Understanding staking pools: The pros and cons of staking cryptocurrency

1. What are crypto staking pools?

A staking pool is a tool that allows multiple crypto token holders to pool in their tokens, thereby granting the staking pool operator a validator status and rewarding all stakeholders with tokens for their computational resources’ contributions.

For many crypto investors across the globe, the concept of a staking pool is rather unknown, and investing in one elicits skepticism rather than drawing hordes of investors to it. Yet, the overall concept of a staking pool is available on blockchains that employ a proof-of-stake (PoS) model and requires stakeholders to lock their crypto tokens in a specific blockchain address or wallet in return for an annual percentage yield (APY).

These locked tokens are tethered toward developing the respective blockchain. In exchange, the blockchain provides stakeholders through the public stake pool operator with a percentage reward based on the number of tokens staked. The many advantages of investing in a public stake pool are accompanied by a number of caveats that are important to consider before staking crypto tokens, especially the staking pool model employed.

Public stake pools are ideal for retail investors who want to participate in the staking activity without having to stake large amounts of a crypto token which is needed to become a validator on the blockchain network or start a private staking pool. For Ethereum, an investor would need 32 ETH to become an independent validator, so any user can stake Ether (ETH) and earn rewards in the process.

2. Staking pool returns

As a suitable option for long-term crypto token holders, staking pools offer the promise of earning yields in addition to the capital gains earned through token value appreciation.

One can invest in a stake pool with a fraction of the number of tokens required to become a validator on a PoS blockchain, while the staking pool rewards users on a daily, weekly or quarterly basis, depending on the cryptocurrency being staked.

For example, investors can stake their ETH tokens in a staking pool on Coinbase for daily rewards and with no minimum balance requirement.Another popular blockchain to stake tokens is Cosmos, the second largest ecosystem in blockchain. Investors can also stake their tokens through various validators on many chains available in the Cosmos ecosystem.

Choosing which staking pool to enter depends on a number of factors, including the commission rates, which are typically between 5% to 6% and how they contribute to the ecosystem like creating code for the projects they validate. The annual percentage rate (APR) varies from chain to chain, with the APR on Cosmos Hub being 15%, while for Osmosis it’s 60% and Juno offers 150%, which is significantly higher.

Apart from these factors, many staking pool operators offer unique value propositions that may make them appealing to potential stakeholders. A relevant example here is Cosmos Antimatter, a new budding Cosmos ecosystem validator that is promoting decentralization within the validator network.

The main aim is to ensure that no validator cartels are formed while giving up 100% of their profit to the stakeholder ecosystem.

3. Why should you invest in a staking pool?

Staking pools earn rewards in proportion to the tokens invested, even if the quantity staked is a fraction of what is needed to achieve validator status on the blockchain.Staking pools provide anyone to earn a passive income while still holding on to the crypto tokens for long-term price appreciation.

Moreover, investors do not have to worry about how a staking pool works or the procedures required in setting up and running a validating node, which the staking pool operator instead does on behalf of all the stakeholders.Rewards earned are in the form of the staked crypto token as the blockchain rewards the validator (pool operator in case of a staking pool) with newly minted tokens every time a block of transactions is successfully added.

This means that stakeholders will receive their fair share in proportion to the number of tokens staked and will be able to generate even higher returns when the price of the staked token appreciates with time.

Considering that the minimum amount of tokens required to become a validator is so high, it is far easier for even novice investors to lock their coins with a public staking pool operator to enjoy more predictable and frequent staking rewards.

4. What should you be aware of before starting your staking journey?

Despite the potential returns, the costs of operating a crypto staking pool need to be considered wisely before investing.It is important to choose a staking pool wisely, as the staked tokens act as a guarantee for the blockchain and it is important that the pool operator, who is acting as a validator on the blockchain, does their job without any malicious intent.

Suppose a block is formed with invalid or fraudulent transactions, the blockchain network may burn a certain amount of the tokens staked and result in you losing money staking crypto along with other stakeholders who have invested their tokens in the staking pool.

Moreover, once an investor decides to join a staking pool, their crypto tokens are locked in a specific blockchain address or with a third party and this may result in stakeholders not having direct control over their staked tokens. It is wiser to choose staking pools that allow stakeholders to participate in the staking process while still having their holdings held on a hardware wallet for more security.

A staking pool will give smaller rewards than if the tokens were directly staked with the blockchain since every staking reward is split among the many participants of the staking pool. After deducting platform fees and commission rates, the final payout reduces further. For ETH, becoming an individual validator could earn someone an APY of 6%. In comparison, investments tied in crypto staking pools can earn a lower APY of about 5% from pool staking in the best-case scenario.

5. How should one begin their staking journey?

It is necessary to conduct due research about all available crypto staking pools for a particular crypto token and choose those with a proven track record.Unlike crypto mining, crypto staking doesn’t involve investing in mining equipment to generate returns.

There are several crypto staking pools that are currently available for different cryptocurrencies that operate on a PoS blockchain and it is suggested that investors choose notable crypto exchanges that operate public stake pools over private staking pools that may offer a higher APY.

Apart from considering the stake pool’s ranking, it is prudent to choose staking pools that provide stakeholders with regular updates about the staking pool’s performance and are transparent in their functioning.

This includes key decision-making regarding the future roadmap of the pool and how stakeholders are made a part of the process.It is advisable to go through performance reviews before narrowing down on a staking pool for investing. Factor in the membership or entry fee to understand the likely real returns that will be generated on the tokens staked and enter a staking pool that doesn’t have too many stakeholders to ensure that rewards aren’t diluted further.

Opinions expressed by Entrepreneur contributors are their own.From giants like Tesla, Square and Microstrategy to small-scale traders, everyone is betting on blockchain projects. And why not?

Within a decade, the crypto market has grown exponentially to reach a market cap of over a trillion dollars. 

Blockchain technology is not only used to create cryptocurrencies or tokens. Companies like Amazon, IBM, Google and others are embracing the underlying technology behind cryptocurrencies — blockchain — to enhance their IT services. 

Another misunderstanding is that cryptocurrencies are only used as a medium of exchange. Well, thanks to DeFi, the technology has brought every financial service you can imagine, whether it’s lending, borrowing, payment or derivatives, on the blockchain.Decentralized finance or DeFi is a term used for financial applications built on top of blockchains through smart contracts.

These are self-executable programs on the blockchain that are pre-programmed to run certain functions once the defined conditions are met. Think of DeFi as an alternative to the traditional financial infrastructure created using blockchain technology.

Related: Getting Drawn Into DeFi? Here Are 3 Major Considerations

Here are five reasons why you should jump on the DeFi bandwagon.

Decentralized, secure and transparent 

No central entity controls DeFi applications. Instead, DeFi apps are run by smart contracts that are open for everyone to inspect and scrutinize. Furthermore, you can participate in the governance process of DeFi apps by voting on the platform proposals.

In short, the DeFi space is transparent and governed by people in the community like you who participate in it. From cryptography to secure storage of data, DeFi inherits all of the security features from cutting-edge blockchain technology.

Plus, the smart contract code also exists on the blockchain. There is no denying that smart contracts can be faulty and may lead to thefts. To avoid this, go for DeFi applications with smart contracts that are audited by reputed, independent auditors. 

DeFi gives you total control over your assets 

Traditional financial services are tightly controlled by central entities running them. However, such gatekeepers come with many disadvantages, like hefty middlemen charges, low transaction latency, entry barriers and more. Most importantly, with traditional financial services, you have less control over your money.

On the other hand, DeFi eliminates intermediaries from financial services and offers you total control over your assets. Related: What's Holding DeFi Back (and How to Fix It)

DeFi brings a wide range of financial services that are open to all

The prime reason why DeFi is getting massive adoption is its ability to provide simpler, borderless financial services.

DeFi applications are spread over a range of financial services like payments, decentralized exchanges, stablecoins backed by stable fiat assets like the U.S. dollar, lending, borrowing, prediction markets, insurance, derivatives, yield farming and so much more.Every day, something new is being built in the DeFi space.

For example, how do you get a loan from a bank? You submit tons of paperwork and go through complex procedures, right? In the DeFi space, getting a loan is simple. You deposit the collateral, and your loan will be credited to your crypto wallet. 

Long story short, DeFi is borderless. Everyone has access to financial services in the DeFi world. There is no entry barrier to DeFi. You don’t need paperwork, a bank account or even a credit score. All you need is an internet connection and a crypto wallet; that’s it.

Most importantly, DeFi applications are open source. Anyone can view the underlying smart contract code running those applications. Not only can you view their source code, but you are also free to use it to create your own DeFi apps.

Thanks to such composability, DeFi apps are called "money legos." You can snap together DeFi apps to create a unique financial service. Related: How DeFi Will Reshape Financial Services

DeFi could be a tool to end corruption and monopoly

Unlike traditional financial systems, DeFi applications are governed by the people using them. For any proposal to be approved, there should be a majority consensus. Also, as discussed, DeFi applications are public, and anyone can audit their transactions.

As such, there is no room for corruption in the DeFi space. Also, there is no monopoly in the DeFi space. Why? Because the underlying code is open to all. Everyone is welcome to create DeFi applications.

Early mover advantage

Even though the first projects in DeFi space were started a couple of years ago, the DeFi world is still in its infancy. It is still far away from mass adoption. Considering the skyrocketing growth of DeFi, you will be sitting on huge profits in the future if you manage to get on the DeFi bandwagon before it becomes a household name.

Fast forward to today in 2021; the DeFi space has hundreds of applications amassing a total value locked (TVL) of over $50 billion, as of now. This is exponential growth in any market.


So, how do you get started with DeFi?It’s quite simple and straightforward actually. Download a secure crypto wallet or install the popular add-on metamask on your browser, then buy some native tokens of the blockchain you intend to use. 

There are many to choose from, including the most popular, Ethereum.If Ethereum fees are too high for you to test things out, go for faster blockchains like Fantom, where fees are a fraction of a cent, and everything is exactly like Ethereum but better (Fantom is an Ethereum Virtual Machine (EVM) compatible blockchain that provides scalable and faster blockchain-powered solutions, something its predecessor isn’t capable of at the moment).

Buy some FTM (you will need to use the native token of the blockchain you intend to use as the transaction fee, known as gas) and play around on popular DeFi platforms on Fantom to get familiar with things. 

On any major blockchain, the overall basic how-tos would be similar to the above. Once you install a wallet and have some tokens in it, you can start your DeFi journey. You can choose to buy assets, lend or borrow cryptocurrencies, earn fees by providing liquidity to decentralized exchanges (DEX) or invest in emerging DeFi projects, and much more. 

Most importantly, always rely on your risk appetite and analyze your personal-finance goals before diving into the DeFi space, as there are also risks and scams. And never invest what you can’t afford to lose.Like any other new technology, it is not all rainbows and sunshine.

There are thefts due to things like smart-contract failures, scam projects and rug pulls (when developers abandon a project and run away with the funds).

Even billionaires aren’t spared, like the recent incident with Mark Cuban, who got rug pulled while yield farming (after blogging about its high APR and investing in it) on Iron Finance, as its native token crashed to zero in one day.  

DeFi projects can yield great returns given you have done your research properly. The rule of thumb to avoid scams is to stay away from projects that seem too good to be true and have no real value.

The world’s leading decentralized exchange, Uniswap, has announced the delisting of a number of tokens from its app interface.Uniswap Labs made the announcement on Friday, emphasizing that the tokens had been removed from the app interface only and that the protocol remains immutable:

“These changes pertain to the interface at app.uniswap.org — the Protocol remains entirely autonomous, immutable, and permissionless.”

The company Uniswap Labs is the software developer that has built the front-end web app portal. The front-end is separate from the Uniswap protocol itself, which is autonomous code that was released as a public good.

In the blog post, Uniswap Labs hinted that increased regulatory pressure may have influenced its decision, stating, “We monitor the evolving regulatory landscape.

” The company also described the move as “consistent with actions taken by other DeFi interfaces.

”The tokens that have been delisted from the platform’s interface include instruments that may be at risk of being classified as securities by a regulator, including tokenized stocks, options tokens, insurance-based tokens and synthetic assets from crypto derivatives platforms like Synthetix.

Gold-backed token Tether Gold (XAUT) is among the assets targeted, however, Uniswap founder Hayden Adams attributed XAUT’s removal to buggy code. Meme-themed tokens including Grumpy Cat (GRUMPY) had also found their way onto Uniswap’s blacklist.

The reaction from the crypto community saw Uniswap’s purported decentralization called into question. Industry observers such as ChainLinkGod asked why Uniswap’s UNI holders did not get to vote on the delistings, tweeting:

“Not very informative here. Was this decision made through governance vote? If not, this opens a whole can of worms and sets a terrible precedent.”

Uniswap is currently the leading decentralized exchange by trade volume, with the protocol’s v2 and v3 versions facilitating a combined $1.45 billion worth of trade in the past 24 hours.

Related: Concern as Uniswap-backed 'DeFi Education Fund' dumps $10M worth of UNI

Regulatory pressure on the crypto sector is mounting across the globe, with Binance and BlockFi recently incurring the wrath of authorities in the United Kingdom and the United States, respectively.

As reported by Cointelegraph on Thursday, the Texas State Securities Board has joined its counterparts in New Jersey and Alabama in taking action against the crypto lending platform.

Vermont became the fourth state to issue an order against BlockFi on July 25.

Cryptocurrencies have garnered something of a reputation as being fast, dangerous and lethal for many — so much so that the average investor is scared of digital assets.

The volatility that’s associated with this new asset class has also meant that gaining exposure to the world’s biggest coins has been likened to an experience that’s not for the faint-hearted — or, in traditional investor terms, “not for the wise.

”Inevitably, this will spark endless debate on whether crypto is something for everyday consumers to be scared of. Is investing a small percentage of one’s portfolio into digital assets prudent or reckless?

Are regulators going overboard when they warn that people who purchase cryptocurrencies should be prepared to lose the shirt off their backs? And are there any ways for people to enter this exciting but intimidating world safely?

The current mood music surrounding cryptocurrencies have created something of an echo chamber within the nascent DeFi ecosystem.

Traders are predominantly the people who use these protocols. This creates wider ramifications for fledgling projects that are seeking to enter the space — and a rather unpleasant dilemma comes to the fore.

Should new platforms adopt a long-term view and build an environment that’s built for the masses, meaning they may only attract a small number of users for the foreseeable future?

Or should they create ecosystems that are designed for traders — something that could attract a large but fickle following who are always looking for a new project to move on to?

Across the DeFi ecosystem, a vortex of projects is simultaneously aiming for very different target markets. Some are living in the now, while others have their sights firmly set on the future.

Understanding the average person

For the holy grail of DeFi to be achieved — the much-anticipated milestone of mass adoption — it’s worth taking a step back and considering what the typical consumer is like.

Of course, everybody likes an opportunity to make a quick buck. But those already in the crypto space often take for granted that many consumers are unprepared to take the type of risks that are often associated with the fast-moving, 24/7 world of trading digital assets.If you’ve been involved in the crypto space for years, it may also be difficult to appreciate that most trading platforms are exceedingly confusing for newcomers.

The crypto curious end up being bombarded with information — far more than they can realistically process — and this doesn’t foster an atmosphere where they can feel confident in the choices that they make.

News websites like Cointelegraph can help — and there are an ever-increasing number of educational resources that are geared toward beginners. But there’s also a danger that those who end up getting their news from social networks may end up being suckered in to buying whichever coin is pumping at the moment and losing money in the process.

Although the worlds of DeFi and retail banking are like night and day, there are things that these two financial worlds have in common. Leveraging this can be the key to unlocking mass adoption — presenting decentralized finance in a way that the public will understand, even if they have no interest in getting their heads around spreads and technical analysis.

Breaking it down

Most consumers understand that, living in a world where interest rates are low and inflation is through the roof, they are losing money on a daily basis.They’re familiar with the concept of savings accounts — and the fact that their nest egg can grow if it is locked away for a set amount of time.

Platforms such as UniFarm say they deliver a familiar experience for crypto newcomers who crave simplicity. Now, all they need to do is find a token that they believe in and stake it.

Returns are automatically diversified on their behalf — and crucially, funds can also be unstaked at any point. This gives peace of mind to those who may be feeling nervous about having their assets locked away for extended periods of time.

UniFarm says that its app is both clean and simple, packaged in a user interface that anyone will be able to understand.

This helps reduce the risk of inexperienced users making costly mistakes by pressing the wrong button, or not knowing how to complete a transaction.The platform’s co-founder and chief operating officer Tarusha Mittal said:

“At UniFarm, our aim is to help DeFi appeal to the masses by being simple, smart and adding massive value.

”Mittal and fellow co-founder Mohit Madan describe themselves as long-term serial entrepreneurs in the world of blockchain — and both have now been in the space for over a decade.

They together founded one of India’s first Ethereum exchanges in 2015 and now have a massive undertaking in the form of OroPocket — the parent company of UniFarm and another project called OpenDeFi.

UniFarm had a working product in place by late January 2021, and a plethora of milestones have been achieved over the past four months.

This included a successful $2 million funding round that was led by AU21 Capital and a number of other notable blockchain funds.

Key TakeawaysUniswap is Ethereum's most popular decentralized exchange.In addition to trading cryptocurrencies, users can stake their holdings in liquidity pools and vote on governance decisions.The exchange uses the UNI token for its governance model.SHARE THIS ARTICLEUniswap is a decentralized exchange (DEX). It allows users to swap various Ethereum-based ERC-20 tokens from a simple web interface, as shown in the image below.




Source: Uniswap

Uniswap is currently the most popular DEX. It has $2.1 billion secured in its contracts as of October 2020, which accounts for 20% of all value locked in DeFi apps. It also has a daily trading volume of $263 million, which makes up about 95% of all DEX trading.Finally, it is the most popular DEX by usership, with 38,000 daily users.

The platform was created in 2018 by Hayden Adams, an Ethereum developer. Two other developers, Noah Zinsmeister and Dan Robinson have also contributed to the project.

This article focuses on Uniswap v2, which handles the vast majority of Uniswap trading and offers specific features. However, it should be noted that Uniswap v1 is still operational.

What Features Does Uniswap Offer?

As a DEX, Uniswap is more decentralized and, therefore, more flexible than many other exchanges for various reasons.

Any Ethereum-based token can be traded: The protocol does not have a listing process, nor does it charge listing fees. Instead, users stake their tokens in liquidity pools, which determines which tokens are listed. In Uniswap v2, liquidity providers can combine any two ERC-20 tokens into a trading pair without the need to use ETH itself.

Of course, not every possible trading pair is available, but Uniswap’s coverage is impressive. It offers over 2,000 trading pairs, according to CoinGecko, surpassing every other exchange.

Funds are not held in custody: Uniswap itself does not hold user funds; instead, funds are controlled entirely by smart contracts. These contracts handle every aspect of trading. Uniswap’s factory contract creates separate contracts to handle each trading pair, while periphery contracts support the system in other ways.




In practical terms, this means that funds are immediately deposited into users’ wallets after each trade is complete. There is no central authority that can seize user funds. This also means that users do not need to provide identity (KYC) information or create an account.

These features are all commonplace among DEXes.No centralized orderbook: Uniswap does not use an orderbook to determine prices. Instead, it uses formulas based on token ratios in its various liquidity pools. Uniswap v2 also uses oracles that average price data over time. This approach is meant to produce more reliable prices and prevent price manipulation.


Developers can extend Uniswap: Developers have forked Uniswap and created variations such as SushiSwap, KingSwap, and Zuniswap.

They have also created custom interfaces, such as Uniswapdex.com and Uniswap.ninja, which provide access to Uniswap itself but with slight variations.

Finally, exchange aggregators like 1inch can include Uniswap in their services.Anyone can provide liquidity: Investors can earn revenue from Uniswap fees by staking their tokens in Uniswap liquidity pools. Projects can also fund liquidity pools to facilitate trading.Competitive fees: The DEX charges a fee of 0.3% on each trade.

These fees are close to industry averages: most other crypto exchanges charge 0.1%-1% per trade. (However, it is important to note that Ethereum’s gas fees can dramatically drive up trading costs; this will change when Ethereum developers solve that issue.)

What Is the UNI Token?

Uniswap introduced a governance token called UNI on Sept. 17, 2020. The company did not run an ICO or any other token sale; instead, it will distribute tokens according to a set release schedule.




Uniswap ran an airdrop and offered 400 UNI tokens (worth roughly $1,500) to certain users who had previously used Uniswap’s services.In the future, users will also earn UNI tokens by staking tokens in certain liquidity pools. This is called liquidity mining or yield farming.

The UNI token is meant to be used in governance. UNI holders can influence and vote on Uniswap development decisions. They can also fund grants, partnerships, liquidity mining pools, and other proposals.

Soon, the Uniswap team will no longer be directly involved, and UNI token holders will make all governance decisions.Investors can buy UNI tokens from several different exchanges, including Binance, Bitfinex, Coinbase Pro, Gemini, Huobi, Kucoin, and Uniswap itself.

The token has proven to be a fast success, entering the top 50 coin listings just weeks after its launch.

How Profitable Is Staking?

As noted, Uniswap allows users to earn revenue by staking their tokens in a liquidity pool. The platform has attracted plenty of users seeking profit. Investors deposited most of Uniswap’s current locked value during a popularity surge in September 2020.




Source: DeFi Pulse

However, rising participation does not necessarily mean that participation is profitable for all.The standard 0.3% trading fee is split between all members of a liquidity pool. Naturally, pools that attract the most traders, but have the fewest liquidity providers, are the most profitable opportunities.

Additionally, this sort of investment opportunity carries risk: investors need to estimate losses due to changes in their staked tokens’ value over time. One commentator notes:

“It’s difficult to know what the trade-off is between revenues from fees and losses from directional movements without knowing the amount of in-between trades.”

The chart below explains how to estimate losses. For example, if token values change by 200% (on the horizontal axis), the tokens deposited will lose 5% of their value (on the vertical axis):

Uniswap Controversies

Uniswap has suffered several exploits involving minor tokens. $300,000 to $1 million of imBTC was stolen in April 2020, and $370,000 worth of Opyn tokens were stolen in August 2020.It is up for debate whether these are true thefts or risky but opportunistic trades.Uniswap’s open listing policy also has caused issues. Fake tokens have been listed on Uniswap, misleading some investors to buy the wrong tokens.

It is not clear whether Uniswap plans to blacklist these fake tokens; however, users can avoid the problem by carefully inspecting token IDs on the Etherscan block explorer.

Finally, some critics argue that Uniswap’s token distribution is not as decentralized as the project reports.Analysis firm Glassnode argues that Binance and the Uniswap team have very significant UNI holdings, giving either group potential sway over the project, even if they do not exercise that power in the end.

In Summary

Uniswap has already delivered on most of its potential. It is the most popular decentralized exchange in the crypto industry, and it is a highly convenient option for most Ethereum investors.

The project’s decentralization and open governance attempts mean that it is popular among blockchain advocates who oppose big crypto companies. Finally, Uniswap’s liquidity pools are attractive to investors who want to earn income on their holdings.

There are some limitations, though. Uniswap is not useful for investors who want to spend fiat currency or trade non-Ethereum tokens. Plus, there are a few minor safety considerations for users who are not familiar with cryptocurrency.

The protocol is also burdened by Ethereum’s high gas fees as of late 2020, though that problem will hopefully disappear in the future.

The cryptocurrency world is prone to hype, whether on the grand scale of the ICO boom and Bitcoin price pump of 2017 or the lesser scale of a new project or platform launching.

This year has been all about DeFi and its revolutionary potential to reshape finance. In February, total value locked in decentralized finance applications exceeded $1 billion for the first time. By late October, it had hit $12 billion. The growth reflects the increasing willingness of traders to speculate on this nascent and largely experimental sector.

With the potential for returns bordering on the ridiculous — 52,000 percent in one estimate — it’s hardly surprising. But activity in DeFi is now showing signs of slowing down, with the volume on decentralized exchanges starting to drop off. Perhaps this was inevitable, but it represents a timely moment to reflect on some of the lessons learned from riding the DeFi rollercoaster. 

1. DeFi can be dangerously exposed to price manipulation

Price manipulation became a problem early in 2020, as users sought to exploit the relatively new availability of flash loans. A flash loan involves taking out an uncollateralized loan using a protocol like Aave or dYdX, and using it in one or more related trades, then repaying the initial loan and pocketing any profits. The catch is that the entire series of events has to be performed within a single Ethereum transaction. 

One challenge of decentralized finance is that the Ethereum blockchain doesn’t know the market value of the tokens based on its platform. Therefore, DeFi protocols use price oracles to settle trades. In February, a trader took advantage of the fact that bZx, a lending protocol, used the prices on decentralized exchange Uniswap as its price oracle.

With low liquidity in a particular Uniswap pool, it was easy to borrow enough in a flash loan to dump tokens on Uniswap, forcing the price down while a parallel trade took out a long position. The trader came out of this chain of events with $330,000 in profit. 

So, what can we learn from this? DeFi needs better price oracles. Relying on a single data point with fluctuating liquidity represents a vulnerability. Decentralized oracle services such as Kylin Network aim to overcome this challenge.

A decentralized oracle doesn’t use a single price feed. Instead, it takes data from many different sources. Kylin Network is developed on the new interoperability platform, Polkadot.

Therefore, it is a cross-chain protocol that can both take data from multiple blockchains and be deployed on applications running on any platform. By using price oracles that take data from multiple feeds, then engineering an arbitration mechanism that allows for real-time validation, DeFi applications can reduce or even negate the risk of price manipulation. 


Related: Getting Drawn Into DeFi? Here Are 3 Major Considerations

2. Unaudited code is a risk

As developers rushed to get their DeFi applications out to the markets amid the hype, it became apparent that anything goes as far as code is concerned. This year, there have been several incidents illustrating the dangers of unaudited code. 

In April, hackers exploited a vulnerability in lending app dForce that affected a particular type of Ethereum token, stealing $25 million worth of funds. However, it should never have been allowed to happen, given the vulnerability was known among Ethereum developers.

Reputable projects like Uniswap and Compound had already issued upgrades to address the issue. For its part, dForce had simply copied and pasted an older version of Compound’s code that still contained the vulnerability. Such is the appetite for DeFi that some developers are finding traders will start using their code even before they’ve confirmed it’s ready for release.

In October, whizzkid developer of the popular yEarn finance protocol, Andre Cronje, confirmed he was developing a new dApp called Eminence. Investors started pouring funds into it before he had even released it. Some of them later sent Cronje death threats after hackers realized what was going on, exploited the unfinished code and stole their funds. 

In the latter case, an easy lesson for DeFi investors is not to put your funds into unreleased protocols. However, the first case illustrates that developers need to ensure that their code is robust against attacks.

Some projects, such as the Polkadot-based Equilibrium, are addressing the issue head-on by engaging external code auditors.It’s still early days, but the Smart Contract Security Alliance is a coalition of blockchain auditing firms that aim to create standards for smart contract security.

Ultimately, this could prove to become a stamp of credibility, indicating applications that are operating safe and secure code. 

3. DeFi tokens are probably overhyped

DeFi tokens, earned through the practice of yield farming, have been the new ICO token of 2020. Like their ICO predecessors, most of them underwent price spikes driven by initial hype around the token.

The boom and bust pattern is observable in tokens from established DeFi projects, including Compound and Uniswap, which fell 70 percent and 60 percent respectively, between their launch dates and the end of October. Perhaps unsurprisingly, the trend is no different in the newer DeFi projects released this summer, none of which managed to retain their initial value. 

Related: 8 Smart Ways to Analyze Crypto Token Before Investing in It

This price pattern isn’t necessarily an indicator that these tokens don’t hold any longer-term value. Some of them confer governance rights, such as voting on particular developments within a project, similar to company shares.

These features may help them sustain their price level stability in the longer-term.

However, when a new DeFi project token emerges, and the price is rocketing to meteoric highs, chances are it’s not a sustainable long-term investment. In the case of DeFi tokens, the best advice is the oldest adage in the crypto sector — do your own research. 

Bitcoin had its strongest month since April as a surge in Ethereum followed an announcement on its ETH 2.0 upgrade – but the DeFi party ‘ends abruptly.

’Those are the key takeaways from Binance’s October trading report – the first of which was at the start of this year – which looks to assess the key information and data on trading activity across crypto-futures markets.In October, Binance noted, Bitcoin gained more than 27%, crossing above the $14,000 mark for the first time since June last year.

Yet for Binance’s DeFi (decentralised finance) index, the market has seen plummeting returns for a space which saw a ‘phenomenal run’ for most of this year.As reported by various publications, the start of September saw the vast majority of top DeFi tokens lose more than 50% of their value.

Messari, a provider of market data for DeFi assets, noted the change. Analysts at the time saw the primary reason as a straightforward market correction, noting assets were overbought during the growth period.Binance saw a negative correlation between DeFi tokens and Bitcoin, as well as something of a negative between DeFi and Ethereum.

This is despite Ethereum powering much of the DeFi ecosystem. Yet there is a silver lining: the sector’s underlying fundamentals have remained stable, according to the trading report, with steady growth in spite of dying hype ‘underlining [its] long-term potential and investors’ interest.

’For Ethereum, a slew of updates around the upcoming Ethereum 2.0, which will allow a much greater number of transactions, helped boost signal this month.

Phase 0 for ETH 2.0 has been formalised for launch, with the expected launch date – subject to the contract collecting 16384 deposits of 32 ETH each – around December Ist

 Vitalik Buterin sent 100 transactions for 32 ether each last week.

ETH is currently priced at just under $440 at the time of writing, up from $420 as the Binance report dropped. The company added that moving Ethereum’s consensus mechanism to proof of stake, reducing the supply of tokens while maintaining demand, will also help.

“The upgrade could drag out ETH from its recent slump and potentially inject more positive sentiment into the altcoin sector,” Binance noted.You can read the full report here.

Decentralized Finance has been all the rage lately. However, while all the hype was focused on DeFi, Non-Fungible Tokens (NFTs) have also increased in popularity.

Unlike BTC or ETC, an NFT is a crypto token that has the characteristics that ensure an identical token is not interchangeable with it. Therefore, NFTs create digital scarcity, ownership, and uniqueness for the crypto space.An increasing number of innovative projects are arising with NFT that have extremely creative ways of generating value.

For example, just last week, more than $1.8 million was traded through the crypto-collectibles market. Let’s take a look at some of the most promising aspects of NFTs and their wider implications for the blockchain industry.

The Most Diverse Audience to Date at FMLS 2020 – Where Finance Meets Innovation

The Features and Advantages of NFTs

Some common features and advantages of many NFTs include being ERC-720 compliant, which means they can be used in the storage of crypto-collectibles such as in crypto gaming or art, providing a means of proving authenticity and ownership.

The hype around NFTs started in earnest with CryptoKitties, which at one point saw the price of a single digital collectible feline surpass $100,000. Developed on Ethereum by Axion Zen, CryptoKitties was a blockchain




Jay Hao, CEO of OKExgame that allowed users to purchase, sell and collect virtual cats. In the years since the NFT space has become more diverse with major players such as Internet giant Kakao rolling out a wallet that will support NFTs.Compared to the common ERC-20 standards of most tokens and dApps, many NFTs are built instead with the ERC-721 token standard.

ERC-721 standard can be a way for significant assets to be tokenized on a public or hybrid blockchain with both immutability and security.

While pretty similar in functionality to ERC-20, ERC-721 is easier for developers to make a transition in developing and architecture. ERC-721 is also easy for users to store tokens in ordinary wallets and trade them on exchanges. With ERC-721, a token’s unique ownership details are added in addition to the address and balance on the blockchain.

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One of the qualities that make NFTs so attractive is aesthetics that many users will find familiar. While other tokens have a symbol and exist on the blockchain, they cannot be physically owned, and envisioning their supposedly invisible ownership is hard for many newcomers to comprehend.

However, many projects such as Nifty Football and CryptoKitties come in the forms of virtual card games and pets and make use of concepts familiar to many users from childhood.

The advantage of blockchain environments is they permit players to gain true ownership of their in-game items. With non-fungible tokens (NFTs) and digital collectibles, games based on the blockchain can revitalize a new economic system that enables gamers to earn while they play.

In fact, the appeal of NFTs is starting to extend beyond games and collectible cards, even the major traditional auction house Christie’s is now starting to tokenize some artwork through NFTs.

The Challenges NFTs Still Face

However, there are challenges in implementing NFT projects. For example, if a tokenized piece of artwork was split up, it may be subject to securities regulation law. In addition, although centralized players have made strides in innovative trading tools and crypto education to make the industry accessible to all, the industry is still difficult for less tech-savvy users to enter into.

For the less tech-savvy users, even tasks such as managing private keys and setting up wallets could create barriers to entry. Lastly, while the line between centralized and decentralized is becoming blurred, some notable NFT projects such as Enjin Mintshop and Terra Virtua involve marketplaces and would need to effectively bridge that gap.

While all the attention has been focused on DeFi, there is some crossover appeal with NFTs, which could make an impact on insurance policies that have unique properties.

Could it be the future holds more cases of tokenization of insurance policies mixed with yield farming? For advanced uses such as NFT for insurance, the DeFi space still has a way to go in terms of stability, equity and transparency. However, the rapid progress made so far and wide application of use cases shows much promise.

Programmers have found a way to replace the core service offerings of Wall Street and an army of corporate lawyers with 800 lines of smart contract code.

The “De” in DeFi stands for “decentralized,” meaning there are no intermediaries in the process.

Despite the raw and unpolished user interface, billions of dollars in assets flow through new decentralized apps every day.

We’re only at the beginning of the growing DeFi bubble, and there are already tokens worth more than Bitcoin (BTC). Some of these tokens are nothing more than a name, code and smart marketing.

There are shrimp, burger, spaghetti and sushi tokens that have reached sky-high values, and many of these meme tokens even have “sequels.” It is madness in excess of the ICO bubble of 2017.

Can it all be bad or can we use this technology for good?

Anything that can be tokenized can end up on a DeFi application. The pace of development is intense. Every day, new brilliant projects emerge — DeFi could end up being bigger than the internet one day.

Anything is possible now.Peer-to-peer finance has also been operating silently in the background. It offers financial services to people based on real use cases like payments, remittance, wealth preservation and commerce.

The people of emerging markets such as Africa and India, for example, seem to benefit most. All DeFi trades are peer-to-peer in nature, as they happen on a blockchain.Imagine a pure DeFi version where we can bridge fiat money like dollars and all the world’s currencies.

Why does the world need this?

Remember the frictionless onboarding part? It is actually a huge value add-on because over 40% of the emerging world that we serve cannot provide proper Know Your Customer services, as localized KYC solutions are not well integrated or developed.

Furthermore, many people have no ID at all, which is another opportunity to provide financial inclusion to more people.

There are 1.7 billion people who don’t have access to traditional financial services. If Bitcoin is layer one, then DeFi is layer two, and the “people” layer provided by P2P networks is the third layer.

This decentralized, people-powered marketplace for money transfers just needs the frictionless onboarding that decentralization brings.

Another huge benefit is the potential for decentralized price discovery. Current decentralized exchanges cannot do this, as they use a price “oracle” from centralized exchanges.

However, decentralized people-powered marketplaces could offer a price based on P2P crypto to fiat trades.

This can give us the true street price of Bitcoin to the dollar, which is something that would be of enormous value to people in hyperinflationary economies such as Zimbabwe or Venezuela, as people there often have to check many different sources.

Additional price discovery models can be built on top of auction model exchange rules.

There is a hidden world-changing product to be found here; price discovery of this nature would become the new standard and potentially tip the scales of geopolitical power.

Remember that we’re in a bubble, but when it bursts, the next Bitcoin bull run will begin, so prepare yourself. As the world plunges into chaos, just remember that “it’s good to be into crypto,” as crypto is the hedge against the world of finance falling apart.

Bitcoin and Ether are rock solid because they now serve as real use cases.

DeFi tokens are literally playing with fire, and you might get burned. Those who win this game buy, hold and check the price constantly. Bitcoin will always be the backbone of the crypto economy, and it will grow. And DeFi will finish the job that Bitcoin started.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Ray Youssef is the co-founder and CEO of Paxful. Aside from making Bitcoin accessible, Ray also launched the #BuiltWithBitcoin charitable initiative that aims to show the humanitarian capabilities of Bitcoin.

He’s a New York City native and has been a serial entrepreneur since 2001.

The hype around DeFi is not fading away and is only just beginning, said Neo founder Da Hongfei, during a live stream on China’s Hub on Sept. 25.

Da said DeFi created a process in just a few years that traditional finance took hundreds of years to perfect.

DeFi projects are now experimenting with all sorts of financial products and services. He added that:

“Lending and borrowing, decentralized exchanges, insurance and all kinds of derivatives are on the rise in DeFi. The initial stage DeFi infrastructure has a solid good start, and now it is time to see more and more applications to be built and innovated on DeFi.”

According to Da, DeFi has brought numerous new possibilities in the financial arena, including creating a new type of asset that allows users to access cash at any time. DeFi, Da said, will have a significant impact on future economic life.

He predicts people will not need banks in the future as they turn towards DeFi services. And this scenario may already be happening. Using China as an example, Da said:

“Chinese people have done this more or less, probably dealing with banks, dealing with Alipay and WeChat, at least doing this kind of financial behavior without going to the bank.”

Da, and Binance co-founder He Yi, revealed in the live stream that Neo and Binance are actively looking into DeFi applications. One such application is Flamingo, an interoperable, full-stack DeFi protocol built on the Neo blockchain. It allows users to participate as traders, stakers, and liquidity providers.

Binance has announced it listed Flamingo on its launch pool on Sept. 23. Both are also looking to build DeFi infrastructure further.As Cointelegraph previously reported, China’s state-endorsed public blockchain is looking into building a regulatory compliance platform that can bridge global DeFi applications and government regulations.

1.

What is yield farming?

Yield farming is the practice of staking or locking up cryptocurrencies in return for rewards. While the expectation of earning yield on investments is nothing new, the overall concept of yield farming has arisen from the decentralized finance sector.

The general idea is that individuals can earn tokens in exchange for their participation in DeFi applications. Yield farming can also be called liquidity mining.

The popularity of yield farming has become a self-fulfilling prophesy comparable to the initial coin offerings boom of 2017 due to the laws of supply and demand.

As each new project that emerges offers new tokens or ways to earn rewards, users have been flocking to it, hoping to get a cut of the yield on offer. In turn, this creates a demand that pushes up the value invested in the project and the tokens.


2.

How does yield farming work?

The precise mechanics of yield farming depend on the terms and features of the individual DeFi application. The practice started out by offering users a small share of transaction fees for contributing liquidity to a particular application, such as Uniswap or Balancer.

However, the most common yield farming method is to use a DeFi application and earn the project token in return. 

This practice became popular early in the summer of 2020 when Compound announced it would start issuing its COMP governance token to lenders and borrowers who use the Compound application. It was an instant hit, pushing Compound to the top of the DeFi rankings. 

Since then, several projects have followed suit by creating DeFi applications with associated governance or native tokens and rewarding users with their tokens.

These copycat tokens have replicated COMP’s success like, for example, Balancer’s BAL token, which gained 230% immediately after launching.

The continued success of each new project fuels more innovation, as projects compete fiercely for users.

The most successful yield farmers maximize their returns by deploying more complicated investment strategies. These strategies usually involve staking tokens in a chain of protocols to generate maximum yield.

Yield farmers typically stake stablecoins, such as Dai, Tether (USDT) or USD Coin (USDC), as they offer an easy way to track profits and losses. However, it’s also possible to farm yield using cryptocurrencies such as Ether (ETH).

3.

What are the benefits and risks of yield farming?

The benefits of yield farming are immediately apparent — profit. Yield farmers who are early to adopt a new project can benefit from token rewards that may quickly appreciate in value. If they sell those tokens at the right time, significant gains can be made.

Those gains can be reinvested in other DeFi projects to farm yet more yield.

Yield farmers generally have to put down a large value of initial capital to generate any significant profits — even hundreds of thousands of dollars can be at stake.

Due to the highly volatile nature of cryptocurrencies and particularly DeFi tokens, yield farmers are exposed to a significant liquidation risk if the market suddenly drops, like it did with HotdogSwap.

Furthermore, the most successful yield farming strategies are complex. Therefore, the risk is higher for those who don’t fully understand how all the underlying protocols work. Yield farmers also take risks on the project teams and underlying smart contract code.

The potential for gains in the DeFi space attracts many developers and entrepreneurs who bootstrap projects from scratch or even copy the code of their predecessors. Even if the project team is honest, its code is often unaudited and may be subject to bugs that make it vulnerable to attackers.

There have been several examples of this risk playing out as yield farming has grown in popularity.

One is bZx, which suffered a series of hacks early this year and, most recently, lost another $8 million, which were later returned, due to a single misplaced line of code.YAM Finance was another high-profile example.

The project’s YAM token went from zero to $57 million in value locked in only two days after its launch in August — then crashed when the founder admitted a major flaw in the underlying code. A subsequent audit revealed several more issues related to security and performance.


4.

What are the key challenges and opportunities for yield farming?

Most DeFi applications are currently based on the Ethereum blockchain, creating some critical challenges for yield farmers. Ahead of the Ethereum 2.0 upgrade, the network is struggling with a lack of scalability.

As yield farming becomes more popular, more transactions clog up the Ethereum network, leading to slow confirmation times and spiraling transaction fees. 

This situation has led to some speculation that DeFi could end up self-cannibalizing.

However, it seems more likely that Ethereum’s woes will ultimately work to the benefit of other platforms.

For example, the Binance Smart Chain has emerged as an alternative option for the yield farmers that flocked to the network to take advantage of new DeFi DApps, such as BurgerSwap. 

Furthermore, Ethereum’s existing DeFi operators are also attempting to alleviate the issue with their own second-layer solutions for the existing platform.

Therefore, assuming that the problems with Ethereum aren’t fatal to DeFi, the practice of yield farming could end up being around for some time to come. 

The cryptocurrency money manager Panxora seeks to raise up to $50 million for a new hedge fund to buy digital tokens associated with the fast-growing decentralized finance (DeFi) sector. 

DeFi is a segment of the blockchain industry consisting of automated lending and trading platforms that aim eventually to displace banks and Wall Street firms.

But in a sign of just how fast-moving and fickle digital-asset markets can be, the new fundraising effort is getting underway just as prices are tumbling for some of the leading DeFi projects, including Yearn.Finance and Aave.

“This has got the potential to really change the way finance is carried out,” Panxora CEO Gavin Smith said in an interview. 

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DeFi projects, often referred to as protocols and mostly built atop the Ethereum blockchain, have soared in popularity this year.

It has been fueled by the “yield farming” craze that encourages crypto traders to sock digital assets into the trading and lending systems in pursuit of high interest rates, token rewards and fast gains.

Dollar-linked tokens known as stablecoins can fetch annualized rates up to 20% through Yearn.Finance, versus 0.01% for a savings account with JPMorgan Chase, the largest U.S. bank. 

Collateral locked into DeFi projects surged to $13 billion earlier this month, according to DeFi Pulse, a 20-fold increase since the start of the year.

Big cryptocurrency exchanges like Binance and Coinbase have rushed to cash in on the trend, listing DeFi tokens while acknowledging that a growing share of market volumes might eventually migrate to decentralized trading platforms. 


Read more: Coinbase Pro Lists Uniswap’s New Token Just Hours After Launch

But just in the past week, the trend has reversed; total collateral in the systems has declined to about $9.5 billion. And as prices tumbled for bitcoin (BTC), the largest cryptocurrency, and ether (ETH), the native token of the Ethereum blockchain, DeFi-affiliated tokens fell even harder. 

Aave, a decentralized lender, saw its LEND tokens fall by 12% during the seven days through Tuesday, according to Messari, a cryptocurrency data firm. OMG’s OMG tokens have plummeted 54%, while Yearn.Finance’s YFI tokens are down 29%.

It’s been “an absolute bloodbath,” Messari analysts wrote Tuesday in their daily newsletter. “DeFi’s casino summer could be coming to an end.”

Cryptocurrency analysts say DeFi systems are likely to grow over the long term, though short-term risks are high in the nascent market, and many of the digital tokens are so new that they can be difficult or even impossible to value using anything resembling traditional financial analysis.  

Read more: Supply of Tokenized Bitcoin on Ethereum Now Tops $1.1B: Here’s Why

Chainlink, a so-called blockchain “oracle” that supplies price feeds to decentralized protocols, is the top-performing digital asset this year among those with a market value of at least $1 billion, climbing more than fourfold in 2020. And that’s after a 45% decline just this month.

“We expect the market to be volatile in the early years,” Smith said. “While there is great potential there will inevitably be setbacks along the way.”

Panxora’s new hedge fund, based in the Cayman Islands and scheduled to start trading on Nov. 2, will primarily buy tokens listed on big centralized cryptocurrency exchanges rather than from the roster of decentralized, automated exchanges like assembled by DeFi developers.  

Smith, a former metals-pricing analyst for the Singaporean commodities-trading firm Trafigura, says that’s primarily because few if any decentralized exchanges can guarantee sufficient compliance with anti-money-laundering rules, and also because a token listing from an exchange theoretically implies some level of vetting.   

“We have to offer it as a conventional hedge fund that invests in these protocols,” Smith said.



Biggest DeFi tokens ranked by Messari, with 7-day and YTD returns.Source: Messari

This column has written in recent weeks about the surprising possibility that cryptocurrency markets might have become the new home for capitalism, in an environment where central banks and governments are intervening deeply in markets while picking corporate winners via emergency aid. 

If anything, the ridiculousness of the recent weeks’ saga involving the deliciously named startup protocol SushiSwap shows that not only are market signals alive and well in digital assets, but competition is, too. 

While from the outside these markets may seem like a den of rampant speculation, the innovative mania now taking place in the fast-growing arena of decentralized finance , known as DeFi, is providing a test of just how much the 11-year-old digital-asset markets can bear. 

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The proving ground for most DeFi projects is Ethereum, the second-biggest blockchain, preferred by many developers for its facilitation of “programmable money” through “smart contracts” – bits of programming that stipulate conditions under which transactions occur, as well as any outputs.

The ultimate goal of these DeFi systems is to automate the functions of banks and other financial firms, making them less expensive, more efficient and maybe even fairer in their allocation of capital.

Put another way, entrepreneurs are trying to make a buck by building things they hope people will use. 

DeFi applications have jammed up the Ethereum blockchain, roughly quadrupling median transaction fees, known as “gas,” since the start of the year.

But as the research firm Dapp Radar points out in a new report, the network’s usage has continued to increase. 



Ethereum monthly transaction volumes, USD.Source: Dapp RadarGambling applications appear to be getting crowded out, but activity has swelled on decentralized lending platforms like Aave and automated, network-based trading systems like Uniswap and Curve.

Total transaction volumes reached nearly $25 billion in August, from less than $5 billion a month earlier in the year. 

“High Ethereum gas prices have not affected the DeFi ecosystem yet,” the publication wrote in its “Dapp Ecosystem Report” for August. Nor have the elevated transaction fees sowed many doubts in the minds of investors.

While prices for ether, the native token of the Ethereum blockchain, have retreated in recent weeks, they’ve still nearly tripled since the start of the year, to about $367. 

John Todaro, director of institutional research for the cryptocurrency-analysis firm TradeBlock, estimated this week in a report that daily fees collected on the Ethereum network have climbed to an average $5 million a day, implying an annual run rate of about $1.5 billion.

“Users have flocked to trading DeFi tokens as they have become the hottest new sector in the space,” Todaro wrote. 

Shiv Malik, co-founder of the Intergenerational Foundation think tank, wrote Thursday in an op-ed for CoinDesk that a lot of the DeFi activity might just be “token speculation” and “manufactured out of nothing,” with “no actual coffee under all that froth.”  

But based on the recent data, the market appears to be working. And customers are apparently willing to pay. 


Ether median transaction fees (in green, right-hand scale), with ether price (in red, left-hand scale), both in USD.Source: Coin Metrics

Binance continues to chase after decentralized finance (DeFi) by giving its new decentralized Binance Smart Chain (BSC) access to its centralized exchange (CeFi). The global cryptocurrency exchange giant is putting up $100 million to support DeFi projects on BSC.

• Binance CEO Changpeng Zhao announced the plan during the company’s World of DeFi summit on Thursday. It's a “bridge” between DeFi and CeFi, an integration between Binance, the exchange, and BSC, the Binance-owned public chain.
• Binance’s users can benefit from elements of CeFi – futures, margins, savings, DeFi staking and DeFi pooling – and DeFi – lending, automated market makers, liquidity mining, yield farming – according to the company’s news release Thursday.
• This new plan targets Binance users who want to participate in DeFi without leaving the centralized platform.
• Under the new platform, holders of Binance’s native token, BNB, can have more rights to the decentralized governance of the BSC, which uses a Proof-of-Stake Authority (PoSA) consensus mechanism, when they participate in staking on the BSC.
• Since the popular crypto exchange first ventured into DeFi with its decentralized exchange in April 2019, Binance has continued expanding its footprint in this space.
• Earlier this month, Binance introduced a product called Launchpool to provide users a way to make income by staking tokens for yield farming – the trendy strategy to make profits in DeFi.
• It also launched a Uniswap-like DeFi platform allowing trades on an automated market maker (AMM).

The decentralized finance (DeFi) bubble appears to have popped for the time being, with half a dozen top DeFi tokens shedding half of their fiat value over the past seven days.

According to crypto market data firm Messari’s list of DeFi assets, 32 of 34 markets are down over the past week — with only PowerPool (CVP) and SushiSwap (SUSHI) posting seven-day price gains.

The markets hardest hit include Curve — which is down 65% this week, followed by Meta with a 58% loss, Ren with 52%, AirSwap with 51%, and bZx Network and Wrapped Nexus Mutual with a 49% draw-down each.

The sell-off has erased the gains enjoyed by most DeFi markets during August’s month of record volatility, with more than 60% of the tokens featured in Messari’s DeFi list posting a 30-day loss as of this writing.

Curve again leads the monthly losers with a 58% loss, followed by Bancor with 57.8%, Kava with 50%, and Meta with 46%.

Ethereum (ETH) tokens in general have suffered this past week, with only 14 of 178 markets posting a gain — seven of which are stablecoins. Only two Ethereum tokens were able to post double-digit gains this week, with ZB and Origintrail topping the list with roughly 15% each.

Less than one-third of Ethereum tokens have retained 30-day gains.The publication of Messari’s findings sparked a variety of responses on Twitter, with user ‘stackthosesats’ replying:

DeFi is going straight into the ground. Just another series of scams. 

Other traders appear to view the price slump as an opportunity to stockpile discounted tokens, with ‘Ms. Coins’ asserting it is a “great time to scoop up some at those prices.”

In the last two months, the decentralized finance industry has seen a dramatic surge of interest, as new platforms promising to disrupt the way people manage their money, transact, earn and entertain themselves have launched in rapid succession in recent months.

Much of this growth has been catalyzed by the meteoric rise of DeFi lending platforms like MakerDAO and Aave, which together now compose more than 40% of the DeFi market.

But a wave of new DeFi products that are targeting practically every traditional and digital industry is now making the rounds, expanding the benefits of DeFi to casual consumers and cryptocurrency users alike.In 2020, DeFi projects and products can be described as either base-level protocols or new experiences built on top of these protocols; or they can be considered refinements or enhancements to pre-existing products and services.

Step 1: Define the transaction rules

Since the industry is still very much in its earliest stages of development, a large proportion of the new projects launched fall under the “protocol” category — these are essentially the cooking methods that allow entrepreneurs and trailblazing firms to launch their own products and services because they can be woven together into complex platforms that offer new functionality.

These protocols define what can be done within a DeFi application, including which types of digital assets can be issued, managed or used, as well as how the platforms built on top of the protocol are able to communicate with one another.

In this case, the interplay of different raw materials, such as Wrapped Bitcoin (WBTC), Wrapped Ether (WETH), stablecoins and popular crypto project tokens like Basic Attention Token (BAT), Chainlink and Curve (CRV), among others, can be used to create entirely new combinations (or recipes).

The interplay of multiple different DeFi platforms has led to the rapid growth of the industry, as users stack the benefits of each platform on top of one another to achieve new, ever more creative uses for the technology.

For anybody building their own DeFi initiative, this usually means either working with a handful of plug-and-play solutions to build something new or introducing a new protocol into the mix, with the hopes of adding value to others.

When defining the transaction rules for this protocol, developers need to consider its intended use case and find the right balance between versatility, security and usefulness.

Developers in the DeFi space typically consider how their own assets (ingredients) fit in with the ecosystem and whether they can provide additional value to holders — beyond what is currently available.

If DeFi is a soup, then blockchain protocols and transaction rules are the cooking method, and the assets are the ingredients.

By varying the combination of protocols (cooking methods) and assets (ingredients), it is possible to form a huge variety of products — giving rise to the diverse DeFi ecosystem we see today.

Step 2: Develop the asset(s)

In order to further expand the DeFi industry and bring in the next big wave of users, we need more raw materials. Arguably, one of the most promising raw materials would be tokens that represent sports rights and assets from the sporting industry.

With more than 3.5 billion sports fans worldwide, the majority of whom are aged 18–49, there is an excellent opportunity to expand the DeFi industry by offering additional value to sports fans.

For people looking to develop a disruptive DeFi product that forms the interface between sports and blockchain technology, then sports would form the meat of their recipe.

The global sports industry is a $500-billion market that is ripe for disruption by innovative blockchain products, new products and new experiences. Firms have already begun building the basic protocols that can facilitate this disruption.

Some platforms enable fans to participate in the decision-making processes of their favorite sports teams by purchasing and using their chosen sports team’s fan tokens.

Depending on the team, these fan tokens can also grant the holders access to a range of rewards, such as unique experiences and exclusive merchandise that is unavailable elsewhere.

This can help to provide fans with more meaningful interactions with their favorite sports stars and clubs, while also generating a unique online economy around fan tokens.

But DeFi has the potential to extend this much further. With DeFi, users can engage with an entirely decentralized fantasy league, collecting and trading nonfungible tokens that represent players and teams, and setting up trustless betting contracts where players pit their teams against one another and wager on the outcome.

Participants in the system don’t need to trust that the wager will be paid out correctly, as everything is completely transparent and trustless.

DeFi also extends its reach directly into the crowdsourced prediction and betting industry.

With new DeFi protocols on the stage, users can turn live predictions into liquid assets, which can allow users to enter and exit wagering positions for practically any event, including sports, presidential elections, cryptocurrency price action and even black swan events.

With the elaboration of DeFi exchange protocols, cryptocurrency users no longer need to rely on centralized platforms to conduct their trades, which means users can trade their DeFi ERC-20 tokens.This development has come just at the right time.

Many sports platforms are either looking into or have already begun tokenizing physical merchandise, including MLB Champions baseball cards and collectible crypto bobbleheads.

It won’t be long until these tokens could also be used to redeem real-world merchandise, too — such as exchanging a sports jersey NFT won in a competition for an actual jersey, or, vice versa, by unlocking a new jersey NFT for a fantasy team by purchasing a jersey in real life.

Although the functionality of a DeFi product represents the meat or substance of our recipe analogy, a new wave of products built on top of DeFi protocols can be considered the garnish — or finishing touches.

Step 3: Optimize the user experience

The final layer of the DeFi space is the projects and platforms that either work to make the industry more accessible to everyday users and investors or offer new experiences entirely using the building blocks that are already available.In the initial stages of the DeFi industry, and even for some DeFi projects today, the user interface was less than intuitive, and the concept behind the platform was difficult to grasp.

As a result, just like the blockchain industry in general, the DeFi industry was initially adopted by financial professionals, savvy entrepreneurs and those with a passion for new technologies.Now, however, the industry is far more accessible, as great strides have been made in terms of the user experience — or dining experience as far as our recipe goes.

Dramatic changes in both ease of use and the elaboration of use cases that suit everyday investors and general consumers have helped to make DeFi more than just a niche that benefits the experts.

More mainstream use cases for the technology, like the potential to cross over NFT items in popular video game titles without game houses needing to sign IP license agreements, and adding digital currencies to video games are almost certainly on the horizon.

Likewise, the Olympics, various soccer premier leagues, the National Football League and the National Basketball Association will almost certainly be poised to dive into the growing soup of DeFi projects to deliver an engaging sporting experience, player interactions and merchandise over the blockchain.

And all of this is coming sooner than you might think.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.Victor Zhang is the CEO and co-founder of AlphaWallet.

He has spent the past five years working to transform the way banking and blockchain technology intersect. Prior to his venture into blockchain technology, Zhang worked for 17 years in international business in Asia and Australia.

OKEx is the latest cryptocurrency exchange to hop on the DeFi bandwagon. On August 28, they announced listings for eight different DeFi tokens, including Band Protocol (BAND), JUST (JST), REN, Reserve Rights (RSR), Yearn.finance (YFI), Nexus Mutual (wNXM), YFII.finance (YFII), and Tellor (TRB). These new listings expand their DeFi suite to a total of 27.OKEx’s CEO, Jay Hao, praised the DeFi sphere, stating:

“OKEx has been keenly observing the DeFi market dynamics and trying our best to collaborate with high-quality innovative DeFi projects that show the most potential. We are very encouraged to see so many excellent projects emerging in the market, as this also indicates that the DeFi space is developing rapidly.”

OKEx is certainly not alone in its commitment to this particular facet of Blockchain’s ecosystem. In April, Binance issued a new DeFi token backed by the crypto asset, Ontology (ONT).

Built on Binance Chain and governed by a series of parameters known as BEP2, the new token goes by the name ONT-33D, a Binance spokesperson told Cointelegraph.Back in June, Coinbase announced support for the popular DeFi project, Compound (COMP).

Huobi Global also recently listed Band Protocol (BAND) on August 10, and Poloniex listed the Decentr DeFi token in July.

DeFi (decentralized finance) is a revolution, but all uprisings can implode with the smallest of hitch or get crushed by the boot of the established order. They are also mostly brought down from within. Crypto is plagued by hitches.

How could it be otherwise? If you can’t make omelettes without breaking eggs, you can’t build a crypto future without breaking heads, wallets, smart contracts, laws, rules of established common sense, etc.

Ethereum, the blockchain on which the DeFi revolution is built, is meant to be a decentralized computing device that can be used to run programs that in turn speak to a Bitcoin-style blockchain. You can think of it as a virtual ATM if you like, if that is how you want to use Ethereum.

This is how the DeFi people want to program Ethereum and the programs are called “smart contracts.” There is no reason a smart contract could not obsolete all the tens of thousands of bank branches in the world that put even Bitcoin to shame for its colossal global energy footprint. In fact, computers are doing that slowly but surely anyway but in a centralized way the banks still own.

So far so good. Think of the glory of a financial world run by no one but enabled by disparate and diverse owners of a vast network of computers. All those government and corporate wonks would be obsolete, too and at last we would all be free of middlemen scamming, chiselling and slicing and dicing us out of our hard earned cash.

An explosion of tech genius will sweep away all the old disreputable gatekeepers. Hurrah!This breakthrough is why DeFi tokens are exploding in value. Their price charts look like 1999 (for stocks) and 2017 (for crypto) all over again. I myself am up to my ears in these tokens and have made amusing money from them so far. But there is a huge black cloud hanging over the whole arena.

Transaction fees.As DeFi exploded, so has Ethereum, and the cost of executing smart contracts for DeFi applications has gone ballistic. It is simply not viable to use these sites at the current costs unless you are swinging in big sums.You are talking of $10, $30, $100 in Ethereum to execute a single transaction on various of the significant platforms.

I won’t name and shame any particular one but when you go to pop $1,000 on deposit and earn 3% a year on a stablecoin, expect to be asked for $10, perhaps $20 or more to do so.

That’s a “nope” for lodging that money on the hope of earning $30 in a year. Sure, it makes sense if you are dropping $50,000 to $100,000 into one of these systems, but I for one don’t have that much trust to do that right now with all that might go wrong, and most simply don’t move money on that scale, period.

 I’m happy to play with a few thousand, but not when suddenly I’m $20 a click away for doing anything, including withdrawing it, with my money.Right now, at these costs, DeFi is a non-starter.

I’m not going to place a bet on Donald Trump losing the election if it costs me $80 in fees.

Is anyone? I don’t think so.These charges were meant to be cents not dollars, but the boom in DeFi has stuffed up the Ethereum network and the transaction costs have gone ballistic. So a cynic would say, “Well that was a quick bubble to get busted. DeFi is over already.”It could be.

But crypto has an amazing way of getting around its problems. Here is an off the cuff list of ways that will fix this issue:

1)     Ethereum is changing the way it operates from miners to “staking” nodes. This should crush transaction costs.

2)     Ethereum could tweak its current system to increase its computing power and make the network less congested some other way.

3)     DeFi platforms could shift to other Ethereum-a-like blockchains, which can cope with DeFi’s demands. (A good punt for speculators to play.)

4)     Platforms could re-engineer their (likely bloated) code to run faster and cheaper

.5)     Other technical solutions can be magicked up to decongest the current process like the sort of voodoo behind Bitcoin’s lightning network or some other nerd sorcery.

It’s easy to look at new tech and say, that is impractical, it doesn’t operate on current available technology fast enough to be viable, but that is always a mistake. I know I made it in computer games 35 years ago.

The winner in tech development always abuses computer resources and wins because those resources always balloon to catch up and the greedy code dominates the lean code with its juicy plumpitude.“It will never work” is famous last words in technology.

What is more, DeFi is a cat and it is out of the bag, and while the barn door might be jammed the horse has bolted. If you have tried DeFi, you will have had an epiphany moment, and even after later being dismayed at the current transaction costs, you still know this hitch is just a hiccup.

The key players now will form the core of this DeFi future and while some will wither through bad luck, hubris or incompetence, many crypto tokens in this segment, now worth hundreds of million, will in 10 years be worth hundreds of billions.

Once again, this is a buy and hold and buy the dips game where the smart investor will ride the oncoming roller coaster, winnowing away the losers from the winners.

So when you start hearing doomsters moaning about DeFi transactions invalidating the whole idea, you can rest easy that this will be the typical pothole in the technology road that all the titans of the Nasdaq had to jar through on their road to global dominance.

DeFi will be the same old bumpy track to glory.——-Clem Chambers is the CEO of private investors website ADVFN.com and author of 101 Ways to Pick Stock Market Winners and Trading Cryptocurrencies: A Beginner’s Guide.

Clambers won Journalist of the Year in the Business Market Commentary category in the State Street U.K. Institutional Press Awards in 2018.

Subscribe to Bull Sheet for no-nonsense daily analysis on what’s happening in the markets, delivered free to your inbox.In late 2017, cryptocurrency prices went crazy as Bitcoin brushed $20,000 and the value of other digital tokens—many of them fly-by-night projects—soared inexplicably.

Today, something similar is underway, albeit on a smaller scale.In recent months, speculators have rushed to snatch up digital coins with names like COMP and LINK that are now among the most popular cryptocurrencies, with market caps suddenly worth billions of dollars.

And earlier this month, a novelty currency called YAM began trading at over $100 right after it appeared, only to crash to around $1 days later.

This new wave of investment—or bubble if you prefer—has echoes of the 2017 craze, but also represents a new phase for the rapidly maturing cryptocurrency industry. This time around, more players from the traditional finance world are participating, while two new buzzwords—DeFi and yield farming— are driving a new surge of investment.

The rise of DeFi and Yield Farming

If you take even a casual interest in cryptocurrency markets, there's a good chance you've heard the term DeFi, which is short for decentralized finance.

The term is relatively new but the underlying idea is not:

 For more than a decade, Bitcoin supporters have touted it as decentralized form of money overseen by blockchain software rather than a central bank.

What's new this time around is that a set of equally decentralized infrastructure has grown up around Bitcoin, Ethereum and other cryptocurrencies. This includes exchanges and websites that broker crypto loans, letting crypto holders earn interest on their stash.

Like Bitcoin, these services don't require anyone's permission to use, and can be accessed around the world. Trading and lending arrangements are overseen by so-called smart contracts, which serve to enforce whatever deal—perhaps a 6 month loan at 5% interest—two parties have struck on the platform.

"The simplest way to describe DeFi is as an open financial network. If you want to send, lend or borrow money you don't need to join a private network like PayPal or Fedwire or a bank" says Peter Johnson, a former Morgan Stanley banker who is now an executive at Chicago's Jump Capital, a firm that specializes in fintech and cryptocurrency.


Like Bitcoin, the broader world of DeFi is fueled by a libertarian worldview, and a thirst for money. But unlike the crypto mania of 2017, savvy traders don't have to rely on swings in asset prices to earn a return. Instead, they can turn to a variety of websites that let people loan out their cryptocurrency, often for high rates of interest.

Most of these sites—notably Compound and Maker—rely on a decentralized network of lenders and borrowers, who use smart contracts to arrange collateral and payment terms.

At first, the sites amounted to experiments on the outer edges of the crypto universe, but in 2020 they have started to attract real money. As of August, more than $4 billion in loans were locked up in smart contracts.

All of this has given rise to the newer phenomenon of "yield farming" in which traders lend or borrow cryptocurrency not just to receive interest or a loan, but to receive new types of digital tokens.

The most prominent example came in June when Compound issued a new cryptocurrency called COMP.The new COMP tokens have the nominal purpose of giving owners a say in how Compound is run, but the tokens quickly became the subject of a speculative mania. In June, the price of COMP soared to $350 but has since leveled off to around $175.

Colleen Sullivan, an attorney who is CEO of the crypto trading firm CMT Digital Holdings, likens yield farming to obtaining airline miles. In recent weeks, she says some traders have been clamoring to obtain bonus tokens in the same way veteran travelers might take an extra flight to obtain extra status.

This has also led DeFi traders to hop around to different exchanges in their yield farming quest, sometimes with disastrous results. In the case of the new token YAM—a novelty coin driven by a meme (much like the older Shiba Inu coin Doge)—traders poured a reported $400 million into farming YAMs on an exchange called Uniswap.

But soon after, YAM's creator acknowledged a bug in the token's code that made it worthless. The price now reflects that.Despite such setbacks, cryptocurrency veterans believe yield farming and DeFi are part of a massive and permanent expansion of their industry.

2017 all over again?

The 2017 crypto meltdown—in which Bitcoin lost over 80% and many other cryptocurrencies became worthless—reinforced the negative views held by many that cryptocurrency has no real value or, in the harsher words of Warren Buffett, is "probably rat poison squared."

Since then, the crypto industry's two flagship currencies, Bitcoin and Ethereum, have bounced back significantly, though both are currently at around 60% of their all time highs, and the industry as a whole has proved resilient.

But the recent resurgence and spike in prices for DeFi tokens raise the question of whether this is just another bubble waiting to pop.Sullivan of CMT Digital acknowledges that the recent frenzy of DeFi-related trading has a 2017 feel to it. But she says that this isn't necessarily a bad thing.

While the price gains in currencies like COMP have been driven by traders looking for arbitrage opportunities, Sullivan notes that such activity helped mainstream cryptocurrencies like Bitcoin gain a foothold years ago.Sullivan also points out that, compared to the early days of Bitcoin and Ethereum, the cryptocurrency industry has attracted a greater share of people from the world of conventional finance.

While radical libertarians —including Bitcoin's pseudonymous creator Satoshi Nakamoto—defined the first generation of crypto, the face of DeFi includes the likes of Compound's founder, Robert Leshner, a CFA who used to oversee bonds for the city of San Francisco.And while the price spike for certain DeFi tokens feels like a sugar high brought on by yield farming, this is not the case for other tokens.

A price surge for the DeFi token LINK—now the sixth most valuable cryptocurrency—has been driven by the value of its issuer, Chainlink, which acts as a data provider to the crypto industry.But even if the Defi boom of 2020 is built on sounder fundamentals than the 2017 crypto bubble, it's also more inaccessible to ordinary investors.

Making money in DeFi not only requires a familiarity with an exotic market, but a high degree of technical savvy. Even Compound, which is becoming DeFi's best known platform, has a daunting user interface.

"If you want to partipciate in DeFi and yield farming, you need to know what you’re doing. It's mostly technical folks who have been in this for a while," says Johnson of Jump Capital.This may not be a bad thing.

The technical barriers could prevent millions of amateur investors losing their shirts, which is what happened when the 2017 bubble popped.

Meanwhile, cryptocurrency giant Coinbase has been working to make a small corner of the DeFi market accessible to amateurs.

The company has developed a digital wallet where consumers can earn interest on a handful of cryptocurrencies through a simple interface.Sid Coelho-Prabhu, who is leading the Coinbase wallet initiative, says any loans consumers make on the platform are secure, since they are backed by borrowers' collateral.

But he notes that investors could still face risks in the form of faulty code for some of the tokens, or a large-scale meltdown across the crypto industry.For cautious investors, Coelho-Prabhu recommends investing in USDC, a so-called stablecoin this is backed by a full reserve of U.S. dollars.

Currently, investors can make returns on cash starting at 3 percent—a relatively high figure at a time when even "high yield" savings accounts are paying under 1 percent.

A final question for the nascent DeFi industry is whether regulators will take steps to snuff it out. While the idea of a bank open to anyone in the world may appeal to crypto libertarians, it's unlikely the U.S.

Treasury Department shares this sunny view—especially if DeFi, like other corners of crypto, becomes a haven for money-laundering or terrorist financing.

Sullivan of CMT Digital is optimistic that the DeFi industry will be able to avoid regulators' ire, in part through the self-regulation efforts of groups like the Chicago DeFi Alliance, a group of industry veterans with ties to the regular finance industry.

For now, though, the emerging industry's biggest challenge may not be regulation, but proving it is built to be more than a bubble.

DeFi projects seem to be well known in the cryptocurrency circles surveyed by CoinGecko, but usage is somewhat lackluster, especially for lending protocols.
Cryptocurrency price aggregator CoinGecko conducted a survey with almost 700 of its users to learn more about the trends in decentralized finance (DeFi).

The report, published on May 20, highlights that many cryptocurrency users heard about DeFi and some of its better known projects, but few of these are actually using it.Out of its sample of 694 respondents, only 11% said they haven’t heard anything about DeFi. 

Unsurprisingly, the most well-known and used DeFi app — as defined by CoinGecko — is MetaMask. About 72% of respondents heard of it, and 73% of them used it. The dominance can be attributed both to the platform-agnostic functionality of MetaMask, which is supported by all DeFi projects, as well as its longer lifespan. 

Exchanges at the helm
The highest awareness and usage statistics were found in the category of decentralized exchanges. The survey only analyzed automated platforms relying on liquidity pools, specifically Kyber, Uniswap and Bancor.

The highest awareness levels were for Kyber, which 57% of all respondents had heard of. Uniswap and Bancor effectively split the second spot, with 44% and 43%, respectively.

Uniswap appears to have the most efficient marketing funnel, as almost 48% of those aware of it have recently used it.

Kyber trails second at 42%, while Bancor has a much lower ratio of 23%.In comparison, lending platforms generally have worse usage statistics.

Maker is second only to Kyber in terms of awareness at 46%, but only 26% of them used it recently.

Compound was known to only 25% of respondents, of whom 32% said they had used it.

The bZx platform presents an interesting case, as 12% of respondents heard of it, but a very small percentage of them tried using it. This may be due to the infamy following their back-to-back hacks in February.

CoinGecko theorized that the lower usage was due to either not offering a compelling use case, or their products being too hard to understand.It is worth noting that the aforementioned usage percentages would make for excellent conversion rates for any marketing campaign, which normally deal with percentages below 10%.

This would suggest that active DeFi users were more likely to answer the survey, but the differences between categories are still notable.

Distrust of banks is common
CoinGecko’s data reveals a net distinction in attitude to banking between users familiar with DeFi and those who just heard of it. Of those who said to be familiar with it, 54% would stop relying on a bank completely, while the percentage is just 28% in those who are only casually aware.

The leading cause for those willing to ditch banks is the distrust in the banking system, at 31%, while 21% would do so because they consider DeFi to be a better alternative.




FELIPE ERAZO