DeFi 2.0: An Upgrade to the First Generation of DeFi
This article covers the fundamentals of Defi 2.0 while discovering the need for DeFi 1.0 evolution.
Several crypto users are getting weary of DeFi 1.0 due to its many flaws and inconsistencies. To newbies, these flaws are not obvious, but to oldies, these flaws are very obvious. All of the flaws associated with DeFi 1.0 are due to its instability and lack of popular acceptance.
Seeing that DeFi 1.0 can’t match the pace of crypto advancement, there is a need to launch into a better crypto world. Hence, the essence for the creation of DeFi 2.0.
DeFi 2.0 is an advanced version of the DeFi 1.0 with several improvements and addition to its networking. As a trader, we’ll recommend that you know so much about this new system network.
In this article, we’ll be discussing DeFi 2.0 in detail and the problems it will be solving. Also, we’ll be discussing how DeFi 2.0 solves these problems and why it is better than DeFi 1.0.
What is DeFi 2.0?
The DeFi 2.0 is an advancement of the DeFi 1.0 with improvement on its liquidity infrastructure layer and sustainability of the Decentralized Financing project.
DeFi 1.0 offered users liquidity mining, AMMs, lending, and token exchange. The DeFi 1.0 network was also offered alongside many projects that made transactions on the ecosystem comfortable and secured. Some of these projects are
Although these projects were incredible, there had to be improvements on the DeFi 1.0 ecosystem to accommodate the newly developed projects. The DeFi 2.0 will offer everything DeFi 1.0 will offer and many more. That is, the DeFi 2.0 ecosystem will offer liquidity, AMMs, lending, token exchanges, new finance technologies, user experience, and some improvement to capital utilization.
To improve on the capital utilization and use experience, DeFi 2.0 will be solving problems DeFi 1.0 couldn’t solve.
Meanwhile, here are some drawbacks to DeFi 1.0
So far. DeFi 1.0 has not been able to form close connections between its users. It forms weak vertical links and horizontal connections. To worsen it all, DeFi 1.0 is responsible for the cold transactions that occur on the website.
DeFi 1.0 didn’t focus on decentralized finances. It allowed transactions based on interest and enthusiasm. So, authorization of transactions was assigned to only specific individuals on the network.
A major disadvantage of the DeFi 1.0 was its means of accruing funds for transactions. It is used to acquire funds to loans via deposits from depositors for deposit claimers. This means of funding loans became a big problem over time. Hence, a need to find other alternatives of funding liquidity pools for loans.
These said, just like DeFi 1.0, DeFi 2.0 will come alongside various, better, and more problem-solving projects too. Some of these projects are:
The Olympus DAO serves to solve one of the biggest problems with DeFi 1.0. DeFi 1.0 was DeFicient in how it sourced funds for loans. It focused majorly on using funds from users to supply its bridge pool.
It'll mean that if there is no supply from users, there won't be a supply of funds to the bridge pool. Consequently, there won't be loaning in the network.
To properly handle this, Olympus DAO will be sorting funds for bridge pools without getting any from users. This is why Olympus DAO is often referred to as the alternative model to liquidity mining.
Olympus DAO is an algorithmic protocol that utilizes bond mechanisms to help it serve as an alternative for liquidity mining. It's the first protocol to use this kind of liquidity mining mechanism.
Olympus DAO can function effectively by issuing its tokens at lower costs for easy purchase. With this, the OHM (Olympus DAO Token), will be able to secure a position in the market to create protocol-owned liquidity.
Each OHM is oftentimes backed by DAI. It means that one OHM is backed by 1 DAI. So, higher OHM prices will mean more DAI pumped into the pledge contract. Consequently, more returns are available during participation in OHM pledges.
With this mechanism, the price of OHM is constantly maintained above 1 DAI and the market cap steadily approaches the overall asset value of Olympus treasury.
In addition to all these said about the Olympus DAO, we must mention that users don't own the tokens on this system; it is the protocol that owns the tokens.
This is an advantage as it helps to prevent selling pressure from immediate liquidity providers. So, it is Olympus DAO filling in the place of liquidity providers.
Abracadabra
Abracadabra works like MakerDAO in that they both are lending platforms and collateralize users’ assets to generate stable coins. Also, they both function by using protocol incentive tokens.
But unlike MakerDAO, Abracadabra collateralizes assets with proceeds such that users can use tokens to mint or borrow stable coins some of the tokens Abracadabra uses are yvUSDT and xSUSHI being tokens. By using these tokens, they can free up assets, liquidity, and user revenue.
Abracadabra has lending advantages too and some of them are:
Abracadabra offers a very low cost of borrowing and low, stable interest rates
Independent liquidity risk with no linkage to other collateral.
Conversion of assets with high potential of yielding interest into liquidity for the increment of income and capital leverage.
On the whole, Abracadabra enhances the utilization of funds and reduces the chances of liquidation.
Convex Finance
Convex finance has embarked on the journey to improve the user experience in DeFi 2.0. It will be doing this by showcasing a one-stop platform for its users for liquidity mining and CRV pledging.
In the end, convex finance will be developing the CRV ecosystem by balancing CVX tokens by simplifying the CRVA locking, pledging, and process of the curve.
Recent breakthrough with DeFi 2.0
One of the key indicators of the growth of DeFi 2.0 is the quick growth of its projects on the ecosystem. So far, Convex finances a Total Value Locked {TVL} of 14.55 billion surpassing yearn of .0 billion.
In the same way, Abracadabra has accrued 4.2 million and Olympus DAO accruing 650 million growth change. All of these are clear indicators of the effectiveness and efficiency of DeFi 2.0.
Which Way to Go?
We have seen the differences between the two DeFis, weighing their cons and pros, and have submitted our resolution to you to pick which best suits you.
No one will prefer DeFi 1.0 over DeFi 2.0 seeing its ease of adaptability and its ease of incorporating ability into several crypto networks. You may want to deny it but several applications and transactions will soon wear out your patience for DeFi 1.0.
Instead of sticking to the old man, why not launch into newer experiences and enjoy smooth transactions on DeFi 2.0?
Serum: A Blend of Speed, Convenience and Trustlessness
As the next-generation exchange system, Serum is making waves in proving its credibility in crypto-trading and decentralized finance transactions. It provides faster and frictionless orders with its automated order book system.
Serum provides incentives to its users which in turn favors so many developers. Some of these incentives are Serum Token (SRM) and MegaSerum Tokens(MSRM). With these tokens, one can achieve passive crypto income by staking their tokens on Serum.
Serum allows every member to stake their tokens. It doesn't only allow members with the highest token to stake, it also allows members with small tokens to stake too.
Seeing that Serum DEX has so much to offer, there's a need to know so much about it. In this article, we'll extensively discuss Serum DEX and its features. Also, we'll discuss the values and how it relates to other blockchains. Enjoy!
What is Serum?
The Serum is a decentralized exchange system built on the Solana ecosystem to provide unmatched low costs and speedy DeFi transactions. It charges as low as 0.0001 cents for transactions.
The system aims to offer users faster settlement times and zero centralization.
In offering a non-centralized side of its architecture, it centralizes price fees even without using Oracles services. Hence, we say the Serum system functions without Oracles. Oracle is a centralized service used by Defi protocols to verify, authenticate and query external data then send them to an already closed system.
Because Serum is based on the Solana blockchain, it offers fully decentralized services that are easy, fast, and affordable to use.
In Serum DEX, users can easily transfer assets amongst different blockchains and even trade stable coins and wrapped coins or even convert coins from one coin to another. For instance, converting Ethereum to FxT. Some of the projects build on Serum DEX are:
Furthermore, users can create customized financial products as they deem fit.
The Serum uses native Serum tokens(SRM) as its main governing assets and incentive for its ecosystem. With SRM, users can stake, trade, or participate in burn and buy fee incentives for reduced trading costs.
Also, with the SRM, users enjoy a further reduction in Serum-based transactions.
Aside from all of these, Serum aims to enhance frictionless cross-chain contracts in DeFi while traders trade synthetic assets. It provides many synergies with the Solana blockchain serving as its host application.
Solana Blockchain
As the fast-growing blockchain system, Solana has secured a spot in the top 10 cryptocurrency projects according to the market cap. Being able to carry out fifty thousand transactions in a second(TPS), Solana blockchain has demonstrated to be the quickest blockchain anywhere on the globe. So, Serum building their project on the Solana network will allow for quick fast transactions on the Serum network.
Solana, with all of its functions, is a layer-1 blockchain. So, to function effectively, Serum functions solely on a layer-1 solution system without layer-2 solutions. It operates solely on a decentralized clock that monitors time-stamps transactions together with an advanced Proof-of-Stake(POS) mechanism.
In recent times, blockchain developers have been designing decentralized applications using the Solana blockchain. This widely accepted choice from blockchain developers is due to Solana's reputation in providing fast and scalable smart-contract-enabled blockchain. It's this advanced blockchain system that the Serum network is built on. Clearly, Serum is just a project on the Solana ecosystem.
That said, Serum DEX mirrors the cost and speed of the Solana network. With this, it offers a fully decentralized trading arena with easy trading on centralized exchange systems. It also offers inter-operable features that allow users to exchange assets such as Ethereum (ETH), Bitcoins (BTC), SPL-based tokens, and ERC-based Tokens.
Serum Token (SRM)
A unique thing about the Serum token (SRM) is its means of collecting values. It accrues values via hyperinflation.
SRM accrues values through adoption and utility. Some are:
All Serum's net fees go to burn.
50% off on all Serum fees on holding a token.
Fees payment with SRM.
That said, most SRM have extensive unlocking terms with all sales fees inclusive. Serum achieves this by locking the tokens. SRM are locked cryptographically in a smart contract. It takes about a year or less to unlock a locked token.
The period where you cannot unlock a locked token is its unlocking period. Most SRM have an unlocking period of one year.
In some cases, some SRM take up to 6 years to unlock. This type equates to 1/2190 SRM in a day.
SRM amount to a maximum of 10 Million tokens, creating about 175 million tokens in its circulation. Because of this high number of tokens in circulation, Serum has been able to provide liquidity to their project. However, several token stakeholders have decided to hold on to a large number of their tokens thereby reducing the number of tokens in circulation.
Moving on, several traders stake SRM to achieve passive crypto income. They also do this by rescuing fees and staking rewards when trading on Serum DEX.
Howbeit, traders with SRM can still partake in on-chain governance. Traders who do this will vote on updates to specific markets on the project.
MegaSerum Tokens (MSRM)
A MegaSerum(MSRM) is equivalent to one million SRM. It means you have to have a million SRM as they'll amount to one MSRM.
MegaSerums are rare and there are only 10%. This is so as there are just fewer users that show belief and commitment to the Serum network. It's just those 10% that can lock their SRM with MSRM.
Project Serum Cryptocurrency Ecosystem
The project Serum, built on the Solana ecosystem, provides usable services to developers and other users from the start of their project to its deployment. On a large scale, this ecosystem provides a suitable platform for non-technical users planning on delving into Decentralized Finance(Defi). This they can do on Serum's user-friendly App(dApp).
That said, in the Serum ecosystem, developers are automatically eligible for grants once they build on this network. With this, projects receive the support and funding to enhance their user adoption and brand awareness.
A good example of a project like this is the Phantom project. The Phantom project is a Defi(Decentralized finance) and NFT crypto wallet. Another example is Coin98 that offers users smooth running payment gateway services.
Also, Project Serum provides developers contact points and resources. With that, you can view on-chain codes, clients codes, and repositories. The project also offers tutorials for developers which can be found on the "Developer Resources" on its website.
Finally, the Project Serum allows users to comprehensively overview all Serum's tokens and integration within its ecosystem. And to top it all, the project provides a link to its whitepaper.
Serum and Staking Nodes
Before one becomes a Serum node, one must take at least 10million SRM including a minimum of 1 MSRM. However, at 100 million SRM or 100 MSRM tokens, nodes stop staking tokens.
Nodes collect several rewards based on their network participation, the aggregate of activity, and performance within the Serum ecosystem. Generally, nodes are in charge of some blockchain operations like cross-chain settlement validation.
Staking
Oftentimes, traders can't continue the Serum project and earn passive income via Defi because they can't stake 10 million Serum tokens. This shouldn't be a challenge as there are alternatives to this.
Serum token holders can now stake tokens as regards a node. A node is formed by a leader and consists of members of that network. The node leader doesn't necessarily have the highest tokens. But the leader can be the founder of the node and will receive small fractions of node staking fees.
In a node, anyone or the leader can stake a node on behalf of another member. Still, Serum nodes will offer trading fees and governance rights within its ecosystem.
However, there're mechanisms to provide an overload of tokens in the ecosystem. As many readers stake their SRM tokens, the system cools down following unstacking tokens. This period, known for just a week.
Node Rewards
In a node, rewards are distributed through native SRM. However, the nodal leaders receive more proportion of the node than other members. Commonly, the leader receives 15% of the rewards while the 85% is distributed among other members.
Annually, nodes receive a 2% percentage yield (APY) based on their staked funds. However, this percentage can increase to around 13%. This can only be possible if members of a node increase their performance duties and challenges. Also, nodes get special rewards for special challenges. One of these challenges includes providing collateral for SRM tokens. The aim of this is to prevent funds from burning.
How to Use Serum
Serum exchange doesn't require that users own an account before a transaction. All you need to transact on Serum DEX is an internet connection, a wallet, and some cryptocurrencies.
First, if you're carrying out a transaction on Serum, you’ll be needing a Solana wallet. Asides from the Solana wallet, there are other wallets that Serum interacts with.
To switch between the wallet, click on the change wallet at the top right corner of the interface. Then pick your desired wallet.
Here is a breakdown of how to use the Serum before we delve into each process extensively.
Create a Solana wallet
Here is a link that explains how to create a Solana wallet.
After creating a Solana wallet, on the first opening, you’ll be asked to write down your recovery keys. Make sure to write them somewhere first as you’ll be needing them some other time.
Often, we advise users to create a password immediately after creating their Solana wallet.
After creating a password, you’ll be asked to re-enter your new password for confirmation.
After doing this, you click on continue. There you have it. You have just created your Solana wallet.
On your Solana wallet, you can deposit Eth and convert it to Sol and vice versa. As you’ll expect, there are conversion fees associated with this.
From another exchange system, you can click on the cryptocurrencies you have there and transfer them to your Solana wallet. In withdrawing your cryptocurrencies, you’ll be needing your already copied Solana wallet link to be able to receive your money.
To successfully withdraw, you will need to authenticate your transactions.
After a complete authentication, you can head to your Solana wallet. It’s critical to mention that this transaction doesn’t take long. It only takes a maximum of two minutes to complete a transaction.
Seeing that your cryptocurrency has arrived in your Solana wallet, you can add tokens by clicking on the add token feature on the interface. One may choose to add Serum unwrapped Bitcoin to the Sol.
These wrapped tokens can then be in the deposit and become real underlying assets.
Also important to note is the small fee attached to adding tokens to a Solana wallet.
The next thing to do is to find a Serum-based DEX to connect to this wallet.
Connecting your Wallet to Serum DEX
Connecting your wallet to Serum DEX shouldn’t be challenging provided you follow these easy steps. Below are simple steps on wallet connection.
On the Serum DEX interface, click on "connect" on the top right corner of the interface.
Ensure you must have selected your desired wallet before clicking connect.
And if you wish to change your wallet, you must disconnect from the current wallet, then, you can click the select wallet feature to pick your new wallet.
The Value of Serum
As of the time of writing this article, Serum values was the 11th most trending cryptocurrency. On the other hand, it was 141st on the coin market cap on that same day.
Serum DEX offers a platform for developers and other users to trade speedily and conveniently. For developers, it provides contact points and resources. Such that, they can view on-chain codes and attend tutorials. All that Serum offers is because of its conjunction with the Solana network.
The Casper Network is a layer 1 Proof-of-Stake blockchain that improves how businesses upgrade new services and products on the blockchain. Unlike other networks, it has peculiar features that make it unique. It's for these features that the Casper Network is becoming the best choice for programming and blockchain transmission.
One of these unique features includes its Highway protocol consensus. It's with this Highway protocol consensus that Casper blockchains can finalize the addition of new blocks to the chain. Aside from this, there are other unique features of the Casper Network.
In this article, we extensively discuss the unique features of the Casper Network and how they aid blockchain transmission. Enjoy!
Casper Network: History, Protocol and CSPR Token
The Casper Network is a permissionless blockchain network supported by the PoS consensus algorithm and WebAssembly (WASM). It was created to solve global blockchain challenges by effectively solving a trilemma:
Scalability
Provision of e enterprise-level security
Decentralization on a blockchain protocol
Before we fully delve into the benefits, here is a brief on how the Casper Network came into existence and its operations.
The History of Casper Network
In 2018, two people founded the Casper Network - Mrinal Manohar and Medha Parlikar. In its creation, the creators aimed to create a network that promotes DApps, blockchain technology, and smart contracts globally. Hence, based on the Casper CBC specification, they created the first real-time Proof-of-stake (PoS) blockchain.
Casper as a platform aims to continuously adapt to the needs of its users and developers from different spheres. Because of this, it is regarded as the gateway to a developed era for Web3 to match the increasing demand for connected services globally.
Highway Protocol
The Highway protocol is a consensus protocol created with the Casper Network to attain a very high threshold required for finalizing blocks to be added to a blockchain. In essence, it enables quick agreement among validates for block addition on the Casper Network.
The Highway protocol is peculiar to the Casper Network giving it an edge over other networks. Asides from enabling quick agreement among validators, the Highway protocol allows for flexibility during the finalization of blocks.
CSPR Token
After completing on-chain transactions on Casper Network through Casper PoS consensus, network validators are rewarded with native cryptocurrencies. This reward is peculiar to the Casper Network system and is known as the CSPR token.
It was first introduced through the Coin list in a public sale. In the first supply, about 800million tokens were supplied but this was followed by a slight decrease in demand afterward. Although CSPR tokens were first sold on the Coin list, they're currently available on several crypto exchange platforms.
Clean Energy Blockchain
According to research by the University of Cambridge, the bitcoin global consumption index is 0.6%. This is very high relative to other systems. In fact, Elon Musk announced a few months ago that it'll no longer accept bitcoin as a payment option.
The reason for this high energy to power blockchains is due to the validation, computing, and securing activities of the blockchain network system. To solve this, the Casper blockchain has already incorporated a PoS, and a Highway protocol.
Unlike other platforms, the Casper blockchain network provides an environmentally-friendly blockchain network. Clearly, Casper produces clean energy blockchains.
Having known much about Casper Network, you must understand the benefits of this system. Below, we extensively discuss the benefits of the Casper Network.
The Benefits of the Casper Network
As a Layer 1 Proof-of-Stake blockchain system, Casper Network makes it easy to add new blocks. This especially is a major difficulty that other systems haven't been able to solve. Asides from this, there are other advantages of the Casper Network.
Developer-Friendly Features
Commonly, developers use block-chain programming languages for their services. A typical example of a blockchain programming language is Solidity. Solidity makes it easier for developers to code for different locks.
Unlike Solidity, the Casper Network has an advanced programming language known as WebAssemly(WASM) and Rust. Both of these programming languages make coding easy for developers. With the Rust and WebAssemly(WASM), businesses can efficiently future-proof their organizations.
Now, here is some good news, Casper has a transpiler that converts solidity codes into Rust. This tool, known as Caspiler, helps developers convert decentralized applications such as Ethereum onto the Casper Network.
Upgradeable Smart Contracts
The Casper Network has a very distinct characteristic that supports the upgrade of smart contacts already on the on-chain. In fact, the smart contract rate on Casper is less costly and less complex than with other platforms.
Besides this, during upgrades, the Casper system checks for vulnerabilities too. With this, smart contracts cannot be edited by anyone, not even by the original developers once deployed. With upgradeability, businesses can now offer resilient and adaptable block-chain products and services.
Lower Gas Costs
Another very intriguing benefit of the Casper Network is its capacity to moderate gas costs. During large volume transactions, gas volumes can get high and customers can get services at ridiculously high prices. But with the Casper Network, we reduce network congestion when competing with other Layer 1 blockchain projects.
Caper even has a future gas costs plan to help businesses prepare for the future. They hope to develop a predictive gas future to allow businesses to save gas ahead of time. With this, businesses better plan for the future.
Weighted Keys
Often, blockchains come with binary(on and off) smart contracts which is a disadvantage for large teams. Large teams manage complex systems and applications which the binary smart contract cannot accommodate. This becomes a challenge for large teams as they cannot effectively work together and manage these complex systems.
To properly manage complex systems, the Casper Network has weighted keys that allow for multi-level system access permission. These weighted keys organize the security and quantity of businesses' assets. All of these above are the advantages of the Casper Network.
Casper's New Solution for Defi
Seeing the rapid changes that are occurring to the digital world and the cryptocurrency world, it's critical that their systems adapt to these changes too. One of these facets is the Defi system. Meanwhile, Casper is leading in the Defi revolution quite well.
Unlike other blockchains, the Casper Network doesn't contain high security, energy, and decentralization costs. From this, it's clear the Casper Network is leading in the Defi revolution.
Flexible Protocol
Casper Network incorporates a new consensus protocol known as the Highway protocol. The highway protocol allows the easy finalization of additional blocks to be added to the blockchain. To do this, the highway protocol presents varying thresholds for finalization.
Energy Efficient and High Finality Defi
Unlike other blockchains that depend heavily on miners to achieve a consensus, the Casper Network introduces validators to achieve consensus. And Casper can only achieve this through its advanced PoS protocol.
Deterministic Protocol
A major pitfall in Defi is its probabilistic network fees. Several people say the EIP 1559 makes the ethereum fee deterministic but not both. However, the Casper Network provides both a probabilistic and deterministic network pricing model.
User-Developer Friendly Platform
With the Casper protocol, Developers can choose either a private or public and set their permission levels and privacy. In a way, this is paving the way for mass adoption for developers.
The Casper Network features a WebAssembly for developers to create a user-friendly platform. Also, it features an SDK that offers developers the flexibility of deployment without learning new languages.
Upgradeable Smart Contract
The Casper Network can upgrade smart contracts on-chain directly without technical difficulties. This is due to its advanced protocol design and governance procedures.
Sharding Layer 1 Solution
Commonly, users opt-in for Layer 2 solutions to base blockchains for scalability sales. However, this comprises security and decentralization. To solve this, Casper has Sharded Layer 1 configuration.
How Casper Works
Casper functions basically by validating transactions with group validators then continuing with the network. This is quite different from other validation mechanisms like the Proof-of-Work network. For economical reasons, the Proof-of-Work networks centralized validators. However, Casper presents better options like decentralized dependence on validators.
Also, Casper presents stacked tokens that enhance the verification of transactions with validators. In the same way, they're able to receive CSPR rewards because of their PoS consensus protocol. Finally, just like other networks, the Casper Network has tokens for their transactions too.
The Mechanism of How The Casper Network Communicates
There exist networks of nodes that make it easier for peers to reach a consensus on a blockchain. But these nodes are not physical machines. Just like every digital machine, nodes some to network traffic, by presenting ID and addresses.
The Identity
Since Casper ensures the effective security of data it must have high-quality security measures. To do this, Casper registered the fingerprint of members of a blockchain which serves as their identity.
It's worthy of mention that each node has distinct identity features. Each of these features is generated once a new node is activated.
A typical node has an IP and a pair of ports that successfully access the nodes. Also, importantly, a node has an address.
Internodal Connections
Internodal connections refer to the connections that exist between nodes. Before a node successfully creates a connection between nodes it opens a TLS connection that ends on the receiving node.
The node that generates the TLS connection is often referred to as the Client node. On the other hand, the node that receives the TLS connection is the server node. This is important during connection creation as the client node must verify with the client node before generating any signal.
To further explain, TLS connections must contain the same digest and password to prevent connection attacks. The activity of the connection created is dependent on the route of the connection. Connections can be one way or two ways. If one way, connects reconnects with the server but if two ways, the entire connection is discarded. Two ways connections are used to send one-way messages.
Network
It takes at least two nodes to establish a network. Before connecting to a node, the client node will attempt connecting with another node to form a full connection network. The essence of forming a connection is for efficient data transmission.
There are two types of data transmission:
Broadcast
A broadcast allows you to transmit messages once without any accuracy that every node connected will receive the message.
Gossip
Just as you'll expect, gossip is just the distribution of value through a network without directly sending it to each node. It means that only some part nodes connect to the server before the distribution occurs. Some examples of values being gossiped about are endpoints, implementations, and blocks.
It's very critical to note that only consensus messages sent by validators are broadcast. Anything outside of this is gossip.
Node Discovery
When nodes constantly talk about their addresses, it can lead to node discovery. After gossip, each node ensures to establish a connection and records the endpoint. Failure to achieve this is node discovery.
To Wrap It Up
The Casper Network has so much to offer to the digital world. Most especially, in the world of blockchains and developers. With Casper, developers can easily code using Rust or WebAssemly(WASM) programming languages present on Casper.
The Casper Network does not only advance the world of developers, it advances other worlds too. In this article, we discuss the benefits and advancements that the Casper Network presents to the present and the future.
Today, lending is one of the most important financial activities in society. It fuels economic growth and facilitates commercial activities. The size of the world’s debt markets as of 2020 was estimated to be more than $281 trillion, more than three times the world’s annual output. This paper focuses on DeFi lending markets being created through the use of blockchain technology.
Traditional Lending and its Problems
Credit, offered by a lender to a borrower, is one of the most common forms of lending. Credit fundamentally enables a borrower to purchase goods or services while effectively paying later. Once a loan is granted, the borrower starts to accrue interest at the borrowing rate that both parties agree on in advance.
When the loan is due, the borrower is required to repay the loan plus the accrued interests. The lender bears the risk that a borrower may fail to repay a loan on time (i.e., the borrower defaults on the debt). To mitigate such risk, a lender, for example, a bank, typically decides whether to grant a loan to a borrower based on the creditworthiness of this borrower, or mitigates this risk through taking collateral - shares, assets, or other forms of recourse to assets with tangible value. Creditworthiness is a measurement or estimate of the repaying capability of a borrower . It is generally calculated from, for example, the repayment history and earning income, if it is a personal loan.
The current mainstream lending market, led by banking institutions, is fraught with issues as highlighted below.
Financial Exclusion
Individuals or entities with thin credit files face financial exclusion from present lending institutions, which have stringent lending rules and underwriting models to reduce default risk. The International Finance Corporation estimates that 65 million firms have unmet financing needs of $5.2 trillion each year.
Liquidity inefficiency
The supply and demand side of lending is fragmented based on lending period, interest rate, credit rating etc. in the present markets. This results in sub optimal liquidity. Further, the oversupply of liquidity in one submarket cannot be promptly transferred to serve the demand of another submarket.
Subprime problems
The financial exclusion in current systems has given rise to alternative lending entities, including peer-to-peer lending markets. These lending entities typically charge borrowers a premium for securing funding, understanding that the borrowers are left with no other options to source funds. Because these markets are non-regulated, fraudulent activities and high default rates permeate these less strict lending markets.
During 2007 financial crises, institutions were left holding trillions of dollars worth of near-worthless investments in subprime mortgages.
Legacy infrastructure
The dated information technology infrastructure used by mainstream lending entities is a crucial impediment to efficiency and speed. There is limited data exchange between financial institutions. Credit history and other related information is fragmented and opaque.
Key Concepts in DeFi Lending
Despite their respective distinctions, most DeFi lending protocols share two features; they have replaced centralised credit assessment to codified collateral evaluation, and they employ smart contracts to manage the system functionalities. Some key concepts being used by most DeFi protocols are highlighted below.
Value locked
Value locked represents the total users’ deposits in a protocol’s smart contracts. The locked value serves as a collateral or reserve to back the system.
IOU token
Lending protocols issue users IOU (I Owe You) tokens against their collateral deposits. These IOU tokens redeem deposits at a later stage, and they are also transferable and usually tradeable in exchanges.
Collateral
A loan’s collateral represents the entirety or part of the borrower’s deposit against the loan. The collateral ratio determines how much loan a user is allowed to borrow.
Liquidation
The liquidation of a loan is triggered automatically by a smart contract. When a loan’s collateral ratio drops below a critical threshold due to interest accrued or market movements, any network participant can trigger the function to liquidate the collateral.
Interest Rates
Borrowing and lending interest rates are computed and adjusted by smart contracts according to the supply-borrow dynamics, based on protocol-specific interest rate models.
Yield
The total amount of profit or income produced from a business or investment is referred to as yield. In DeFi, it is often measured in terms of Annual Percentage Yield (APY). Yield is relevant to the suppliers of loans, and is largely dependent on borrowing demand.
Key Architecture Elements
Oracles
The market price information of locked and borrowed assets are supplied to smart contracts through external data feeds providers called “price oracles”. An oracle imports off-chain data into the blockchain so that it is readable by smart contracts. There are different kinds of oracles that the lending borrowing protocols use. Such as, chainlink or any custom made DEX oracles such as uniswap’s TWAP.
Lending pools
Liquidity pools are markets of loans for crypto-assets. Users called liquidity providers (LP), act as lenders and supply an asset to the protocol. In return, they receive a claim to the supplied asset represented as minted tokens (IOU). In return for liquidity provision or supplying assets, lenders are given incentive in the form of interest. At any time, lenders can redeem their IOUs by transferring minted IOU tokens to the protocol, which then pays back the original tokens (with accrued interest) to the redeemer, simultaneously burning the minted tokens (IOUs). This can be seen by a simple representation of providing liquidity on Compound protocol shown below. A user supplies ETH as an asset and gets cETH as an IOU token, which can be redeemed back for the underlying ETH plus interest paid in the units of supplied asset, in this case ETH.
Borrowers can initiate a loan by borrowing tokens deposited in a pool. This can be seen by a simple representation of borrowing on Compound protocol shown below in which a user deposits ETH as collateral and gets cETH as an IOU token representing the collateral plus the borrowed DAI. The collateral can be redeemed by paying back the borrowed amount plus the interest. The interest rates paid and received by borrowers and lenders are determined by the supply and demand of each crypto asset. Interest rates are generated with every block mined.
To ensure that borrowers eventually repay the loan, they are required to provide a collateral (usually in the form of ETH). An unpaid loan of person A can be liquidated by person B, who pays (part of) A’s loan in return for a discounted amount of A’s collateral. For this to be possible, the value of the collateral must be greater than that of the loan. To illustrate this, let's say a borrower has taken out a loan of 100 DAI by depositing $150 worth of ETH as collateral, given that the required collateralization ratio is 150%. If ETH falls in value and if the borrower’s collateral is now worth less than $150, then anyone can pay for the loan by paying 100 DAI for the loan, and in return can get the ETH deposited by the borrower as collateral at a discounted rate set by the protocol.
Tokens
In DeFi, tokens can represent a user’s share in a liquidity pool or serve the purpose of keeping the markets in equilibrium and to ensure that all actors behave honestly. Protocols also distribute governance tokens that allow holders to propose and vote on protocol changes, such as modification of interest rate models. Governance tokens are often given as a reward to incentivise participation, from both borrowing and lending sides, in a protocol. One more usage of governance tokens from the perspective of a protocol is to pay debt in the scenario of a black swan event.
Key Participants
Lender and Borrowers
They are the main users of the protocol. Lenders supply assets for loans in order to earn yield or interest income from their holdings. Borrowers on the other hand, take loans to get liquidity by providing collateral. They do this because they expect appreciation in the price of their collateral and don’t want to sell it to access liquidity. The loan can be used for consumption, allowing the person to overcome a temporary liquidity squeeze or to acquire additional crypto assets for leverage exposure.
Keepers
Protocols may require that the on-chain state is continually updated to maintain certain standards such as collateral ratio. To trigger state updates, certain protocols rely on external entities called Keepers. Keepers are generally financially incentivized to trigger such state updates. For instance, if a protocol requires a user’s collateral to be automatically liquidated under certain conditions, the protocol will incentivize Keepers to call transactions to trigger such liquidation and in return the Keeper will receive the liquidated collateral at a discounted price. The network of Keepers can be based on pure P2P execution or a consortium based on some consensus protocol such as PoA, or PoS.
Governance
Governance, in DeFi, is the process through which a protocol is able to make changes to the parameters which establish the terms of interaction among participants. Such changes can be performed either algorithmically or by agents. Presently, a common approach to governance is for a protocol to be initiated with a foundation. The foundation has control over governance parameters, with a promise to eventually decentralize its governance process in future. Such decentralization of the governance process is instantiated through the issuance of a governance token, an ERC-20 token which entitles token holders to participate in protocol relative to their share of total supply. Governance can be both full on-chain, off-chain or a hybrid combination of both.
Basic coin voting can empower large whales to vote on the system and virtually hijack it. But this can be mitigated through Quadratic voting. Detailed information on the topic of DeGov can be found here.
Types of DeFi Lending Approaches
Protocols in DeFi follow different approaches for lending: Collateralized debt positions, P2P collateralized debt markets, Under collateralized borrowing and Flash loans.
Collateralized Debt Positions
Contrary to the traditional lending markets, the lack of a creditworthiness system and enforcement tools on defaults leads to the necessity of overcollateralization in most lending and borrowing protocols (e.g. Compound, Aave). Over-collateralization means that a borrower is required to provide collateral that is higher in value compared to the debt being taken out. To maintain the over-collateralization status of all the borrowing positions, lending pools need to fetch the prices of cryptocurrencies from price oracles.
Once a borrowing position has insufficient collateral to secure its debts, liquidators are allowed to secure this position through liquidations. Liquidation is the process of a liquidator repaying outstanding debts of a position and, in return, receiving the collateral of the position at a discounted price. At the time of writing, there are two dominant DeFi liquidation mechanisms. One is the fixed spread liquidation, which can be completed in one blockchain transaction, while the other one is based on auctions that require interactions within multiple transactions.
To illustrate the concept, let's take the example of Compound protocol. Users of Compound can lend and borrow ETH and other ERC-20 tokens. Users who lend their token receive IOUs in the form of cToken (e.g. cETH, cDAI) of an equivalent value in return. The IOUs can be used to redeem the supplied asset by the lender and accrue the interest. The deposits of all lenders are pooled together and they start earning interest right when they deposit their funds in the smart contract based pool. However, the interest rates are dependent on the pool’s utilization rate. When liquidity supply is high loans will be cheap as interest rates will be lower. When loans are in demand, borrowing will become more expensive with interest rates becoming higher.
Lending pools have the additional advantage that they can maintain relatively high liquidity for the individual lender in case of redemption. The role of the keepers comes into play in the CDPs liquidation process.
P2P collateralized debt markets
This approach works by matching lenders with borrowers. In other words, for someone to be able to borrow ETH, there must be another person willing to lend ETH. Loans are collateralized in this approach too in order to mitigate counterparty risk and to protect the lender, the collateral is locked in a smart contract. Under this approach, the lenders do not automatically start earning interest, but only once there is a match with a borrower. The advantage of this approach is that the lenders and borrowers can specify terms of loan such as time period and fixed interest rates.
From a technical perspective, a state channel can be opened between both parties with the signature verification done on the base chain. And the channel will be closed only if both parties agree that settlement has been done correctly.
Under-collateralized
Under-collateralized borrowing also exists in DeFi (e.g. AlphaHomora), however in a limited and restricted manner. A borrower is allowed to borrow assets exceeding the collateral in value, however, the loan remains in control of the lending pool and can only be put in restricted usages (normally through the smart contracts deployed upfront by the lending pool). For example, the lending pool can deposit the borrowed funds into a profit generating platform (e.g. Curve ) on behalf of the borrower.
Flash Loans
An alternative to over-collateralized loans are flash loans. Flash loans take advantage of the atomicity of blockchain transactions. Atomicity means that multiple actions can be executed within a single transaction. Even if one of the actions is not executed, the whole transaction is reverted. Because flash loans are taken out only for the duration of a single transaction, they allow the borrower to take out loans and repay the full borrowed amount plus fees by the end of a single transaction. Aave is one of the first protocols that supports “flash loans”, later on followed by Uniswap.
DeFi Lending Snapshot
We can see from the chart below that the Total Value Locked (TVL) in DeFi lending has meteorically increased over the last year rising from almost $4B to $39B, posting an increase of almost 10X.
In terms of protocols with highest TVL, Aave tops the list with a current share of approx. 37.5% followed by Compound (25%) and Maker (21.8%). InstaDapp is a lending aggregator, hence we do not account for it here as this could result in double counting the TVL. The combined TVL of the 3 highlighted platforms constitutes approx. 85% of the entire DeFi lending TVL which shows their dominance.
Interest Per Year (IPY) is the speed at which interest is accruing in DeFi. IPY is calculated by multiplying the current borrow rate by the total outstanding debt. The composite IPY of the entire lending space is shown below for the last one year. In general, each asset listed on a lending protocol has its own market and terms for loans. Data from each cryptocurrency / asset listed by a protocol is combined to arrive at its composite IPY.
We can see from below that the overall IPY in the last year has increased starting from around $70M to currently standing at $885M. Around July the IPY fell considerably possibly due to the crypto market downturn, still it was able to stay above $500M. The IPY since the downturn appears to have rebounded back, though one can infer that borrowing demand is correlated to the overall crypto market cycles.
As far as individual protocol’s IPY is concerned, Aave appears to take the lead on this metric too. It generates almost 2.5 times the IPY of Compound and almost 12 times the IPY of Maker. This implies that Aave is able to attract much more borrowing demand compared to the other two. It would be worth investigating the reasons for this. One possible reason could be that Aave allows borrowers to select a stable or variable interest rate, while Compound and Maker only have variable interest rate options. This introduces uncertainty in interest payment amounts both for borrowers and lenders. Other possible reasons could be better user experience and newly added features in Aave V2 as highlighted in this article.
Discussion
Users seem to be engaging with DeFi lending protocols for a variety of reasons. One of the motivations has been to receive participation rewards e.g. valuable, tradable governance tokens resulting in overall higher APY compared to traditional lending. By guaranteeing IOU tokens’ redeemability, DeFi lending protocols also ensure full transferability and exchangeability of debt holdings.
Sophisticated investors as well as institutional investors leverage DeFi lending for trading. For example, an investor bullish on ETH may borrow, say, DAI to buy some ETH. In expectation of a price increase of ETH, investor would swap borrowed DAI for ETH on an exchange, hoping that the purchased ETH can be worth more DAI in the future to such an extent that it exceeds the loan amount and leaves the investor some profit. Similar to the borrow spiral discussed above, an investor can repetitively (i) borrow DAI, (ii) swap DAI for ETH, (iii) re-deposit borrowed ETH as collateral, (iv) borrow more DAI. As such, a “leveraging spiral” is formed to maximize the investor’s long exposure to a crypto-asset that is expected to appreciate.
Flash loans have opened up a huge space for innovation in arbitrage and to unlock collateralized borrow positions on lending protocols, however they can also be used for malicious actions e.g. in case of governance voting.
It is important to highlight that competing blockchains and overcollaterization problems may stifle growth of DeFi lending. Several protocols such as Cosmos, Polkadot and Solana are rushing to kickstart DeFi ecosystems on their own platforms, this may pull some developers and liquidity away from Ethereum based DeFi systems. However healthy competition and increased interest just goes on to demonstrate the value in the potential of DeFi. But perhaps the biggest limitation of current DeFi systems is overcollateralization of crypto assets. This causes capital inefficiency. Further, it does not help the unbanked since without a crypto collateral, they cannot access capital.
Overcollaterization problem can be potentially resolved via a credible reputation/credit system in DeFi. With this approach, based on the credit history and other relevant parameters, loans can be provided to users that meet certain criteria. This would allow for financial inclusion and induce more liquidity in the market to serve user needs.
Conclusion
Decentralized lending has enabled borrowers and lenders to earn yield and maximise their returns on investment on their crypto holdings, without needing to go through any centralised intermediaries. Though the current DeFi lendings’ offer exceptional yields (which are partly there to fuel adoption), it is unlikely these yields will be sustainable. However, billions of dollars worth of value locked, institutional interest and the increasing network effects make it likely that the DeFi lending platforms will continue to grow and offer acceptable yields to its users.
Over the years, cryptocurrency has grown in leaps and bounds. There has been a significant improvement from the day it was first launched, and today the cryptocurrency space has more than a trillion-dollar market cap. Despite the growth associated with cryptocurrency, its volatility has made it increasingly difficult for new investors to put their money into it. ETF provides safety against risk and volatility. Many investors can invest in cryptocurrency through the ETF.
What Is An ETF?
An ETF stands for exchange-traded fund. An exchange-traded fund means buying and selling an ETF the same way you buy and sell a stock. An ETF gives you the ability to spread your investment money across many underlying assets rather than have all your investment in one underlying asset. It can be used for diversification and security of investment because you can use it to get many assets.
An ETF tracks the price of an underlying asset. For example, copper ETF tracks the price of copper.
What Is A Cryptocurrency ETF?
A cryptocurrency ETF is an exchange-traded fund that tracks the price of the cryptocurrency. Investors can buy or sell a cryptocurrency ETF in the stock exchange the same way they buy and sell other stocks. An investor trades cryptocurrency ETF in the traditional market exchange and not a cryptocurrency exchange.
How Does Cryptocurrency ETF Work?
The cryptocurrency ETF works the same way as other ETFs. The organization in charge of funds would need to own cryptocurrencies which serve as the underlying assets. The cryptocurrency would serve as shares that investors can buy. Once the investors purchase the shares as ETFs, they already own cryptocurrencies indirectly.
Since you cannot trade a cryptocurrency ETF on the cryptocurrency market exchange, you do not need a wallet to store it. For example, if you want to invest in bitcoin, you can get the bitcoin ETF from the stock exchange, and it would have the same value as the bitcoin. If the price of bitcoin increases, then the price of bitcoin ETF increases. If the price of bitcoin reduces, the price of bitcoin ETF also reduces. In essence, the price of the bitcoin ETF is dependent on the price of bitcoin.
The Top Currency ETF
There are cryptocurrency ETFs, and it is not surprising that the bitcoin ETF was the first. The first country to approve a bitcoin ETF was Canada. The name of the ETF is the purpose Bitcoin ETF and goes by the ticker BTCC on the Toronto Stock Exchange. BTCC was launched in February 2021. Three more bitcoin ETFs have been launched in Canada, bringing the total number of bitcoin ETFs to four.
Presently, Canada has approved four new Ethereum ETFs: CI Galaxy Ethereum ETF, Purpose Ether ETF, Evolve ETF, and Ether ETF. Toronto Stock Exchange is the place where all ETFs are currently trading.
The year 2021 might be the year of the cryptocurrency ETF as countries like the United States of America, Brazil, Chile, and the UAE, are considering launching it. To date, the U.S. Securities and Exchange Commission (SEC) has rejected all proposals to launch a crypto ETF. The reason cited by SEC for the rejection is related to crypto being volatile and non-regulation of the crypto market.
Despite all the rejections, we await a positive announcement from the SEC later by June. There is a high probability that a crypto ETF would be launched then.
Blockchain ETF
Apart from the cryptocurrency ETF, we also have the blockchains ETF trading on the stock exchange. The popular blockchain ETFs are:
Amplify transformational data sharing ETF
Reality Share Nasdaq NexGen Economy ETF
First Trust Indxx Innovative Transaction and Process ETF
Capital Link Global Fintech Leaders ETF
VanEck Vectors Digital Transformation ETF
Advantages Of Cryptocurrency ETF
Ease Of Investing
Cryptocurrency ETF makes it easy to invest in cryptocurrency because you do not need a wallet. You also do not have to sign up on any cryptocurrency exchange market. The use of an ETF reduces the chances of losing your cryptocurrency. And it also reduces the risk associated with having cryptocurrency directly.
For example, if you store your cryptocurrency in a personal wallet, you could lose it once the password is lost. If a centralized exchange is compromised, you can also lose your funds if you have it there. In summary, a cryptocurrency ETF gives you leverage over the risk and volatility associated with cryptocurrency.
Diversification
It is easy to diversify with an ETF. You could invest in more than one underlying asset from different companies in your ETF. For example, you could have bitcoin, Ethereum, Google stocks, Tesla stocks, Facebook stocks, Guinness stocks, Coca Cola stocks, and more in your cryptocurrency ETF. The advantage of this ETF is that it helps you to reduce your risk and diversify your portfolio.
Tax Efficiency
The United States of America Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) regulate financial institutions. Cryptocurrencies are decentralized, and hence, no financial institution regulates them. Cryptocurrency ETF won't trade on decentralized platforms but regulated exchanges such as New York Stock Exchange, making it open to most tax havens and pension funds.
Long Term Return
Investors that want to invest in cryptocurrency and make better long-term returns can use cryptocurrency ETF.
Disadvantages Of Cryptocurrency ETF
Higher Management Fee
There are two ways a cryptocurrency ETF can be managed. It can either be managed actively or passively. An actively managed fund has a higher management fee than a passively managed fund. The management fee is higher for an investor with many cryptocurrency ETFs when compared with those with less.
Limitation To Trading Other Cryptocurrencies
For instance, you can trade bitcoin for Ethereum, but you cant trade bitcoin ETF for Ethereum. It is impossible to trade bitcoin ETF for Ethereum because it is an investment fund and not a cryptocurrency.
Centralized Regulation
Cryptocurrencies were created not to be centrally regulated. They were created to be decentralized and not regulated by any financial institution such as the central banks. Cryptocurrency ETF won't enjoy all these benefits because they are regulated by the financial institution where they are listed.
The Inaccuracy Of ETF
One of the advantages of ETF is the fact that you can use it to diversify your portfolio. The diversification advantage can also be a disadvantage as ETF may not track the accurate price of a cryptocurrency because of the value of its other holdings.
For example, a drop of 5% in Ethereum may not reflect a 5% drop in the price of an ETF that tracks numerous assets.
Inability To Buy Things With Your Cryptocurrency ETF
While you can directly use your cryptocurrency, such as bitcoin, to buy things and make payments, you cannot use your ETF to do such.
Cryptocurrency ETFs And Institutional Investment
For Institutional investors who could not get into the crypto market for many reasons, crypto ETFs could provide an entry point for them to invest.
Conclusion
Cryptocurrency ETF would open up a new era of investment all over the world if it is accepted. It would allow people who have low-risk tolerance to invest in cryptocurrency. However, if you have high-risk tolerance, there might be no need to invest in cryptocurrency ETFs since the return of cryptocurrency is higher than in ETFs.
The Opium protocol is a robust and universal platform that allows users to create, settle, and trade decentralized derivatives on Ethereum. A token represents every option on Opium, and it can be traded, sent, or stored in cold wallets. The system provides robust and universal financial primitives on-chain. It also allows for more advanced features like order books, combined orders, and market-making features to happen off-chain by leveraging meta-transactions.
The Opium protocol currently supports two products; swap.rate and opium.exchange. In simple terms, swap.rate enables users to create derivatives. On the other hand, the Opium.exchange is an open trading exchange specifically designed for decentralized derivatives.
The Background of Opium:
Arjan Van Der Kooij and Andrey Belyakov founded the Opium protocol. Before creating this, Arjan has been a serial entrepreneur and private investor with 20 years of experience in business management. On the other hand, Andrey has been a professional derivative trader with ten years of experience to his belt. He is also a member of the CFA Institute.
Currently, the financial derivative market is the largest in the market but has always been under the control of banks. Other centralized financial institutions also own a large chunk of the derivative market. These entities provide the clearing, settlement, and trading of derivatives. The goal of the Opium Protocol is to move these traditional functions of centralized entities to the blockchain. By moving these traditional functions to a trustless, distributed, and immutable system, Opium will lower the cost and increase security. It will also make it possible to accommodate unbanked individuals in the world’s financial system. As an Opium user, you can be an investor, a hedger, speculator, margin trader, or arbitrageurs.
In an interview with CoinDesk, Andrey Belyakov said that they created the protocol to solve three specific problems experienced in the traditional derivative market. These problems include:
Transparency problems
Cost efficiency, and
A barrier to entry.
Why Opium?
There must be a very good reason(s) to make us abandon the traditional players in the derivatives market. What are the things that set the Opium ecosystem apart from the centralized financial entities in the market? The Opium system is built to be compatible with both the DeFi market and the professional market. Most of the derivative protocols we have on the DeFi space today bring theoretical risks with them. They do this by using on-chain liquidity pools or the use of automated market makers (AMMs). Opium provides a robust and simple on-chain infrastructure that users can leverage off-chain.
The implication of having an alternative to on-chain infrastructure is the presence of more complex features. Some of these features include advanced derivatives, market-making strategies, order books, arbitrage combined orders, etc. All the features mentioned above are implemented at the layer 2 level. As a user, you can create decentralized derivatives benefiting from a risk profile that is more similar to the traditional financial products. However, these products may appeal more to a broader range of users than the on-chain derivatives.
The Opium protocol is live on the Ethereum mainnet, and SamrtDec audits it. Thus, it gives users the peace of mind necessary to try out new things with DeFi. There are currently at least three working products that are built on the Opium Exchange. These products have been assisting about four independent establishments in bringing their derivatives to the market by leveraging the Opium Protocol.
Features and Products of Opium Ecosystem:
• Opium.Exchange:
The Opium.Exchange product is a non-custodial platform built for decentralized derivatives. You can trade, hedge, or invest without the need for intermediaries. It also allows you to benefit from high-speed orders on meta-transactions. You will also enjoy secure settlement on-chain.
• ERC-721o Token Standard:
Every position created using the Opium Protocol is represented by ERC-721o tokens. These tokens are specifically designed to help you trade financial instruments. The Opium team created the tokens by combining the ERC-20 and ERC-721 standards with more functionality. Users can combine these tokens into portfolios, and they are backward compatible with the ERC-721stanbdard. The implication is that these tokens can be used in existing ecosystems. The ERC-721o standard has primary portfolio functions which include the following:
Compose
Decompose, and
Recompose
A portfolio is composed of the entire portfolio that can be managed or traded as a single ERC-721o token, hence saving gas fees. The portfolio decomposes when the tokens used to compose the portfolio are minted again and stored on your balance. You can recompose a portfolio by removing or adding to/from an already existing portfolio. However, you must ensure that you do that in a gas-efficient way.
• Swap.Rate:
This is a platform designed to help users hedge against or take advantage of the interest rate fluctuations in the DeFi lending and borrowing space. It also allows users to create contracts for interest rate swaps. One stream of future interest payments is swapped for another based on the stipulated principal amount.
Conclusion:
The Opium Protocol is undoubtedly revolutionizing the derivatives market. Without millions of dollars, you cannot make derivatives, but Opium is changing all that. Now, everyone can run his own derivates in the most efficient way possible. You can follow the Opium project on social to stay up to date with the happenings in the derivatives market.
Since the launch of the first cryptocurrency blockchain, the possibility associated with it has been eternal. One such possibility is the introduction of yield farming – a reward scheme that enables you to get more from decentralized finance (DeFi) - that gained popularity in 2020. Some years back, a crypto enthusiast could only generate a reward by trading or holding it. Today, the story is different through the power of yield farming.
Yield farming gives you a new way to generate rewards from crypto. It might be challenging to benefit if you start, or you begin without adequate knowledge about it. Whichever one it is, you don’t have to panic or be scared. You can also benefit from yield farming, and that is why we have written all you need to know about DeFi yield farming below.
What Is Defi Yield Farming And How Does It Work?
Yield farming is a process where you get rewards from your cryptocurrency by investing it in a DeFi platform. It is simply a process of allowing your crypto to work for you while you earn passively. Sounds lovely right? Yield farming works like a bank loan, where you are paid interest on the money you lent. You can lend out your crypto or borrow crypto from a platform that supports it in yield farming.
Yield farming operates on smart contracts. The majority of yield farming is on the Ethereum network using the ERC-20 tokens. Yield farming is also on the Binance smart chain. This is possible because the Binance smart chain is compatible with Ethereum Virtual Machine (EVM) and can also operate with the Ethereum native protocols.
Total Value Locked:
Total value locked (TVL) is the sum of all funds locked in the liquidity pool. This is very important to measure how healthy a yield farming platform is. An increase in the total value locked leads to an increase in the yield farming on a platform. The current TVL for DeFi is approximately 77billion dollars. You can monitor the total value locked through Defi Pulse.
Yield Farm Platforms:
There are various platforms where you can farm tokens. They have the same way of operating, though the reward system might be different. Below are some of the yield platforms that run on the ethereum and Binance smart chain.
• Compound:
Compound is an Ethereum based protocol that allows borrowing and lending. The lender provides a loan by providing liquidity in terms of assets in the platform. The lender gets an interest in the loan supplied. The supply and demand of crypto determine the interest generated. The compound has a native token called cTokens used to pay interest for users. cTokens can also be used in other applications. For example, if you deposit 5Eth on the protocol, the system automatically generates 5c-Eth for you with interest. You can redeem your c-Eth for Eth at any time plus your stake. The compound protocol uses any ERC-20 token. The compound protocol also has the advantage of moving or trading the c-Tokens on other decentralized apps (dApps).
• Aave:
Aave is a smart contract-based protocol that allows borrowers to borrow loans and lenders to lend. All that is required for a lender to do is put their cryptocurrency funds into the liquidity pool. Collateral in terms of cryptocurrency must be provided to borrow from the aave’s protocol. A borrower can only borrow a fraction of the collateral. It boasts a high annual percentage yield (APY) ranging from 6% to 13% on stable coins such as USDT and USDC.
• PancakeSwap:
PancakeSwap is the leading automated market maker on Binance Smart Chain. Though it is an automated market maker, its yield farming has continued to grow and is one of the most used in BSC. Presently, Pancakeswap has more than 10 pairs of cryptocurrency for yield farming.
• Venus:
Venus is now one of the leading Binance smart chain protocols for borrowing and lending assets. Users deposit cryptocurrencies such as BNB, USDT, USDC, and ETH to earn interest. The interest is helpful for other purposes such as minting venus stablecoin called VAI or used as collateral to borrow.
• Autofarm:
Autofarm has a total value locked of 1.3billion dollars. It currently has more than 30 liquidity pools and is very good for farming.
• Yearn.finance:
Yearn.finance is a platform that chooses the best platform to make a profit. It takes the user’s fund from one protocol, such as Aave, to the other to make a profit. It has a native token called yToken. All deposited funds are automatically converted to the yToken.
Steps on Starting Yield Farming:
Get crypto that is useful in a particular yield farm platform. Widely accepted crypto coins are ETH, BTC, and stable coins such as USDT, DAI, BUSD, and USDC.
Download decentralized wallets such as Trust wallet or MetaMask wallet. Register as prompted. Make sure you keep your seed phrase or keys very secure.
After installing, send your funds to your wallet.
Go to the dApp section of the wallet to start farming.
If you are a beginner, it is advisable to start with the compound platform.
On the compound, click the button on the top right-hand corner.
You should connect your wallet, select the wallet you are using, e.g., Trust wallet.
Go to the supply page, and then choose the asset you want to supply and the amount. Then click supply
A page shows the supply annual percentage yield (APY) and the distribution APY. You earn from the APY by depositing on the compound platform.
Confirm the transaction. Note that you need ETH as a gas fee on the compound platform. If you are using a Binance smart chain such as venus, you need BNB as a gas fee.
You can now borrow or lend on the platform.
Viola, you are now a yield farmer. Simple right? Please give it a try now.
Risk of Yield Farming:
Just like everything that has to do with life, yield farming has its own risk. The higher the risk you take, the more profit you make. It is always advisable not to invest more than you can afford to lose.
Liquidity risk:
Liquidity risk occurs when the price of your loan is greater than the collateral you deposited. You run into loss if this happens. Liquidity risk is familiar with crypto that has high volatility, such as BCH or ETH.
Smart contract risk:
Defi protocols are open-sourced and can be open to bugs. These bugs can affect the token price, causing a high drop in the price of the token.
Gas fee:
An increased gas fee occurs on the ethereum smart chain. The increase in eth gas fee has been on the rise, which poses a challenge for an average investor.
Composability risk:
Composability risk is also known as “money legos,” which means that all defi applications and platforms can interact without permission; this means that the whole defi platform relies on each of its building blocks. Naturally, composability should not be a risk but an advantage. It is a risk because if any of the building blocks stops working, the whole platform can be down.
Conclusion:
Decentralized finance is a platform that uses technology to remove the intermediary barrier in carrying out a financial transaction. It is simple to use and very efficient when compared with centralized exchanges like banks. To use Defi, you do not need an identity card, social security number, or a KYC.
There are risks associated with using the DeFi platforms, and as such, you should ensure you research the platform you are using and invest what you can afford to lose.
Most people in the blockchain space know MakerDAO as the protocol behind the stablecoin DAI. DAI is a cryptocurrency that always maintains a 1:1 peg to the United States dollar. You can think of 1 DAI as equivalent to $1. Meanwhile, the interesting thing here is that Ether backs each DAI and not a third party. The volatility of Ether poses some notable challenges in terms of maintaining the peg.
This MakerDAO project joins a DAO with another crypto-collateralized stablecoin called DAI. The aim is to build a complete, decentralized finance ecosystem that permits loans and savings on the Ethereum blockchain network. The responsibility of creating and developing the Maker Protocol also saddles this project. The Maker Protocol aims to permit and control the emission of DAI anchored to the dollar. All these things happen on a series of smart contracts on the Ethereum blockchain.
What has made MakerDAO the largest DeFi project in the crypto and blockchain space? How did it come about? What does the future hold for this project? This article will answer all these and many more questions.
The History of MakerDAO
Rune Christensen started the creation of the MakerDAO project in 2015. In his first work on Reddit, Christensen explained his idea of creating a DAO on Ethereum and using it to generate a stablecoin that will be pegged to the dollar.
Christensen’s idea went further, and led to the formation of the Maker Foundation. The role of the foundation is to direct all developmental and management efforts of the MakerDAO project. In August 2015, the project launched its Maker (MKR) token. The token established the foundation of the government of the Maker Protocol.
In December 2017, the first stablecoin came into existence, governed by DAO in the crypto space.
The Vision Behind MakerDAO
According to the whitepaper, the Maker project aims to create an independent system controlled by smart contracts that manage collateralized debt positions (CDPs) using Ether. Thus, issuing a stable currency hinged on the price of the dollar. This offers new financing options in the relatively nascent blockchain ecosystem.
Creating a decentralized operating and governance infrastructure that enables people to develop a stablecoin with global reach is the main objective of MakerDAO. Also, the project seeks to create a mechanism that gives users access to decentralized finance (DeFi) through the use of cryptocurrency. This mechanism encourages people to convert their Ether to DAI.
What Is The Maker Protocol, And How Does It Our Work?
The Maker protocol is a built-in smart contract and runs on the Ethereum blockchain network. This protocol allows the operation of a platform specifically for the generation and control of DAI stablecoin. The protocol also handles Maker Vault, Oracles, and voting within the entire system. With the Maker protocol, you can control the fundamental parameters of the whole system. This includes stability fees, interest rates, collateral assets, and many other things.
The protocol permits a democratized process where most MKR token holders must sanction every proposed change. This process ensures that the system doesn’t fall into a few hands and prevents manipulation in any way.
The DAI Stablecoin
The DAI stablecoin is the second element that enables the MakerDAO to function efficiently and effectively. You can only generate the DAI stablecoin under certain conditions and with the use of the Maker protocol. The conditions in question are the ones decided by the community governing the protocol. By implication, DAI is an impartial and decentralized stablecoin.
Unlike most other stablecoins, DAI does not depend on banks, and it also doesn’t have collateral in fiat. It makes use of cryptocurrency as collateral. You can store your DAI in wallets that support the standard ERC-20 tokens. As DAI is built in this standard. If you want to generate DAI, you need to lock Ether or any currency accepted by the protocol within the Maker Vaults. The Maker Vaults will utilize such cryptocurrencies to create a collateralized debt position (CDP), thus generating the corresponding DAI. You can also save it as savings using a Maker protocol known as DAI Interest Rate (DIR).
The DAI stabelcoin can function as the following:
Reserve of value
An exchange medium
A unit of account, and
Deferred payment reference
Collateralization of DAI Stablecoin
Before you can generate, support, and maintain the value of a stable DAI, you must first collateralize its value. To do so, you will use different tokens that can be deposited into the Maker Vaults. The Maker protocol ensures every DAI stablecoin has real value support that permits the supporting and issuance of each DAI within the ecosystem.
All collaterals accepted on MakerDAO are all tokens that are supported by the Ethereum blockchain network. Initially, collaterals started as something much more straightforward. Ether was once accepted as the only collateral, but it changed in 2019 upon releasing the multi-collateral DAI protocol (MCD). Other tokens began to be accepted. Today, the accepted tokens include all Basic Attention Tokens (BAT), USDC, wBTC, TUSD, KNC, ZRX, MANA, and Ether.
The collateralization value for every token varies, and the governance of the Maker protocol decides them.
In the course of this article, you must have come across Maker Vaults multiple times. They are the storehouses that hold all cryptocurrencies that act as collateral for DAIs. Using the Maker Vaults, you can:
Send cryptos as collateral and get DAI in return or
Send DAI and receive a collateral cryptocurrency.
It is important to note that the interaction with the Maker Vault is done without an intermediary. The user interacts with it directly. There are rules of operation guiding the operation of the Maker Vaults. If you send tokens as collateral to a Maker Vault to generate DAI, the collateral will always be available under certain conditions. If the token price fluctuates beyond the “Settlement Ratio,” the system liquates the position.
It means that the Maker Vault will sell your crypto to maintain the positive and stable relationship of the DAI. What matters most is to avoid losses to the protocol and to the people who support it. The liquidation is executed by the Maker protocol as stipulated in the interaction of users and the Maker Vaults.
MakerDAO Governance Protocol
The Maker Governance Framework (MGF) is in charge of handling the governance of MakerDAO. It is based on thoroughly analyzed and reproducible scientific models created by experts with a proven track record. The framework falls into the following components:
Governance Proposals
They are symbolic votes that are used to scrutinize community sentiment towards particular models or data sources.
Executive Proposals
They help to rectify the Risk Parameters identified by the models and data accepted by the Government Proposals. Executive votes bring about status change within the DAI Credit System, and it happens every quarter.
In the governance of MakerDAO, the role of the Maker Foundation is vital and very fundamental. The foundation directs the development and management efforts of the project. Aside from that, the Maker Foundation is also dedicated to expanding the project and also seeking financial and institutional support for the protocol.
The governance model of the Maker protocol ensures that neither the MKR holders nor the Maker Foundation has absolute powers to dictate what happens in the system.
Conclusion
The future looks great for the MakerDAO ecosystem and its users. Today, developers continue to use DAI and the Maker Protocol to create innovative decentralized finance applications. It thus increases the accessibility to users all over the world. Although people can argue that we are still at the early stage of things, the achievements so far are massive.
CURVE FINANCE: Let's Take A Curve Into Defi Of Stablecoins
Introduction
Curve finance is a decentralized exchange that facilitates the swapping of crypto-tokens. But it is specifically designed for stablecoins like DAI or USDT with low slippage and low transaction fee while using the liquidity pools like those of Uniswap. Let’s back up a little and first clear the basics.
Decentralized Exchanges
Let’s say Alice wants to send money to Bob. She can transfer the assets by going to a bank. Here a bank works as a centralized entity and verifies the transfer but cryptocurrencies are known for being decentralized.
In a decentralized environment, Alice can send Bob assets without the need of a central entity, and a set of independent nodes to verify the transfer.
Liquidity is the process where liquidity providers pour in their crypto tokens in a pool and allows others to exchange the tokens. They earn a fee on every swap where slippage is the price change of a token during a transaction.
Understanding this formula is extremely important as it is widely used in the decentralized exchange world to determine the price of two tokens in a particular pool. The variables x and y in the formula represent the quantities of two tokens and k being the constant. If the value of one token increases the value of the second token automatically decreases in order to maintain the constant k. However, this formula could be problematic when dealing with stablecoins as the stablecoins should remain constant. Also, while dealing with different flavors of the same tokens, prices have to be the same for each flavor.
Graph
What is Curve Finance?
The curve finance is a platform for the exchange of tokens rather particularly famous for stable tokens. Stable tokens are tokens whose value does not fluctuate rather remain stable.
It offers different flavors of similar tokens like ETH and BTC while using a formula called the STABLE-SWAP INVARIANT for swapping. The flat line in the graph ensures the stable swap of two coins. Uniswap uses the x * y = k formula where one token’s price can grow exponentially and the other token can lose its price and the two tokens could be dollars to pennies. Curve introduced the Stable-swap invariant in which both the tokens tend to remain stable.
Explanation
Let’s understand this with the help of an example:
Suppose, Uniswap pool has a pair of USDT/DAI, both of which are of $1 with a proportion of 50/50. After some swapping the pool becomes unstable now with a proportion of 60/40. Now we have an excess of USDT and a scarcity of DAI. So, the price of USDT will become slightly less than 1$ (0.97$) and DAI will become slightly more expensive than 1$ (1.03$) and the pool becomes lopsided. Here, Curve will incentivize the liquidity providers to pour in DAI thus making the pool stable. The formula handling this is known as the Stable-Swap Invariant.
This is what the Stable-Swap Invariant looks like:
Curve’s Growth
Stablecoins have become an integral part of De-fi with more and more varieties of stablecoins in the market. Which means that there is a bigger space for people trading stablecoins. The curve has captured the market and emerged to become a giant by offering low fees and slippage at the same time. Stablecoins on other exchanges might deviate from their price whereas Curve ensures stability, which is one of the many reasons behind Curve’s success.
Liquidity providers can earn rewards by providing liquidity in Curve pools just like Uniswap. Additionally, there is another way liquidity providers can earn extra rewards; by the concept of lending. Curve finance offers lending pools where liquidity providers can lend tokens to other exchanges like Compound. This takes place in the background and liquidity providers earn fees on top of the transaction fee, as some protocols enable lending and borrowing functionality to the users.
It’s important to note that the rewards are based on the transaction volume; they can be high or low.
You might be wondering about the security risks that might occur while lending a token to another exchange. Curve solves this issue by wrapping the token as a cToken(wrapped token) and lending it to Compound while backing the cToken to the original token.
With Curve, we can have a pool of three or four tokens as well.
Once you deposit the tokens in, you can split it among all the tokens in the pool or you can add just one token. After adding tokens to the pool you will get LP tokens. These LP tokens represent your share in the pool which can be used to stake and mine new CRV tokens.
The 3Pool is a pool with 3 tokens DAI, USDC and USDT, it does not matter in what token the user adds the liquidity as the reward generated is the same. You can get the LP tokens in all the tokens or in a single token.
A metapool is a pool where a stablecoin is paired against an LP token from another pool. For example, a liquidity provider can deposit DAI into 3Pool and earn pools liquidity token 3CRV.
Source: https://curve.fi/
CRV Token
CRV is Curve’s native token, which is generated when the user deposits and stakes the tokens on the Curve platform. It is awarded to liquidity providers, proportional to their share from the yields created by their pools. With Curve’s transition to become a DAO, CRV tokens also represent the holders’ rights to take part in its governance mechanism. That way they can make proposals and vote on them with CRV. Their Governance follows a ‘time-weighted’ voting system which simply means that the longer they hold CRVs, the greater their voting power in the DAO becomes.
Conclusion
Curve’s smart contract is audited by Trail of Bits but this doesn’t eliminate risks completely. Curve lends tokens to other exchanges and hence opens up another front to security risks. Curve finance is in the market for around a year and needless to say that hackers for sure have tried their unsuccessful attempts to steal the funds.
What is Hummingbot? We will answer the question but first, let us have a clear overview of what it is all about. Hummingbot went live on April 4, 2019. Since then, it has been an amazing high-frequency market-making trading bot. The software is available on several platforms like Github and docker. Since its launch, the Hummingbot community has had a massive increase in the number of its members.
HummingBot is designed for traders, developers, exchanges, and token issuers. According to CEO David Garcia, “Liquidity is a core piece for healthy markets. HummingBot is building the next generation liquidity platform by empowering users and traders to participate in the markets with the right incentives.”
There have been more than 4,000 unique Github clones as well as Docker downloads. The code has also been forked on Github more than 100 times.
Crypto exchanges and token projects spend an estimated $1.2 billion yearly on market making. Since, the cost is in the form of rebates, fees, and cost of inventory. As a result of financial and technical requirements, the crypto market makers can be likened to quantitative hedge funds that charge exorbitant fees on and may demand millions worth of inventory. All these necessitated the development of Hummingbot.
Now, it is time to answer the question we asked in the first sentence of this post. It is an open-source software client that offers users the opportunity to create and monetize automated and algorithmic trading bots. Alternatively, it is an easy-to-use command-line interface that makes it possible for you to configure, customize, and run automated bots and other strategies. With this, users can make markets on both decentralized and centralized digital asset exchanges. Market making is a trading strategy that is previously accessible to only algorithmic hedge funds.
Market making is a trading strategy where HummingBot continues to post limit bids and ask for offers on the market and then waits for the various market participants to fill their orders. As a market maker, HummingBot quotes two-sided markets by making bids and offers available on the market. If market making is still confusing to you, then consider this example. A shop X buys a product from Mr. A at a cheaper price and sells it to Mr. B at a higher price for a specific amount of profit. The shop X is the market maker in this case. This is exactly what HummingBot does through the use of bots.
Today, anyone can be a high-frequency trader, earning huge profits from market-making. The software enables users with limited technical know-how to engage in out-of-the-box frequency market making. The Hummingbot software is built for institutional-grade performance, and most importantly reliability.
It is built on technologies like Cython (Python compiled into C). Hummingbot also utilizes low-level programming to optimize the memory-efficient and speed required to carry out high-frequency trading algorithms. It will serve as a base platform where users can customize and build their market-making and trading strategies. The design philosophy of Hummingbot is to fuse simplicity and to make it easy to use with performance and flexibility. Now we have a clear understanding of what Hummingbot is. Let's go-ahead to explore the Hummingbot command-line interface (CLI).
What is Hummingbot Command Line Interface?
Every user operates Hummingbot through an interactive command-line interface (CLI). It is a text-based interface designed for entering commands. There is a “command” prompt on the CLI and it is displayed whenever the interface is ready to accept a “command.”On the CLI, you can only execute tasks by entering a command. The command-line interface employed by Hummingbot helps users to configure and run the bot. CLI also helps to generate logs of the trades that were executed. The command-line interface (CLI) splits into five panes and they include the following:
Input pane (lower left): This is where users of the software enter commands to be executed.
Output pane (Upper left): It prints the output of the command issued by users.
Top navigation bar: It displays the status or information of items like Version, paper_trade_mode, Strategy, and Strategy_file.
Bottom navigation bar: It displays the information of items like Trades, Total P&L, Return%, CPU, Mem, Threads, and Duration.
In order to start Hummingbot from the source, here are the prerequisites:
• The Crypto Inventory
To run a trading bot, users need some inventory of cryptocurrency assets available on the exchange. Or in their Ethereum wallet, if they are using Ethereum-based decentralized exchanges. Every user needs an inventory of both the base asset and the quote asset. The base asset is the asset that you are buying or selling while the quote asset is the one you exchange for the base asset.
• API Keys
To run a bot on centralized crypto exchanges like Coinbase, Binance, etc, users will need to enter the exchange API keys. You will have to do this during the Hummingbot configuration process.
• Ethereum Wallet
For users to be able to earn rewards from liquidity bounties, they will need an Ethereum wallet when running Hummingbot on an Ethereum-based decentralized exchange.
• Ethereum Node (Dex only)
When running a Hummingbot on an Ethereum-based decentralized exchange, your wallet will send signed transactions to the blockchain system through an Ethereum node.
Hummingbot Miner
The Hummingbot Miner is a liquidity mining platform that makes it possible for sponsors to incentivize liquidity provision by leveraging token rewards on order book-based exchanges. If you sign up for the Hummingbot Miner, you can earn token rewards for providing liquidity for some trading pairs.
Users can set up their liquidity mining on the Miner App in order to see real-time rates of their rewards and performance. It also allows you to keep track of your payouts and check market leaders. Liquidity mining is the term for a community-based and data-driven approach to market-making. Here, a token issuer or an exchange rewards a pool of miners to ensure liquidity is available for a particular token.
It is open, hence anyone can participate and you can track your earnings every minute. Also, it is non-custodial meaning that the platform doesn’t have control over your token. To start as a liquidity provider on Humminmgbot, you will need two sets of API Keys. Also, you can use your own trading bots and strategies to take part in liquidity mining. For those that don’t have their own trading bots, Hummingbot allows them access to quant/algo strategies.
For experienced and technical users, it is advisable you set up a cloud instance, then install the Docker version or from the source. Doing this enables the Hummingbot software to run 24/7. You can use Hummingbot as a long-running service using cloud platforms like Google Cloud Platforms, Amazon Web Services, and Microsoft Azure.
Hummingbot Strategic Partnership
Hummingbot is in collaboration with many well-known decentralized finance (DeFi) platforms. They received a development grant from 0x, a leading open-source protocol for DEXs. The grant was to support the 0x ecosystem with Hummingbot. Hummingbot’s collaboration with 0x will help lower the barriers to providing liquidity in the 0x ecosystem.
What Does The Future Hold For Hummingbot Protocol?
The team plans to continue to build additional capabilities on the Hummingbot network to maximize its utility for the growing users. They also, intend to continually roll-out more exchange connectors to help link Hummingbot to more exchanges. Also, there is a constant tweaking of the graphical user interface (GUI) to make it more user-friendly.
Conclusion
In this article, we have taken time to answer the question, “what is Hummingbot?” The article also explores other functions and capabilities of this open-source protocol for crypto traders. The platform is also seeking partnerships with cryptocurrency exchanges. It also welcomes the token issuers with interest in the professional deployment of Hummingbot.
