Category: Cryptocurrency

What is Tether (USDT)?

Surely, you have heard about USDT in the crypto world.

Tether is a cryptocurrency that aspires to maintain a 1:1 parity with the US dollar, which means that the tokens in circulation are backed by an identical quantity of US dollars, making it a stablecoin with a price tied to USD $1.00.

USDT was first issued on the bitcoin protocol via the Omni Layer, but it has subsequently moved to other blockchains as well. In fact, most of its supply is held on the Ethereum blockchain as an ERC-20 token.

It is also available on the TRON network, EOS, Algorand, Solana, among others.

Tether is a stablecoin, which is a sort of cryptocurrency designed to keep prices stable.

Origins

J.R. Willett outlined the prospect of creating additional currencies on top of the Bitcoin Protocol in a document released online in January 2012. (JR Willet is called “The Man Who Invented ICO”).

Willett went on to assist in the implementation of this concept in the cryptocurrency Mastercoin, to encourage the adoption of this new “second layer.” The Mastercoin protocol would provide the technological backbone of the Tether cryptocurrency, and one of the Mastercoin Foundation’s early members, Brock Pierce, would become a Tether co-founder. Craig Sellars, another Tether creator, was the CTO of the Mastercoin Foundation.

Tether’s predecessor, initially called “Realcoin”, was launched in July 2014 as a Santa Monica-based firm by co-founders Brock Pierce, Reeve Collins, and Craig Sellars. The first tokens were released on the Bitcoin network on October 6, 2014. Tether CEO Reeve Collins announced the project’s rebranding to “Tether” on November 20, 2014.

The firm also announced the launch of a private beta program that will enable a “Tether+ token” for three currencies: USTether (US+) for US dollars, EuroTether (EU+) for euros, and YenTether (JP+) for Japanese yen.

Why was USDT created?

You are probably asking how beneficial a cryptocurrency worth the same as a dollar can be. Especially now that we have the dollar and digital payment methods that use it.

In reality, a stablecoin like USDT makes a lot of sense when we consider the following:

  • It does not place restrictions on you when making a transfer: USDT has all the benefits of a traditional cryptocurrency. This implies that you can transfer USDT anywhere in the globe with little difficulty and at a minimal cost.
  • It provides a way to safeguard investments from traders on an exchange platform: A trader, for example, can purchase and sell bitcoin and then convert his balance into USDT at the end of his deals. In this way, it shields itself against fluctuations in bitcoin values until it can resume operations.
  • Provides a safe payment platform, in terms of volatility: This is due to the cryptocurrency’s constant value of one dollar, making it perfect for payment systems when volatility is undesirable, but you still want to utilize a cryptocurrency.

How does Tether (USDT) work?

Tether is a stablecoin, a type of cryptocurrency that aims to keep cryptocurrency valuations stable, as opposed to the huge swings seen in the prices of other famous cryptocurrencies such as Bitcoin and Ethereum.

Instead of being utilized as a medium of speculative investments, this would allow it to be used as a means of trade and a form of wealth storage.

Tether was created particularly to provide consumers with stability, transparency, and low transaction fees by bridging the gap between fiat currencies and cryptocurrencies. It is tied to the US dollar and maintains a one-to-one value ratio with the US dollar.

Tether Ltd, the organization behind USDT, mints and burns the tokens from circulation based on their dollar reserves — Tether Ltd claims to have a 1:1 reserve ratio of USDT to USD stored in their bank account. As a result, USDT can trade at the same value as the US dollar.

Tether Ltd, in addition to giving US dollar exposure via USDT, also supports the Chinese Yuan (CNHT), the Euro (EURT), and gold ounces (XAUT).

According to a survey conducted by CryptoCompare, a worldwide cryptocurrency market data source, Bitcoin to Tether trading continues to account for the vast majority of BTC exchanged into fiat or stablecoin.

In January 2022, USDT accounted for 55% of all bitcoin trading.

Controversy

Tether Ltd was allegedly hacked in November 2017, with $31 million in Tether tokens taken.

In January 2018, it struck another stumbling block when the required audit to guarantee that the real-world reserve was maintained did not take place. Instead, it announced its separation from the audit company, following which authorities issued a subpoena. Concerns have been raised about whether the corporation, which has been criticized of lacking transparency, has adequate reserves to support the coin.

In April 2019, New York Attorney General Letitia James charged iFinex Inc., parent firm of Tether Ltd. and operator of cryptocurrency exchange Bitfinex, with concealing a $850 million dollar loss of co-mingled customer and corporate money from investors.

According to court documents, these assets were entrusted to a Panamanian firm named Crypto Capital Corp. without a contract or agreement to manage consumer withdrawals.

After the money went missing, Bitfinex allegedly grabbed at least $700 million from Tether’s cash reserves to cover the difference.

The organizations stated in a statement that the papers “were produced in ill faith and are laced with fraudulent statements.”

On the contrary, we have been informed that these Crypto Capital sums have been seized and secured, rather than lost. We are and have been aggressively attempting to enforce our rights and remedies and get the release of those cash.

Unfortunately, the New York Attorney General’s office appears determined to undermine such efforts, to the detriment of our consumers.

Read this article for more much more details.

Advantages

  • Transaction times: In a regular banking system, USD deposits and withdrawals typically take 1–4 business days to process. If the transaction occurs at night or on weekends when the bank is closed, the processing time may be extended. Tether transaction speeds are measured in minutes, which is advantageous for cryptocurrency traders who frequently wish to trade in minutes rather than days.
  • Transaction fees: SWIFT (Society for Worldwide International Financial Telecommunication) transactions are costly, ranging from $20 to $30 or more. Especially if you are using a fiat currency that is not accepted by the exchange, then you will be charged a fee for Forex conversion as well as a percentage of the transfer amount. Tether charges no costs for transactions between Tether wallets.
  • Price Stability: Cryptocurrencies are volatile when purchased using Tether rather than another currency. Currencies are not sufficiently stable as investments. Many exchanges do not accept fiat currency but will accept Tether.
  • Sidelining: Taking no stand while anything is happening. “Cashing out” and waiting for a better chance or market timing. Have your Tether ready. There is no need to take risks or leave money on exchangers.

Disadvantages

  • There are doubts about whether the Tether Ltd maintains a 1: 1 collateralization between the USDT tokens and their bank reserves: This is due to the fact that a full and public audit of this system has never been possible. As a result, the USDT faced a terrible position in 2017, with its value plummeting considerably below the 1: 1 ratio with the dollar, falling to 0.9: 1. Similarly, Tether Ltd has been embroiled in various controversies, including the Bitfinex hacking crisis and Tether’s own, both of which resulted in millions of dollars in damages.
  • Centralization: Because it is a cryptocurrency managed by a firm, its functions are determined by them.
  • Lack of anonymity: The requirement to make a bank deposit in order to produce the tokens reduces privacy and places your data in the hands of a firm.
  • No Mining: Because of its asset-backed nature, Tether isn’t minable. New USDT is issued to verified users who make fiat currency deposits.
  • There is no clarity on its implementation. There is no Github repository on its implementation on the Omni protocol. The only thing known is its smart contracts on Ethereum and EOS, the rest is not clear.

Conclusion

Tether has a role among cryptocurrency, filling a void when fluctuations are insufficient.

When with any cryptocurrency, be cautious and continue to research and monitor the news for any new information as you begin investing.

What is an Initial Coin Offering (ICO)?

An initial coin offering (ICO) is a sort of capital-raising activity for cryptocurrency projects in their early stages.

During an ICO, a blockchain-based firm creates a limited number of its own native digital tokens and sells them to early investors.

While ICOs can provide a simple fundraising method and an innovative way for entrepreneurs to acquire funds, investors can also profit from both access to the service provided by the token and an increase in the token’s price if the platform is successful.

The primary benefit of ICOs is that they avoid intermediaries from the capital-raising process and establish direct relationships between the corporation and investors.

Furthermore, both sides’ interests are linked.

An initial coin offering (ICO) is a fundraising event in which a firm offers a new cryptocurrency.

Origins

It all started in 2013, when J.R. Willet, a software engineer, authored a white paper titled “The Second Bitcoin White Paper” for the token MasterCoin and raised $600,000.

Seven initiatives have raised a total of $30 million by 2014.

Ethereum was the largest that year, with 50 million ether minted and sold to the public, generating more over $18 million.

2015 was a more sedate year. A total of $9 million was raised through seven transactions.

In 2016, 43 ICOs raised $256 million, kicking off a surge in activity.

ICOs reached a new high in 2017, thanks in part to technical developments.

The issue of 342 tokens raised about $5.4 billion, propelling the idea to the forefront of blockchain innovation.

Telegram completed the biggest ICO to date. The UK-registered corporation raised almost $1.7 billion in a private ICO.

Types

  1. Private ICO: Only a small number of investors are permitted to participate in the process. Private ICOs often allow only accredited investors to participate, and a corporation might opt to establish a minimum investment amount.
  2. Public ICOs: A type of crowdfunding aimed at the whole public. Because almost anyone can become an investor in a public offering, it is a democratized form of investing.

How does an ICO Work?

When a corporation decides to hold an ICO, it publishes the date, regulations, and purchasing procedure ahead of time. Investors can purchase the new coin on the ICO date.

The majority of ICOs need investors to pay using another cryptocurrency, with Bitcoin and Ethereum being two popular options. There are ICOs that accept fiat money as well.

Typically, the purchasing procedure is transferring money to a specific crypto wallet address. Investors specify their own recipient address in order to get the cryptocurrency they purchase.

During an ICO, the quantity of tokens sold and the token price might be fixed or flexible.

  • Fixed number of tokens and price: The corporation determines both in advance, for example, selling one million tokens at a price of $1 per token.
  • Fixed number of tokens and a variable price: The corporation sells a fixed number of tokens and charges a variable price dependent on the amount of cash received.

A greater token price stems from more investment. If it sells one million tokens and raises $2 million, each token will cost $2.

  • Variable number of tokens and a fixed price: The corporation has a fixed price but does not limit the amount of tokens sold. As an example, suppose a corporation sells tokens for $0.50 each until the ICO concludes.

An ICO can be launched by anybody. Many new forms of cryptocurrencies are launched using this procedure due to the low barrier to entry.

ICO vs. IPO

ICOs are sometimes contrasted with initial public offerings (IPOs), which are fresh stock offerings by a private firm. Companies can raise capital through both ICOs and IPOs.

The fundamental distinction between ICOs and initial public offerings (IPOs) is that IPOs include the sale of securities and are subject to substantially tougher laws.

To launch an IPO, a firm must file a registration statement with the Securities and Exchange Commission and obtain its approval. A prospectus containing financial statements and possible risk factors should be included with the registration statement.

An initial coin offering (ICO) is the selling of a cryptocurrency rather than a securities. As a result, it lacks the formal criteria that IPOs do. However, if a corporation tries to circumvent the rules by holding an ICO for anything that meets the definition of a security, it may face legal consequences.

Advantages and Disadvantages

Online services may help with the creation of cryptocurrency tokens, making it extremely simple for a business to contemplate launching an ICO.

ICO managers produce tokens in accordance with the conditions of the ICO, receive them, and then distribute the tokens to individual investors by transferring the coins.

However, because ICOs are not regulated by financial institutions such as the SEC, monies lost due to fraud or ineptitude may never be recovered.

Early investors in an ICO are typically driven by the anticipation that the tokens will appreciate in value once the coin is launched. The prospect for extremely large profits is the key advantage of an ICO.

However, the legality of cryptocurrencies or digital assets is not assured.

The People’s Bank of China formally outlawed ICOs in 2017, deeming them harmful to economic and financial stability. In 2021, the Chinese government banned bitcoin mining and made all cryptocurrency transactions illegal.

What is a Crypto Liquidity Pool?

A liquidity pool is a crowdsourced pool of tokens locked in a smart contract that offer liquidity in decentralized exchanges (DEXs) in an effort to mitigate the difficulties created by illiquidity in such systems.

Instead of traditional buyer-and-seller markets, many decentralized finance (DeFi) systems employ automated market makers (AMMs), which allow digital assets to be exchanged automatically and without authorization via liquidity pools.

Because each liquidity pool is made up of two tokens, they are also known as pairs.

A liquidity pool is a smart contract in which tokens are locked in order to provide liquidity.

How do liquidity pools work?

A liquidity pool, at its heart, is a smart contract that regulates the supply of two crypto assets, like USDC and ETH. This type of smart contract is known as an automated market maker (AMM).

Anyone who utilizes the above-mentioned pool to exchange ETH for USDC or vice versa is a member of this pool. When someone makes a deal, regardless of how much or how little they exchange, they pay a fixed cost.

To make this model function, the pool must have a constant supply of USDC and ETH, which is where liquidity providers come in.

A liquidity provider must deposit the same amount of USDC and ETH. We may imagine that many other liquidity providers are doing the same thing so that when someone wants to trade a token, they can do so easily.

When the liquidity provider adds their tokens to the pool, the underlying smart contract will return a “liquidity pool token” representing their stake. They also earn a part of the fees paid by traders who utilize the pool, which is proportionate to the amount of liquidity pledged.

The AMM smart contract that underpins the liquidity pool is constantly rebalancing, quoting prices based on supply and demand.

Liquidity pools seek to address the issue of illiquid markets by motivating users to supply crypto liquidity in exchange for a part of trading costs.

Why Are Crypto Liquidity Pools Important?

Any seasoned trader in traditional or crypto markets will warn you about the risks of investing in a market with minimal liquidity. Slippage will be an issue when attempting to enter — or leave — any deal, whether it is a low-cap cryptocurrency or a penny stock.

The discrepancy between the projected price of a trade and the price at which it is performed is referred to as slippage. Slippage is most prevalent during moments of extreme volatility, but it can also happen when a large order is completed but there is not enough activity at the targeted price to keep the bid-ask spread constant.

The bid-ask spread of the order book for a specific trading pair determines the market order price that is employed in times of high volatility or low activity in a typical order book model. This implies it is the price at which sellers are willing to sell the item and the price at which buyers are willing to acquire it.

Low liquidity, on the other hand, might result in increased slippage, and the executed trading price can greatly surpass the initial market order price, depending on the bid-ask spread for the asset at the moment.

Liquidity pools seek to address the issue of illiquid markets by motivating users to supply crypto liquidity in exchange for a part of trading costs.

Trading utilizing liquidity pool protocols does not need buyer and seller matching. This implies that users may easily trade their tokens and assets utilizing liquidity offered by users and transacted using smart contracts.

Uses of Crypto Liquidity Pools

  • Token Distribution: Liquidity mining is also a viable technique for distributing fresh tokens to the correct individuals in various crypto initiatives.
    Better efficiency is provided by the algorithmic distribution of tokens to users who have placed their tokens in the liquidity pool.
    Following that, the freshly produced tokens are allocated based on each user’s part in the liquidity pool.
  • Yield Farming: A way of earning tokens from your crypto holdings. It is been compared to farming since it is a novel approach to “produce your own cryptocurrency.” The procedure entails leasing crypto assets to DeFi in exchange for interest.
    The money in the liquidity pool are used to give liquidity to a DeFi protocol, which is used to allow trading, lending, and borrowing.
    The platform makes fees by providing liquidity, which are distributed to investors based on their part of the liquidity pool.
    Yield farming is often referred to as liquidity mining.
  • Governance:  The best liquidity pools could also serve as helpful instruments in governance. You could discover a potentially higher threshold of token votes required for establishing a formal proposal for governance. However, pooling funds together as an alternative could help participants rally behind a common cause perceived as significant for protocol. 

Advantages

The benefit of employing liquidity pools is that it eliminates the need for a buyer and a seller to agree to swap two assets for a defined price, instead leveraging a pre-funded liquidity pool.

As long as there is a large enough liquidity pool, transactions can take place with little slippage even for the most illiquid trading pairs.

Other users contribute the funds kept in the liquidity pools, and they receive passive income on their deposits through trading fees based on the percentage of the liquidity pool that they provide.

Risks

Impermanent losses are one of the most serious dangers associated with the liquidity pool.

Because of the volatility in a trading pair, liquidity pooling causes a temporary loss of cash for the liquidity providers.

The trading activity of the pool has a significant influence on the asset’s pricing.

Arbitrage traders might benefit from a fluctuation in the asset’s price in relation to the worldwide market price.

Furthermore, pricing algorithms in liquidity pooling may cause slippage difficulties for smaller pools.

Final Thoughts

Liquidity pools are the most current inventive technical intervention in the crypto sector.

They are critical to the viability of the present DeFi technology stack.

Liquidity pools may boost access and yield farming opportunities while also opening up new pathways in DeFi use cases.

On the other hand, they pose various hazards, such as temporary loss and over-reliance on smart contracts.

What is GameFi?

What is GameFi?

GameFi is a new concept in the gaming and blockchain businesses.

Traditional video game players who are familiar to paying to play an online game are drawn to blockchain video games where they might instead be compensated for their time and work.

What is GameFi?

The term GameFi is inspired by the term DeFi and stands for Game Finance.

GameFi refers to financial transactions in the crypto world that are based on games.

The term Play-to-Earn (P2E) is used outside of GameFi and may be considered synonymous with GameFi. Yet, P2E and GameFi do not have the same connotation.

While P2E refers to earning money by playing video games, GameFi encompasses much more. GameFi not only the system of making money by playing games, but also financial transactions and systems on gaming platforms.

To explain GameFi more clearly, there are staking, yield farming, etc. that exist in DeFi processes. We can say that it is the integration of financial transactions and NFTs into the gaming industry.

GameFi, in its most popular meaning, refers to decentralized apps (dApps) with monetary incentives. These are often tokens awarded as prizes for completing game-related activities like as winning battles, mining valuable materials, or cultivating digital crops.

It is critical to understand that GameFi is not a gambling site. To earn cash, the games to be part of this developing industry need players to use a combination of skill and strategy. Although chance plays a role in these games, it is not the most important element in determining who wins or is eligible for monetary compensation.

How do GameFi games work?

In these games, all objects are represented as NFT. Consider land plots, avatars, outfits, weapons, and gold bars. Once a player finds and accumulates these goods via gaming, they may trade them with others in digital markets for different NFTs or sell them for cryptocurrencies.

Depending on the game, players can boost their earning potential by spending time leveling up and upgrading their characters, building monetized structures on their property that other gamers pay to use, or competing in tournaments.

All NFTs and cryptocurrency transaction data are maintained on a public blockchain to keep track of what each participant possesses.

Today, GameFi comes in a variety of flavors. As a result, the ways via which gamers might gain cash from their games differ. There are, however, a few key elements worth addressing. To monetise the activity, many of today’s most popular blockchain games use a mix of the following characteristics.

  • Play-to-earn: Players in certain blockchain games are rewarded financially for accomplishing gaming objectives. The monies rewarded in these games are often derived from a reserve of native tokens kept within a smart contract.
  • Asset ownership: The notion of ownership of limited digital assets is central to many blockchain games today. Digital ownership of one-of-a-kind assets opens up previously unimaginable business potential. Owners can monetize their digital assets in the same manner that they may market their physical assets.

Bottomline

The GameFi concept outperforms existing online games.

As blockchain and NFT games hint to what is to come, the play-to-earn mechanism will eventually be the passport to widespread crypto adoption. So it is hardly surprising that this exponential trend shows no indications of abating.

If current trends continue, GameFi and NFTs will serve as a rallying point for DeFi.

Prospects for this new business are infinite, thanks to rising public interest and an injection of finance.

What is a Decentralized Crypto Exchange (DEX)?

What is a Decentralized Crypto Exchange?

Every person on the planet has heard about cryptocurrencies in recent years.

With the growing popularity of cryptocurrencies comes an increased interest in other digital financial transactions.

But, if you want to buy or sell cryptocurrencies, you will need a exchange.

A decentralized exchange, or DEX, is a peer-to-peer marketplace where cryptocurrency traders may conduct transactions without entrusting their assets to an intermediary or custodian.

To understand decentralized exchanges, first you should familiarize yourself with centralized exchanges. 

A centralized exchange is a platform where anyone may buy, sell, or trade cryptocurrencies that are listed on that exchange.

Assume you wish to acquire some Bitcoin.

You may visit an exchange, join up by supplying banking and identification information, and deposit some cash.
The exchange will tell you the price based on a “order book” of individuals buying and selling at various quantities, and you can then complete the transaction.

So, what comes next?

The exchange will display those Bitcoins in your account, and you may trade them for other tokens. But you do not truly own them since you are relying on the exchange to serve as a custodian on your behalf.

Any trade you perform, like as exchanging Bitcoin for Ethereum, takes place within the exchange’s database rather than on a blockchain.

The user’s coins are pooled into exchange-controlled wallets.

The exchange is in charge of your private keys

DEX supporters argue that the attractiveness of decentralized exchanges is security.

A centralized exchange can restrict your access to your cryptocurrency, limit or prevent your ability to trade it, and potentially leave you susceptible to hackers.

Centralized exchanges, on the other hand, are often considerably easier to use for newbies, and they may sometimes offer quick trading since they are not bound by blockchain technology.

How do DEXs work?

DEXs are constructed on top of blockchain networks and employ smart contracts to enable trade between individuals while retaining ownership of their currency.

Along with the trading cost, each deal incurs a processing fee.

Decentralized exchanges are classified into three types:

  • Automated market makers
  • Order books DEXs
  • DEX aggregators

Automated market makers (AMMs):

AMMs rely on blockchain-based services called blockchain oracles, which supply information from exchanges and other platforms to fix the price of traded assets.

Instead of matching buy and sell orders, these DEX’s smart contracts employ pre-funded asset pools known as liquidity pools.

Other users finance the pools, and they are then entitled to the transaction fees levied by the protocol for executing transactions on that pair.

To earn income on their cryptocurrency holdings, these liquidity providers must deposit an equivalent amount of each asset in the trading pair, a process known as liquidity mining.

If they try to deposit more of one asset than the other, the pool’s smart contract invalidates the transaction.

Traders can utilize liquidity pools to execute orders or earn interest in a permissionless and trustless manner.

These exchanges are frequently graded based on the amount of cash locked in their smart contracts, known as total value locked (TVL).

Order book DEXs

Order books compile records of all open orders to buy and sell assets for specific asset pairs. The spread between these prices determines the depth of the order book and the market price on the exchange.

There are two kinds of order book DEXs:

  1. on-chain
  2. off-chain

Every transaction in an on-chain order book is recorded to a blockchain.

That includes not only the transaction itself, but also the request to purchase or cancel an order.

It is the pinnacle of decentralization, but the requirement to place everything on a blockchain can make it more expensive and slower.

With off-chain order books, all of this happens elsewhere, with only the final transaction settled on the blockchain. Since orders aren’t stored on-chain, this method can run into some of the security issues of centralized exchanges but isn’t as slow or costly as on-chain order books.

It is vital to note that order book DEXs frequently have liquidity concerns.

Traders typically prefer centralized platforms since they are effectively competing with centralized exchanges and pay more costs as a result of what is paid to transact on-chain.

While DEXs with off-chain order books decrease these expenses, smart contract risks exist due to the requirement to deposit cash in them.

DEX aggregators

To overcome liquidity issues, DEX aggregators employ a variety of protocols and techniques.

These platforms effectively combine liquidity from many DEXs in order to minimize slippage on big orders, optimize swap costs and token prices, and provide traders with the best price in the shortest amount of time.

Another important purpose of DEX aggregators is to protect consumers from the price effect and to reduce the risk of unsuccessful transactions. Some DEX aggregators additionally employ liquidity from centralized platforms to give a better experience for consumers, all while staying non-custodial through interaction with certain centralized exchanges.

Why should you opt for DEXs?

Trading on decentralized exchanges may be costly, particularly if network transaction fees are high at the time the deals are made.

However, there are significant benefits to adopting DEX platforms.

  • Privacy: Because DEXs are anonymous, they should be your first choice if you desire total anonymity.
    Centralized crypto exchanges may request know-your-customer information, whereas DEXs operate on the premise of anonymity.
  • Token availability: Before listing tokens on centralized exchanges, they must be independently vetted to verify they conform with local rules.
    Decentralized exchanges may incorporate any token generated on the blockchain around which they are constructed, implying that new projects will likely list on these exchanges before their centralized equivalents.
  • Reduced security risks: Because all the funds in a DEX trade are housed on the traders’ own wallets, they are less vulnerable to a hack.

What are some potential downsides?

  • Requirement of specific knowledge: Users should be familiar with security principles in order to protect their cash in a DEX crypto exchange. Furthermore, you must have special expertise on the choosing of wallets as well as the funding of the wallet with appropriate tokens.
  • No customer service: Centralized exchanges function similarly to banks.
    They have consumers that they mostly wish to keep satisfied. However, there is no actor on the opposite end of a genuinely decentralized exchange.
    The protocol’s creators do not have the same connection with users. While there are entire communities of DEX users, you are alone responsible for your own finances.
  • Smart contract risks: Exploitable defects in smart contracts may evade extensive audits and detailed code reviews, causing more harm.
  • Unverified token listings: On DEXs, anybody can create a new token with the purpose of increasing liquidity. However, for investors, this may result in rug pull scams. As a result, traders must exercise extreme caution while validating tokens before to investing in them.

Final Thoughts

The first decentralized exchanges appeared in 2014, and their popularity grew in tandem with the rising popularity of DeFi.

DEXs have moved beyond their traditional order book model shortcomings thanks to the capabilities of the Automated Market Maker technology.

Decentralized crypto exchanges, on the other hand, have proven to be crucial venues for users to borrow cash for leveraging their holdings or give liquidity in return for trading fees.

DEXs have also allowed users to generate passive income from their cryptocurrency holdings by depositing them in liquidity pools.

On the contrary, the usage of smart contracts in DEXs continues to introduce dangers.

What is ERC20?

What is ERC-20?

Prior to the advent of Ethereum, every new coin required its own blockchain.

This put a lot of pressure on developers, who required time and money to build a network that could support their coin or fork an existing blockchain.

The introduction of Ethereum altered that, as it was the first project to operate as a development platform. This opened up a slew of new opportunities for blockchain technology and digital currencies alike.

Ethereum evolved into a platform for the creation of decentralized apps (dApps), smart contracts, and new coins. Soon after, a variety of token formats evolved, with ERC20 being the most popular and dominating.

ERC20 is an acronym that stands for Ethereum Request for Comment (ERC), with the 20 denoting a proposal identification on the blockchain. The proposal ID number specifies the collection of rules that must be followed in order for tokens with that ID to be generated, shared, or transferred, with the ERC20 list being the most extensively used set of protocols.

ERC20 was proposed in November 2015 by Ethereum developer
Fabian Vogelsteller

The standard specifies a set of criteria that must be fulfilled in order for a token to function effectively inside the Ethereum ecosystem. As a result, ERC20 should not be regarded as a piece of code or software. It is more accurately defined as a technical guideline or specification.

In other words, the ERC20 provides developers with a set of standards to follow, allowing for flawless operation inside the wider Ethereum ecosystem. ERC20 tokens are supported by a large number of decentralized apps and services, making it simpler for community members and companies to accept and utilize them on a wide range of applications (such as cryptocurrency wallets, decentralized exchanges, games, and so forth).

ERC20 is one of the most significant Ethereum tokens

What does ERC20 do?

ERC20 defines the functionality and protocols for coins created within its framework.

By describing how they must function, new tokens may be produced very quickly. In comparison to developing them on your own blockchain, it instills consumer confidence in the security of that token. According to Etherscan, around 470,000 token contracts exist under the ERC20 framework at the time this post is being written, owing to their relative simplicity of deployment.

ERC20 Standard Rules

If a smart contract want to use the ERC20 token, it must adhere to certain criteria called ERC standards. In other circumstances, if you do not follow the guidelines, it will not be appropriate to call it an ERC 20 token. There are now nine rules, six of which are necessary and three of which are optional.

The Mandatory Standards

  • totalSupply: specifies the total quantity of ERC20 tokens you intend to produce. To begin creating the token, you must first establish the entire supply of this token. You cannot, under any circumstances, create your own token on the fly since this will have a major impact on the value of these tokens.
  • allowance: The most significant function is the allowance function. In reality, when the contract wishes to carry out a transaction, it has to check the balance of the Ethereum smart contract to determine if the user has the required minimum amount. Using the allowance function, the contract can carry through or cancel the transaction.
  • transfer: The owner can use this function to transmit tokens to another address after determining whether the user has enough tokens to transfer. Furthermore, this behaves similarly to a conventional crypto transaction on other blockchain systems.
  • transferFrom: This function is mostly used to automate specific transactions.
    For example, maybe you have to pay someone the same amount every month, or maybe you have to pay rent and expenses. As a result, you may utilize transferFrom to schedule these payments for a certain day and time.
  • balanceOf: This function’s sole purpose is to return the total quantity of tokens held by any address. In reality, it serves as user information, so if you produced some tokens and sent them to other addresses, you can use this to see how many tokens you have left.
  • approve: The approve function aids in the elimination of token counterfeiting. Once the contract owner has checked the amount, he or she can approve the contract in order to receive the money. This approve function will also check to see whether the number is right in relation to the total quantity of tokens. As a result, counterfeiting tokens is impossible. If this function discovers any discriminates among the numbers, it will reject both the payment and the smart contract.

The Optional Standards

  • Token name: It is critical that the token be connected with a name or identity. Yet, you are not need to name them; however, associating identification with any token is beneficial when utilizing it within a community.
  • Decimal (Max: 18): It is actually pretty significant since it ensures the lowest possible value for your token. If the divisibility is zero, the lowest value is one; if it is two, the lowest value is 0.01. You can go up to 18 decimal places in this case.
  • Symbol: It is mostly used to create brand value via the use of catchy symbols, however you may not necessarily require a symbol for your coin.

ERC20 Advantages

The ERC20 standard has several advantages. It enables developers to create dApps on the Ethereum network. It also aids in the streamlining of the entire standardized procedure. Let us go over the advantages one by one to gain a clearer picture.

  • There is a standard protocol to maintain and follow.
  • Token implementation becomes easy for blockchain developers.
  • ERC20 tokens offer high liquidity.
  • Smart contracts ensure that transactions are risk-free.

ERC20 Disadvantages

  • Transfer function bug: Contract accounts and externally owned accounts are the two types of accounts in Ethereum. When attempting to engage with another externally owned account, just utilize the transfer function to transmit tokens.
    However, when its contract account is used, the transfer feature does not operate well, and you are likely to lose money.  But how exactly? When you use this blockchain technology to transmit money to a contract, the receiver is not alerted. As a result, they will not recognize it, and the token will be trapped within the contract, unable to be used. This is why you must utilize the approval + transferFrom functions. However, using these two might result in double-spending.
  • Low Entry Point: These standards, on the other hand, may be used by anybody to create tokens. There are no restrictions on who may and cannot attend. As a result, many people are producing unnecessary tokens that are flooding the market and, in many cases, creating fraudulent tokens to raise money.

The Takeaway

ERC20 is one of the most effective blockchain protocols. It is in charge of hundreds of tokens on the Ethereum network. It is also developer-friendly.

An ERC20 token may be created and released on the blockchain by anybody. ERC20 may also be used to create utility tokens for a dApp.

What is a Crypto Token?

What is a Crypto Token?

Token is a term that is frequently heard in the cryptocurrency community. In fact, you may hear Bitcoin referred to as a “crypto token” or something similar, because – theoretically – all crypto assets may be referred to as tokens.

Crypto tokens are programmable assets that may be created and stored on current blockchains. While they frequently have extensive compatibility with the network’s cryptocurrencies, they are a whole new digital asset class.

Tokens are units that are built on top of existing blockchains.

Tokens function within an existing blockchain to enable the development and execution of one-of-a-kind smart contracts, which frequently provide ownership of assets outside of the blockchain network. Tokens may be sent and received and can represent units of value such as electricity, money, points, coins, digital assets, and more.

Crypto tokens are a sort of cryptocurrency that symbolizes an item or a specific use and has its own blockchain.

How Crypto Tokens work?

To monitor transactions, blockchain employs a decentralized, or distributed, ledger that lives on a broad variety of independent computers. Each node organizes additional data into blocks, which are then chained together in “append only” mode. Because of the append-only structure, no one on any node can change or remove data from previous blocks. They can only contribute to the chain, which is one of blockchain’s primary security characteristics.

Cryptocurrency tokens provide an append-only safe record of cryptocurrency that is linked to a special-access contract that can connect to a variety of assets.

The token-based special-access contract can grant users access to assets like as cash, crypto coins, reward points, or even digital material such as music, art, a video clip, or a movie.

The tokens enable the ownership of a blockchain-verified private smart contract linked to that asset.

Coins Vs Tokens

While the terms “coin” and “token” are sometimes used interchangeably, they refer to different sorts of assets.

A crypto coin is often employed as the native coin of a blockchain, which is used to exchange cash, store value, and so on. Tokens, on the other hand, are not native to the blockchain on which they operate.

Crypto Token Types

Currently, there are four main categories of tokens

  • Payment Tokens: Payment tokens are the most well-known and extensively utilized types of cryptocurrency. These crypto tokens are used for buying and selling in the same way that the US dollar or the Euro are, only they are not backed by a specific government. Payment tokens are units of value that may be traded for other currencies that exist within the blockchain of crypto networks such as Bitcoin, Monero, and Ethereum. Third-party custodians or exchanges are also available to convert payment tokens into legal tender currencies such as the US dollar. People are increasingly utilizing these tokens to purchase products and services, albeit the aggregate number of retailers who accept them remains tiny.
  • Utility Tokens: These crypto tokens provide its owners with access to a product or service that is either now available or in the works. They are most typically employed as a fundraising mechanism for initial coin offers (ICOs), as a placeholder for the crypto currencies that buyers would get when the new coins go live on the network. The term for these tokens stems from the fact that they may be used to purchase an item or service from the issuer. Because they exist on an actual blockchain, their owners can be confirmed, and they can be readily swapped.
  • Security Tokens: Security tokens represent the rights and duties associated with securities such as stocks and bonds. A security token is often used to represent a stake of the firm that issued it. They can reflect legal ownership of an asset or a piece of an asset, such as real estate, stocks, exchange-traded funds (ETFs), and so on.

As a result, they are more strictly controlled than ordinary tokens. Companies may issue security tokens instead of traditional stock shares to raise funds more cheaply, or because the tokens provide immediate settlement and simpler cross-border trade.

  • Non-fungible Tokens: Also known as NFTs, these tokens have made the news lately because of the eye-popping sales prices of single NFTs connected with works of art, individual tweets, and sports memorabilia. They exist on pre-existing crypto networks, with ETH being one of the most popular. These tokens have private contracts that can be clearly distinguished from any other token in existence. Because of that feature, they are used by athletes, artists, musicians, and other creators as a way to connect with collectors, who see them as digital one-of-a-kind assets. Because the consumer may still reproduce the underlying material, they cannot copy, sell, or pirate it, NFTs have created new marketplaces for digital art and memorabilia. Some persons have also issued NFTs that provide ownership of non-digital assets that are one-of-a-kind, such as real estate.


Tokens can be used for investment purposes, to store value, or to make purchases.

The Takeaway

As the blockchain industry matures, the number of distinct digital assets will only increase to meet the diverse demands of all ecosystem members, ranging from business partners to individual users. Given that generating new assets in the digital world is less limiting than in the physical realm, these digital assets are widely predicted to change the way many sectors work, interact, and produce value, enabling a plethora of new social and economic possibilities.

What is Crypto Staking?

What is staking?

Staking has lately gained popularity in the crypto world, and like many things in crypto, staking may be a difficult or easy concept, depending on how many layers of understanding you want to access.

Before delving into crypto staking, it is natural to ponder if it is worthwhile to stake cryptocurrencies. Indeed, crypto staking has seen a rapid growth in recent years, with intermittent surges in the number of people staking cryptocurrencies for yield farming prizes or fixed interest.

In reality, big exchanges such as Coinbase and Binance that offer staking services to consumers might earn APYs of up to 30%. As a result, you can plainly see a significant increase in the demand for staking cryptocurrencies, which generates numerous talks about staking.

Staking is a way of earning rewards for holding certain cryptocurrencies

Crypto staking is the process of locking up crypto holdings in order to receive rewards or interest. Cryptocurrencies are built on blockchain technology, which verifies crypto transactions and stores the resulting data on the blockchain. Staking is another term for confirming transactions on a blockchain.

These validation methods are referred to as proof-of-stake (PoS) or proof-of-work (PoW) depending on the kind of cryptocurrency and its accompanying technology. Each of these procedures contributes to crypto network consensus, or confirmation that all transaction data adds up to what it should.

However, attaining that consensus necessitates the participation of others. That is what staking is—investors that actively retain or lock up their crypto assets in their crypto wallet are participating in the consensus-taking procedures of these networks. Stakers are essentially the people that approve and verify transactions on the blockchain.

The networks reward those investors for doing so. The particular prizes will vary according to the network. It may be useful to think about crypto staking as equivalent to putting money in a savings account. As a reward from the bank, the depositor gains interest on their money while it is with the bank, which utilizes the money for other reasons (lending, etc.). Staking coins is therefore analogous to earning interest.

How does Crypto Staking work?

Staking is how new transactions are added to the blockchain in cryptocurrencies that follow the proof-of-stake concept.

Participants must first pledge their currencies to the cryptocurrency protocol. The protocol selects validators from among these individuals to confirm blocks of transactions. The more coins you commit, the more probable it is that you will be selected as a validator.

When a new block is added to the blockchain, new cryptocurrency coins are created and given as staking rewards to the validator of that block. Most of the time, the payouts are the same cryptocurrency that the members are staking. Some blockchains, however, employ a different form of coin for incentives.

To stake cryptocurrency, you must first acquire a cryptocurrency that employs the proof-of-stake concept. Then you may decide how much you wish to bet. Many prominent exchanges allow you to do so.

When you stake your coins, they remain in your ownership. You’re basically putting them to work, and you may unstake them later if you wish to exchange them. The unstaking process may take some time, and some cryptocurrencies require you to stake coins for a set period of time.

Staking is not available for all forms of cryptocurrencies. It is only accessible for coins that employ the proof-of-stake methodology.

To add blocks to their blockchains, several cryptocurrencies employ the proof-of-work concept. The issue with proof of work is that it needs a significant amount of computational power. As a result, cryptocurrencies that employ proof-of-work consume a lot of energy. Because of environmental issues, Bitcoin in particular has been chastised.

Proof-of-stake, on the other hand, does not need quite the same amount of effort.

Which cryptocurrencies are capable to be staked?

This also makes it a more scalable solution capable of handling larger volumes of transactions.

Here are a few of the major cryptocurrencies you can stake:

  • Ethereum: was the first cryptocurrency with a programmable blockchain that developers can use to create apps. Ethereum started out using proof of work, but it’s transitioning to a proof-of-stake model.
  • Cardano: is an eco-friendly cryptocurrency. It was founded on peer-reviewed research and developed through evidence-based methods.
  • Polkadot: is a protocol that allows different blockchains to connect and work with one another.
  • Solana: is a blockchain designed for scalability since it offers fast transactions with low fees.

Is Crypto Staking a Good Investment?

Anyone may earn crypto by staking it. However, unless someone has a large cache of proof-of-stake coins, staking is unlikely to make them wealthy.

Staking payments are comparable to stock dividend payouts in that they both provide passive income. They don’t need the user to do anything other than keep the correct assets in the proper place for a defined period of time. Because of compound interest, the longer a user invests their coins, the bigger the overall profit potential.

However, unlike dividends, there are a few factors specific to proof-of-stake currencies that determine how much of a staking incentive users are likely to earn. When looking for the most successful staking coins, users should consider the following variables and more:

  • How big the block reward is
  • The size of the staking pool
  • The amount of supply locked

Furthermore, the fiat currency worth of the coin being staked must be considered. Assuming that this value remains stable or grows, staking might be advantageous. However, if the coin’s value declines, earnings may be swiftly depleted.

What exactly is a stake pool?

A staking pool is a collection of coin holders that pool their resources in order to improve their chances of validating blocks and getting rewards. They pool their staking power and split the benefits in accordance to their contributions to the pool.

Setting up and managing a staking pool may take a significant amount of effort and expertise. Staking pools are best successful on networks if the entrance barrier (technical or financial) is reasonably high. As a result, many pool operators deduct a fee from the staking incentives provided to players.

Aside from that, pools may offer further freedom to individual stakeholders. Typically, the stake must be locked for a specific length of time, and the protocol specifies a withdrawal or unbinding time. Furthermore, there is probably definitely a significant minimum amount necessary to stake in order to disincentivize malevolent action.

The majority of staking pools have a minimal minimum balance and no extra withdrawal delays. As a result, joining a staking pool rather than staking alone may be preferable for beginning players.

The Advantages of Crypto Staking

Here are some of the advantages of staking cryptocurrency:

  • It is an easy way to earn interest on your cryptocurrency holdings
  • You do not need any equipment for crypto staking like you would for crypto mining.
  • You are helping to maintain the security and efficiency of the blockchain
  • It is more environmentally friendly than crypto mining

The major advantage of staking is that you earn more cryptocurrency, and interest rates may be quite high. In rare circumstances, you may be able to make more than 10% or 20% every year. It has the potential to be a highly rewarding method to invest your money.

And all you need is crypto that operates on the proof-of-stake mechanism.

Staking is another technique to support the blockchain of a cryptocurrency in which you have an investment. These cryptocurrencies rely on staking by holders to authenticate transactions and keep things operating smoothly.

The Dangers of Crypto Staking

There are a few risks of staking crypto to understand:

  • Crypto prices are volatile and can drop quickly. If your staked assets suffer a large price drop, that could outweigh any interest you earn on them.
  • Staking can require that you lock up your coins for a minimum amount of time. During that period, you’re unable to do anything with your staked assets such as selling them.
  • When you want to unstake your crypto, there may be an unstaking period of seven days or longer.

The most significant danger of crypto staking is that the price will fall. Remember this if you come across coins with unusually high staking reward rates.

Many lesser crypto companies, for example, promise high returns to tempt investors, but their prices later plummet. If you want to add cryptocurrencies to your portfolio but want less risk, cryptocurrency stocks may be a better option.

Although the crypto you stake is yours, you must unstake it before you may trade it again. To avoid unpleasant surprises, ask out if there is a minimum lockup time and how long the unstaking procedure takes.

Closing thoughts

Staking is a method of earning additional benefits by using your crypto holdings or coins. It might be beneficial to conceive of it in terms of earning interest on cash deposits or dividends on stock assets.

Essentially, coin holders enable their crypto to be utilized in the blockchain validation process and are paid by the network for doing so. Staking might provide another possible revenue stream for cryptocurrency investors.

What is a Crypto Wallet?

What is a Crypto Wallet?

A crypto wallet is not the same as a traditional wallet. You could definitely go for your wallet right now, open it, and either take out tangible money or put some back in—or at the very least a payment card. A wallet does not secure your money in any manner, except from the elements or becoming misplaced in your luggage.

A crypto wallet is a different beast entirely. A crypto wallet is a software or physical device that allows users to store and manage their Bitcoin, Ether, and other cryptocurrencies.

When you wish to acquire cryptocurrency, whether through a exchange or as a gift or revenue, you direct the sender to a unique cryptographic address generated by the wallet.

You can imagine your cryptocurrency saved on the wallet in the same way that files are stored on a USB drive, but the information stored on the wallet just refers to the location of your cash on the blockchain, the public ledger that records and authenticates all cryptocurrency transactions.

A crypto wallet is a way to manage, secure, and use cryptocurrencies

Origin

Satoshi Nakamoto created the first cryptocurrency wallet when he released the bitcoin protocol in 2009.

How does a Crypto wallet work?

Blockchain is a public ledger in which data is stored in “blocks.” These are records of all transactions, as well as the amounts stored at each location. Cryptocurrencies are not kept “in” a wallet in the traditional sense. The crypto assets reside on a blockchain, and the wallet software enables you to interact with the blockchain balances. The wallet itself stores addresses and lets their owners to transfer to other addresses while also allowing others to see the balance stored at any particular address.

A crypto wallet works by using two keys: one public and other private. The keys can be used to track ownership, receive, or spend cryptocurrencies. A public key allows others to make payments to the address derived from it, whereas a private key enables the spending of cryptocurrency from that address.

Public Key

Those who wish to send you cryptocurrencies will use your public key as your wallet address. This address is a combination of numbers and letters that ranges in length from 26 to 35 characters. This address is frequently shown as a QR code that can be readily scanned by a camera device to make it more useable.

Sharing your public key with others is secure since it can only be used to contribute funds to your crypto wallet and cannot be used to withdraw cash or see what is within your wallet.

Sharing your public key with others is secure

Private Key

Your private key functions more like a PIN or verification number, confirming your ownership of the cryptocurrency and allowing you to spend it. Your private key, as the name implies, should be kept private and only known to you.

Private key is actually a very lengthy string of digits. Most crypto wallets will share your private key with you as a seed phrase to make it easier for users to utilize.

A seed phrase is an organized series of 12 to 24 syllables that represents a random number. It is important to preserve your seed phrase printed on a piece of paper exactly as shown when you set up your crypto wallet.

Never ever share this information with others

Because your crypto wallet just holds your public and private keys, it may be better to think of it as a keychain. Your cryptocurrency is stored on the blockchain, a digital record, and is encrypted with the information from your wallet proving you are the owner.

It may sound hard, but most crypto wallets come with applications with surprisingly simple interfaces that allow you to keep track of your holdings with live price charts and even trade crypto directly from the app.

While each wallet has its own specific nuances, here are the general steps involved in sending or receiving funds using a crypto wallet:

  • Receive funds: You need to retrieve an address (also known as a public key) from your wallet. Locate the “generate address” feature in your wallet, click it, then copy the alphanumeric address or QR code and share it with the person who wants to send you crypto.
  • Send funds:  You need the address of the receiving wallet. Locate the “send” feature in your wallet and enter an address of the wallet you intend to send coins to. Select the amount of crypto you’d like to send and click “confirm.” Consider sending a small test transaction before sending large amounts of crypto. Note that sending coins requires a fee that will be paid to miners in exchange for processing the transaction.

Types of crypto wallets

It’s also worth noting that crypto wallets come in two varieties: hot and cold wallets.

  • A hot wallet is one that is linked to the internet and operates as a program on your computer or mobile device. Because of their user-friendly design, accessibility, and functionality, hot wallets are widely regarded as the ideal alternative for individuals just getting started with cryptocurrency.-
  • A cold wallet, on the other hand, is one that is not online and takes the shape of a tiny physical device that allows you to control your private keys and verify transactions before they are executed. Cold wallets are thought to be more safe, and as a result, they are better suited for large sums of money or long-term storage.

Hardware wallets

Hardware wallets are physical devices that use USB to connect to your computer.

As previously stated, these wallets are also known as cold wallets. You may transfer funds from them while they are linked to your computer, but once they are unplugged, your funds are fully protected.

But what if you misplace your hardware wallet?

A decent hardware wallet has a “seed,” which lets you to restore your wallet on any new device. Remember that the wallet does not contain your cryptocurrency; it only has the keys to the addresses where your money is stored.

Hardware wallets are an excellent choice for crypto traders who want full control over their crypto assets and value the security features that they offer.

Software wallets

Software wallets are classified as hot wallets since they are internet-connected and are available as apps or applications on your mobile devices or desktops.

Some of these wallets are cross-platform compatible, allowing users to manage their crypto assets no matter where they are.

As a result, they are a fantastic alternative for newcomers or people who value easy access to their digital funds.

Mobile wallets

Mobile wallets are hot wallets that may be accessed via a downloading app on your mobile device. Some mobile wallets also have a desktop companion software that allows you to synchronize your portfolio and manage your assets across different devices.

Mobile wallets are frequently seen as the greatest option for those who are new to the world of cryptocurrencies. They’re loaded with features that make managing your assets simple, and they have user-friendly interfaces.

The majority of mobile wallets will save your private key for you. While this is helpful (since you don’t have to worry about losing or accidently revealing it), it implies that the wallet (rather than you) controls your private keys.

Paper wallets

Cryptocurrency does not have to be entirely digital; once you have your address and private key, you can print it out — this is known as a “paper wallet”.

This is another type of cold storage because it is not connected to the internet.

Pros of Crypto Wallets:

  • Ownership of one’s own money: If you have your own private keys, the crypto belongs to you and you alone. Money in a bank, on the other hand, is theoretically the bank’s property.
  • Flexibility to send transactions whenever and to whoever you choose: Decentralized cryptocurrencies are resistant to censorship since no one controls the network, making it difficult for anyone to halt transactions.

Cons of Crypto Wallets:

  • User responsibility: When you start your own bank, you accept full responsibility for everything that goes wrong.
  • Learning curve: Using a crypto wallet necessitates a minimum amount of technical skills as well as being acquainted with a new type of financial environment.

The Takeaway

Setting up a crypto wallet is a necessary step in order to transfer, receive, and store cryptocurrency. These digital wallets store the key pairs that provide you access to the blockchain, which is where your crypto and crypto transactions are stored. To accomplish anything with your crypto, you need the keys, much like a car.

Fortunately, there are several solutions available these days, including wallets that are connected to the internet or the cloud (hot wallets) as well as physical devices known as cold wallets. Most hot and cold wallets are multi-asset wallets, meaning they may hold a variety of various forms of cryptocurrency.

What is a Stablecoin?

What is a stablecoin?

A stablecoin is a digital asset that is linked to a physical asset or fiat money. As a result, it is less volatile than other cryptocurrencies such as Bitcoin and Ethereum. The bulk of the 4000+ cryptocurrencies in existence in 2021 are not stable. This implies that they can change dependent on their market capitalization, the number of coins in circulation, the number of individuals investing, and other factors. Stablecoins originated in response to a market requirement for stability. They still use the same blockchain technology as other cryptocurrencies, but they have been designed so that their value does not fluctuate as much.

Types

There is some attraction to fiat currencies, which are backed by the full confidence and credit of the government that issued them. Fiat currencies benefit from some price stability because of this.

This, however, implies that many fiat currencies are essentially controlled by their central banks. Stablecoins are an attempt to bridge the gap between fiat currency and cryptocurrency. Stablecoins are classified into three types based on their operating processes.

  • Fiat-Collateralized: Fiat-collateralized stablecoins keep a fiat currency reserve, such as the US dollar, as collateral in order to issue a sufficient amount of crypto coins. Other kinds of collateral can include precious metals like as gold or silver, as well as commodities such as oil, however most fiat-collateralized stablecoins nowadays employ dollar reserves. Such reserves are managed by independent custodians and are audited on a regular basis to ensure compliance. Tether and TrueUSD are popular crypto currencies with a value equal to one US dollar and are backed by dollar deposits.

Pros:
– Stable price
– Not prone to hack

Cons:
– Needs an auditor to make sure transparency is maintained
– Slow liquidation to fiat

  • Crypto-Collateralized: Stablecoins that are crypto-collateralized are backed by other cryptocurrencies. Because the reserve cryptocurrency may be volatile, such stablecoins are over-collateralized — that is, a higher number of cryptocurrency tokens are kept as a reserve for releasing a smaller number of stablecoins.

Pros:
– More decentralized
– Quick and cheap liquidation — smart contracts

Cons:
– Not as price stable as the fiat baked stable coins
– Tied to the health of a particular crypto currency
– High complexity

  • Non-Collateralized (Algorithmic): Non-collateralized stablecoins do not employ reserves but do feature a functional mechanism, like that of a central bank, to maintain a stable price. For example, the dollar-pegged basecoin employs a consensus process to increase or reduce token supply based on demand. Such operations are analogous to a central bank producing banknotes to sustain fiat currency values. It is possible to do this by deploying a smart contract on a decentralized platform that can run autonomously.

Pros:
– No collateral required
– Most decentralized and independent
– Not tied to any crypto or fiat

Cons:
– Complex to implement as deeper understanding of finance, economics, technology and cryptography knowledge is required to think along these lines.

Advantages

Stablecoins are gaining popularity due to their promise of a more stable cryptocurrency choice. These are the crypto market’s safe bets, with support that prevents them from plunging overnight. But that’s not the only advantage of stablecoins; they also have a broader appeal, which means they’re more likely to get ingrained in society. As a result, it’s less of a risk for investors and early adopters, who can reasonably trust that the money they put into the currency isn’t going to vanish.

When the general public hears about a certain stablecoin, it is simpler to disseminate it and its effect since it is backed by a physical asset. The normal user is more likely to believe a currency that is the digital equal of a dollar than some transitory digital coin.

The presence of this anchoring feature elevates stablecoins from a mysterious new technology to something that even your grandmother could use. This has the potential to dampen the euphoria a little, because few young tech disruptors will be keen to share their preferred money with the older generation, because that’s just not hip enough. But, let’s be honest, hype hasn’t been doing a great job of keeping other cryptos afloat thus far.

Furthermore, stablecoins are a better choice for speedy transactions than options like Bitcoin and its rivals. The consistent pricing, quick turnaround, and accelerated processing make it suitable for paying for groceries or ordering pizza. The key method of grabbing market attention is to embed stablecoins in daily life and make them function for the user, which has shown to be effective so far.

Problems

Stablecoin, although being a hopeful development in the crypto industry, is not without its drawbacks. There’s no getting around the reality that many of the best stablecoins forego decentralization in favor of the same stability that makes people want them. This, in and of itself, contradicts the original ideology of cryptocurrencies and puts the market at risk of monopolization or cornering.

To be sure, some solutions advocate for decentralization while still attempting to retain the objectives of crypto’s creators. Those, however, confront the challenge of obtaining adequate funding. Essentially, if you rely on a bank to handle collateralization, you may anticipate value stability but at the expense of decentralization. Similarly, crypto-backed stablecoins are decentralized, but they must make certain concessions in terms of stability.

It’s always a balancing act, and not every business can pull it off.

Last but not least, while a crash in the underlying currency or asset is less likely than one in the crypto market, it is nevertheless possible. Stablecoins are not immune to nationwide currency value drops, which have historically occurred all over the world, thus they are not immune .However, if you have analytics on your side, you can generally detect this type of disaster well in advance. Just keep in mind that stablecoins aren’t magically guaranteed to remain stable indefinitely, and you’ll be OK.

Wrap up

Stablecoins are similar to traditional currencies, with the exception that they do not have any centralized qualities and instead utilize smart contracts and blockchain, which are written in computer code, to replace the functions of traditional investment and currency platforms. Finally, stablecoins provide greater benefits in terms of hedging the value as well as many methods to invest in DeFi-based smart contracts. Stablecoins eliminate centralization and become the bridge between the real economy and the encrypted economy, allowing users to focus solely on their earning strategy and never worry about the fluctuation in the crypto world.

Patricio Aguirre
Proactive Computer Engineer - Blockchain Enthusiast & Crypto Learner