge for an affordable fee. Speculation Derivatives are commonly used to speculate on future prices of crypto. Futures contracts can help you bet on low prices, AKA going short. If the price drops, your short position earns a profit. Derivatives also allow you to gain exposure to an underlying asset at an attractive price. For example, you could bet on the price for valuing the DeFi Pulse Index via a futures contract. Studying the trends and researching the valuation forecast for this index may help you create bets and profit from them if done correctly and with finesse. Creating & Funding Your Derivatives Wallet You’ll first need to create a cryptocurrency exchange wallet and follow these steps: Access your wallet or create your wallet on the crypto.com exchange.Select “derivatives wallet” from the navigation bar, follow the instructions on-screen and accept the terms and conditions. After you’ve agreed to their terms, your application will be reviewed.Once approved, your derivatives wallet will be activated, and you can access your derivatives wallet page. Fund your wallet by clicking on the “transfer” option, and proceed to transfer eligible assets from your spot wallet.Accepted virtual assets currently include USDT and USDC. Conclusion: Underlying Assets in Derivatives Crypto derivatives are necessary to the crypto ecosystem, as they are a part of any well-established or mature financial system. Derivatives play a vital role in developing and growing the crypto space as a recognized and reliable asset class. Derivatives are just one of the moving gears in the revolutionary use cases of DeFi. Peer-to-peer lending, financial sovereignty, decentralized insurance options, and accessible payment solutions are part of the DeFi movement.
Algorithmic Stablecoins: Here's How They Work

General Discussions About Decentralized Finance

Algorithmic Stablecoins: Here's How They Work
If you are familiar with crypto, you probably know that stablecoins are kept “stable” via collateralized assets. Although, not all stablecoins are equal. Some are not backed by tangible assets but are kept stable through contract algorithms. These stablecoins are called algorithmic stablecoins, and these algorithms typically link two coins and adjust their price conditional on investor supply and demand. Continue reading to learn more about algorithmic stablecoins and if they make a good investment or not. How Algorithmic Stablecoins Work Usually, stablecoins maintain a 1:1 peg with the currency they track via a collateralized mechanism and are backed by assets or cash. Backing these stablecoins with assets supports the valuation. A peg, or “pegged crypto,” is an encryption-secured digital asset with value attached to some other type of exchange medium. These mediums include gold or the fiat currency of the given country. Algorithmic stablecoins function differently. Instead of having collateral backing them, they use unique algorithms to support and maintain their peg with the fiat currency they are tracking. Algorithms also encourage investors to analyze trends and behaviors to aid in stabilizing said coin’s price concerning the peg. While algorithmic stablecoins are pegged to the value of real-world assets, they aren’t backed by them. Are Algorithmic Stablecoins a Good Investment? Sometimes, algorithmic stablecoins can be a valuable investment since third parties aren’t required, and they can successfully and effectively regulate the number of circulating coins depending on demand. Many wonder whether or not the collapse of TerraUSD has hindered the future of algorithmic stablecoins and similar crypto. TerraUSD (UST) was an algorithmic stablecoin supposedly pegged to the U.S. dollar. However, it lost its dollar peg, collapsed, and shook the market. This debacle comes with increased attention from lawmakers trying to find risks and issues in the crypto space, likely leading to more regulation. Co-founder of BLOCKv, Reeve Collins, mentioned that the TerraUSD situation would “probably be the end” of algorithmic stablecoins. So, the future for these coins is unclear. Pros and Cons of Algorithmic Stablecoins There are both advantages and disadvantages of stablecoins. Pros True decentralizationLack of tangible assets eliminates risks of user errorsAlgorithmic stablecoins reintroduced seigniorage into the crypto space Cons Demand can change drasticallyHaving no collateral may make their price less stable than you thinkSome algorithms have an inherently weak structure Examples of Algorithmic Stablecoins There are plenty of algorithmic stablecoins on the market today, including: TribeMAIBasis Cash (BAC)Empty Set Dollar (ESD)Ampleforth stablecoinsUSDXParallel (PAR)Neutrino USD There are typically three types of algorithmic stablecoins, which are: 1. Rebasing Algorithmic Stablecoins The total is not fixed and is modified regularly. Instead, corrections are made automatically using the rebase technique, which stabilizes the price of a stablecoin towards a fixed peg. 2. Seigniorage Algorithmic Stablecoins This model consists of two forms of crypto, stablecoin and seigniorage ownership (shares.) When the price of a currency surpasses the intended peg, shares are used to increase coin supply. 3. Fractional Algorithmic Stablecoins These stablecoins are associated with less custodial risk and may avoid over-collateralization. They are designed to enforce a tight peg with more security and stability. Conclusion: Algorithmic Stablecoins Before investing in stablecoins or any other form of digital currency, you must do thorough research on your own. Understanding the fundamentals and technical side of the token is critical. The market for stablecoins is unregulated, which means investing may come with devaluation risk. In addition, under-collateralization may make you more prone to speculative targeting. When the supply of stablecoins is linked to the value of the unique governance token, the risk of devaluation increases. Protecting your stablecoins involves only investing in coins fully backed by stable collateral, preferably liquid U.S. dollar reserves. You could also use smart contracts to prevent over-collateralization. This system manages and enforces liquidation to maintain peg stability. Furthermore, since there’s no collateral to liquidate, users risk losing their investments if a market crash happens. This risk is another reason users must be mindful and diligent when researching and investing in algorithmic stablecoin projects.
How to Make Money With Stablecoins

General Discussions About Decentralized Finance

How to Make Money With Stablecoins
Anyone that has been in crypto for a while has used or at least heard of stablecoins. The biggest stablecoins like USDT (USD Tether) and USDC (USD Coin) often have a higher trading volume than big cryptos like Ethereum and Bitcoin. Namely, stablecoins are digital assets that are pegged to a stable asset like a fiat currency or a precious metal. The first stablecoin was launched in 2014 and was called bitUSD. It was pegged to the US dollar, but it didn't gain that much traction. Nowadays, the most popular stablecoins are USD Tether (USDT) and USDC, which are both pegged 1:1 to the US dollar. The reason why stablecoins are so popular is that they are much more convenient to use than traditional cryptocurrencies like BTC or ETH. With volatile cryptos, the value the recipient receives can differ from the one the sender has sent. With stablecoins, this isn't the case. Another reason for the rise in popularity of stablecoins is how easy it is to earn money with them. So, how do stablecoins make money? Since they are popular, there's an ever-growing demand for them, and you can supply this demand by loaning stablecoins or yield farming them. So far, we've only covered the tip of the iceberg regarding earning money with stablecoins. Are Stablecoins Securities? What Makes Something a Security? Now that we've covered the basics of what stablecoins are, the first question we need to answer is whether or not stablecoins are regarded as securities. There are different ways to determine whether or not an asset is a security, but the most popular one is the Howey Test, which is primarily used in the United States. According to the Howey Test, the following criteria need to be fulfilled for an asset to be considered a security: There is an investment of moneyThere is an expectation of profits from that investmentThe investment of money is in a common enterprise If all three points are met, then the asset is considered to be a security according to US law. Do Stablecoins Pass the Howey Test? With stablecoins, point one and three are definitely met, since you're investing money into them (you're usually buying them with fiat currency or cryptocurrency). But what about prong two? Do you expect to profit from your investment in stablecoins? The answer to this question is a little bit more complicated. If you're simply holding stablecoins as a store of value, then you're not expecting to profit from their appreciation in value, so they won't be considered securities in such a scenario. However, if you're lending them out on an interest platform or yield farming your stablecoins, then you are expecting to profit from your investment. This leads us to the conclusion that whether or not stablecoins are securities depends on how you're using them. If you're just holding them as a store of value, then they're not securities. However, if you're actively using them to make money, then they are considered securities in the United States. How Are Stablecoins Funded? One of the most common questions about stablecoins is how they're funded. After all, if they're pegged 1:1 to an asset, then how can you be sure that there's always enough money to cover all of the tokens in circulation? The answer to this question differs from stablecoin to stablecoin. Some stablecoins, like USDT, are backed by actual fiat currency that's held in reserve. So, for every USDT token that's in circulation, there's a real US dollar that's being held by the company behind USDT. Other stablecoins, like USDC, are backed by collateralized debt obligations (CDOs). A CDO is a financial instrument that's created when a group of loans is bundled together and then sold to investors. So, for every USDC token that's in circulation, there's a basket of loans being used as collateral. Read our comparison between USDC and DAI to learn more. Finally, there are also algorithmic stablecoins like the Ampleforth stablecoins, which don't have physical collateral backing them up. Instead, they use algorithms to maintain their peg. How Do Stablecoins Make Money? You now know how stablecoins work as an asset class, but there's an important question left unanswered: how do stablecoins make money? Let's take a look at three of the most popular ways to earn money with stablecoins. Earning Interest by Lending Stablecoins The most popular way to make money with stablecoins is by lending them out on interest platforms. Regarding stablecoins, there are many platforms where you could do this, and some of the most popular are Compound, dYdX, and Nexo. These platforms allow you to supply assets to them to earn an interest rate on your deposit. For example, let's say that you deposit 1,000 USDT into Nexo. You'll then be able to earn interest on that USDT as long as you don't withdraw it. The amount of interest you make will depend on the current borrowing rate for it, which fluctuates depending on supply and demand. Right now, the interest rate for USDT is around 10%, which means that you would earn roughly 100 USDT in interest per year if you deposited 1,000 USDT. That may not seem like a lot, but it can quickly add up thanks to compound interest—especially if you have a large amount of USDT. Also, keep in mind that the interest rate on stablecoins could go up or down in the future, so you could potentially earn even more (or less) interest on your deposit. Confused about how lending works in cryptocurrency? Read about the differences in lending DeFi vs. TradFi. Yield Farming With Stablecoins Yield farming is a relatively new phenomenon in the cryptocurrency space, but it's quickly become one of the most popular ways to make money with stablecoins. In a nutshell, yield farming refers to the practice of earning interest on your cryptocurrency holdings by staking them in specific protocols. The team behind the protocol would create a smart contract on the blockchain, allowing users to yield farm in a decentralized manner. Namely, this is usually done by providing liquidity with two coins—let's say USDT and USDC. Every time a user comes on the protocol and swaps one coin for the other, you'll earn interest. There are many protocols out there that allow you to do this, but some of the most popular ones right now are Compound, Maker, and Curve Finance. Of course, these protocols offer different interest rates for different assets, so you'll need to do your research to figure out which one offers the best interest rate for the asset you want to yield farm with. You should also consider taking a look at the risks of yield farming too. Staking Stablecoins Staking is another popular way to make money with stablecoins. Putting it simply, staking refers to the practice of holding a coin in your wallet for a specific period of time in order to earn interest on it. The amount of interest you earn will depend on how long you stake the coin for, as well as its current interest rate. For example, let's say that you want to stake 1000 USDT for 12 months. If the current interest rate is 5%, then you would earn 50 USDT in interest after the staked period. Of course, the interest rate could go up or down during that time, so you could potentially make more (or less) than that. There are many different platforms where you can stake your stablecoins, but some of the most popular ones are Nexo, BlockFi, and Binance. Each one of these platforms offers different interest rates for different assets, so you'll need to do your research to figure out which one is the best for you. Not sure whether you want to go with staking or lending? Read our staking vs. lending post to help you decide. Are Stablecoins Safe? So far, we've looked at how to make money with stablecoins, so you might be wondering if they're actually safe to use. After all, cryptocurrencies (and stablecoins included) are still a relatively new technology, and there's always the risk of something going wrong. So, are stablecoins safe? Fortunately, stablecoins are safe to use. They're backed by real assets, so you're not taking on any extra risk by using them. Additionally, they're subject to the same regulations as other cryptocurrencies, so you can rest assured that they're being properly monitored. Of course, there's always the possibility of something going wrong with any cryptocurrency—including stablecoins. However, as long as you take the proper precautions (such as storing your coins in a secure wallet and investing in reputable projects), you should be fine. Are Stablecoins Worth Investing In? Now that we've explained how to make money with stablecoins and whether or not they're safe to use, you might be wondering if they're actually worth investing in. The short answer is yes, stablecoins are definitely worth investing in. They offer a number of benefits over volatile cryptocurrencies, including price stability, low fees, and ease of use. Additionally, they're backed by real assets, so you're taking a minimal amount of risk by investing in them. Of course, as with any investment, there's always the potential for things to go wrong. However, as long as you do your research and invest responsibly, you should be fine.
Proof of Ownership in Crypto: How It Works

General Discussions About Decentralized Finance

Proof of Ownership in Crypto: How It Works
In the past decade, we have seen the rise of a new form of asset class—cryptocurrencies. A key feature that sets cryptocurrencies apart from other asset classes is that they are digital and decentralized, meaning that there is no central authority that controls or issues them. Instead, they are produced by a computer network that runs on a decentralized ledger called a blockchain. Although decentralization brings many benefits, it also carries some problems—specifically regarding ownership. Stocks and bonds, for example, are issued by a central authority, so you can quickly get a document proving your assets' ownership. But, on the other hand, no one can explicitly confirm that the wallet where you hold your crypto is yours—unless you prove it with a private key. However, giving your private key to someone has inherent privacy problems. A private key is your wallet's password, meaning anyone who has it can directly access your crypto assets. So, how can you prove that you're the true and only owner of your crypto assets? Read on to find out. How Proof of Ownership Works in Crypto There are three main ways to prove ownership of your crypto. Let's take a look at each one and see how it works. 1. Doing a Test Transaction Let's say that you want to prove to an institution (like a bank) that you hold a specific amount of crypto. You could tell them your wallet's public key, and they could open the blockchain explorer and check the amount held within the address. However, you still haven't proven that the wallet is yours. To do this, you could send a specified amount (an amount the bank would require) from that public address to the bank's address. Thanks to the transparency of blockchain technology, there's no way to falsify this. So, once you make the transaction, it will be imprinted on the blockchain forever, and you have proven ownership of the account. 2. Getting a Printed Statement This is perhaps the easiest method of proving ownership of a crypto wallet, though most central authorities would regard it as the least authentic one. Namely, getting a printed statement is done by exporting the transaction history from your wallet or exchange. Once you have the statement as a PDF, you can print it and take it to a legal authority like a notary public to verify its accuracy. However, it's easy to see why most central authorities wouldn't settle just for a printed statement regarding crypto proof of ownership. Although it's illegal, a printed statement is relatively easy to falsify with just a bit of graphic design knowledge. So, in most cases, a printed statement will be required as an additional ownership verification method. 3. Signing a Message With a Private Key In cryptography, a message can be signed with a public or private key (both are used in blockchain technology). As with cryptocurrency, a public key is something you share with everyone, while the private key is the instrument giving you access to your wallet. This is where signing a message with a key comes in. All tokens in cryptocurrency use specific cryptographic algorithms (BTC uses SHA256, ETH uses keccak256 and ECDSA). With these algorithms, a sender can encrypt a message with the wallet's public key, and the only one who can decrypt it is—you guessed it—the one who holds the private key. Let's take a look at a typical example of this. You want to submit proof of ownership to a bank of a crypto account that you claim is yours, but you can't prove it yet. You tell the bank your public key, and they check it on the blockchain and see the assets held on it. Then, using it, the authority (in this case, the bank) signs a message with the public key as an encryption tool. Thanks to cryptography and the way blockchain technology works, you can use your private key to decrypt it and verify the message. You've now proven ownership of the crypto wallet in question. When Proof of Crypto Ownership Is Needed In TradFi (the traditional finance system), there are multiple scenarios where you might need to prove ownership of an account or asset. For example, when opening a bank account, you will be asked to provide some form of identification like a passport or driver's license. A similar point could be made for investing in stocks and bonds. You will likely go through a KYC (know your customer) process to prove that you are who you say you are and that the money you're using to invest comes from a legitimate source. The same goes for crypto. Although crypto exchanges and wallets aren't regulated the same way as traditional financial institutions, there still are some scenarios where you'll need to prove ownership of a crypto account. For example, suppose you want to open an account at a bank that supports cryptocurrency. In that case, they will likely require some form of proof of ownership for your crypto account. Similarly, if you want to use your crypto assets as collateral for a loan, the lending institution will also require proof that you own those assets. Taking out loans with crypto is, in many cases, cheaper than in the traditional finance system since the APY in crypto is often better. Of course, traditional finance works much differently than DeFi—read our beginner's guide to decentralized finance to learn more. Nevertheless, in all proof of ownership cases, it's up to the bank or lending institution to decide what type of proof they will accept. Some might accept a printed statement, while others might require a signed message. How to Prove Ownership of Crypto Assets As we've seen, there are a few different ways to prove ownership of crypto assets. In most cases, you will need to provide a combination of the methods we've discussed above. The exact proof of ownership requirements might vary, but in general, you will need to provide some or all of the following: Your full name and addressA copy of your passport or driver's license (or another form of government-issued ID)The cryptocurrency wallet address in questionA signed message from that walletA printout of the wallet's contents Again, the specific requirements will vary depending on the institution you're dealing with. For example, suppose you're trying to open a bank account that supports cryptocurrency, and you'd like to use that crypto for yield farming strategies. In that case, they might only require your name, address, and ID. However, if you're trying to use your crypto assets as collateral for a loan, the lending institution will likely require more information, such as your wallet address or a signed message. Ultimately, it's up to the individual institution or authority to decide what type of proof they will accept.