Born from the vision of financial freedom that began when we were children we present to you Crypcadia. There has always been an energy inside that kept pushing us to improve and become successful. All we ever wanted was the chance for a wonderful life and fair opportunity to achieve this. We call our passion Cryptoverance and it’s what is required to reach Crypcadia.
It’s the passion to not only help yourself but also your family and friends so they too can find solutions for what they want to achieve. Along the way everybody will need knowledge. So we provide you with CadiaGems. Curated crypto knowledge that will educate you on what’s required to succeed on the path to your ultimate destination.
DeFi Conventional Logic
As we gain more passengers on the mission to Crypcadia, be particularly aware that learning about the world of Decentralized Finance (DeFi) is one of the most important aspects of blockchain. When you consider the rapid growth that has occurred over the past 18-24 months you may be wondering what it’s all about.
First there was the revolutionary decentralized cash or store of value named Bitcoin that came around and then gradually other decentralized use cases appeared. Ethereum gave us turing complete smart contracts and the resulting boom in variety of new decentralized use cases and decentralized apps (DApps).
Because DeFi is permissionless then all that’s needed to take part is a computer and internet connection...along with some cryptocurrency and the knowledge on how best to take advantage of the opportunities we’re ALL now presented with.
Many of Earth’s citizens in developing countries don’t even have a bank account because they’ve been ignored by traditional finance (TradFi) for decades. They’re often void of the banking facilities that those in the developed world have become accustomed to. A large percentage of the unbanked do however own a smartphone and this gives them the opportunity to access to DeFi so they, no longer reliant upon TradFi, can become increasingly part of the global marketplace.
Whether it be savings, loans, insurance, or any traditional financial mechanism, you can be sure someone is building an equivalent decentralized version to be used on an open and global scale. However, just like TradFi, DeFi comes with its own set of pros and cons, especially in these early days.
Since Ethereum was the first to come out with smart contracts and develop DeFi applications, we can start there. It’ll lay the foundations for most of the variety we encounter in other blockchain protocol’s emerging DeFi ecosystems (e.g. Polkadot, Binance Smart Chain and Solana).
But the truth is they will all be very similar concepts because Ethereum DApps are the original innovators in the space. Regardless of what the future might hold, learning about the Core Building Blocks of DeFi and the Time Tested protocols of Ethereum will better equip you for exploring all the other wonderful things that DeFi has to offer.
Ethereum: The Digital Finance Stack
Reserve Bank Vault and Stable Coin Mint:
It’s no secret that cryptocurrencies are still very volatile. This is expected to become less of an issue in the future as more crypto adoption and development progresses. Pricing of base layer tokens (as the core ‘commodity’ of the network needed to pay tx fees) may one day be more like price fluctuations in fiat, but we’re not at that stage yet.
Additionally, we always hear complaints about inflation when we look at our current financial system, especially during tough times such as the 2008 financial crisis or Covid-19. Regardless, it was thought to be advantageous to have a more secure and stable currency connecting the old with new financial worlds so stable coins were created. Tether/USDT and USDC are the most widely used.
But for pure DeFi, this is best exemplified by the DAI token, which pegs its value to the US dollar, and is created in the Ethereum DeFi equivalent of the Federal Reserve. The DApp is called Maker and it can be accessed via the Oasis.app website. ETH can be deposited into your own personal vault in return for DAI coins which are then “minted”. The USD priced DAI can then be used as a stable vehicle for further transactions such as borrowing, trading and liquidity pools.
In this “Decentralized Federal Reserve” vault, instead of the government or other corrupt influencers and lobbyists making the decisions, the original open source Maker Protocol determines the issuance. There is a native governance token ‘MKR’ for voting on any changes to the protocol by the larger community. Whether we have such faith and influence over our politicians to act in our best interests is something to ponder here.
Or is a decentralized group of token holders incentivized to act in the best interests of the protocol better? You’ll notice in many protocols how one of the key concepts of decentralization is governance. DAOs are Decentralized Autonomous Organizations, where the interests of the broader community are incentivized to come to fruition. If rich biased individuals or entities were to exert negative outcomes, then the community would still have the power to step away. They could sell their tokens, stop using the system and entrust their resources elsewhere.
Interact with the ‘Decentralized Fed’ Maker via Oasis.app
Having a decentralized stablecoin like DAI is important, because the community has facilitated it with their own cryptocurrency (in this example ETH) in a system governed by the blockchain protocol code and community itself. DAI is overcollateralized meaning that for every 1 DAI minted there must be a larger dollar equivalent in ETH held by the Maker protocol.
The centralized stable coins such as Tether/USDT and USDC were originally meant to be backed dollar for dollar in a real world bank account or it could lead to human error or corruption. In the case of Tether in particular, there are always questions whether their reserve funds are fully backed. Tether now publishes a quarterly report which shows only around 10% of USDT is backed in cash or bank deposits. The majority is in so-called ‘cash equivalents’, which so far may be acceptable for regulators, but it’s a long way from a utopian decentralization.
In the coming weeks Crypcadia will explore other stablecoins which have even more innovative solutions. But for now remember that a decentralized stablecoin is made up of reserve funds from the community in a verifiable and permissionless blockchain system, open for review.
MakerDAO | An Unbiased Global Financial System
Borrowing/Lending
Next we can look at DApps specifically developed for loans such as Compound and AAVE. Here participants can borrow coins and tokens at fixed or variable rates to their desire. Or deposit their crypto and earn interest while contributing to market liquidity for others to borrow from.
This is one of the most popular, direct and understandable features of DeFi enabling you to truly be your own bank. Now you (not the bank!) can be the lender and earn interest from borrowers around the globe. It’s also easy to gain access to loans through the security of smart contracts, and no KYC or waiting time is required.
Similarly, if you need to borrow funds, you have a worldwide pool of lenders available. You won’t need to be approved by any financial institution or wait for ID checks. Your privacy is always protected in what is simply anonymous Peer to Peer lending between pools of various cryptocurrencies.
Note that in order to borrow, you will need to put up funds as collateral. In fact, DeFi borrowers will need to “Overcollateralize” (give a higher value of crypto) in order to borrow funds. This ensures against any volatility over the course of the loan, and that the loan will be fully paid back.
Now for the first of our CadiaGems...
CadiaGem 1. ‘Take note of the liquidation point’
When using digital assets to borrow other digital assets (e.g. Using ETH to borrow USDC on AAVE) you must monitor your position and be careful not to reach the liquidation point when the protocol will automatically repay your debt and incur large fees. Most borrowing and lending protocols will notify you of the exact liquidation point when you take out the loan. But always set reminders or price alerts way in advance of your liquidation point. As well, consider a plan to cover it well in case of any sudden volatility.
If you’re not borrowing then you can lend. You’ll be happy to note that you can now earn generous interest on your savings and hedge against inflation... It’s more advanced stuff, but soon we’ll write a feature for you on Yield Farming and tell you all about the double or even triple digit rates you can expect… Try doing that with your traditional bank account!
Aave – Open Source DeFi Protocol
Centralized Exchanges (CEX)
You may be familiar with well known popular “Centralized Exchanges” (CEX) such as Binance, Coinbase, Kraken, Kucoin, FTX and others. These CEXs are a place where you can purchase crypto and easily get started. They offer varying levels of security and regulation. You could consider them as a hybrid of a bank or traditional forex exchange, crossed with the world of crypto. Governments are gradually attempting to regulate them.
Binance has come into the spotlight in multiple regions and been encouraged to tighten their KYC/AML policies in line with TradFi. Even Coinbase, seen as the flagship fully-compliant CEX has had discussions with the Securities and Exchange Commission in the US because they’ve started offering yield for their depositors.
For some people they like the fact that if there’s a problem you can get in touch with customer service and they’ll try to help you. But it’s neither trustless or decentralized which is one of the core concepts of public permissionless blockchain. You are simply making use of the interface to trade your coins. Some are even becoming full-suite platforms to mimic DeFi offerings such as borrowing, lending, and derivatives.
CadiaGem 2. ‘Not your keys, not your coins’
You may have heard the phrase ‘not your keys, not your coins’. It’s because you have to trust the CEX to take custody of your digital assets and be safe and secure. If you still prefer to trust CEXs then diversification across several is a prudent approach. We’ll go further into diversification in the coming weeks and help you understand how this strategy is a real gem throughout the crypto industry.
Decentralized Exchanges (DEX)
If the ultimate goal is a decentralized world and open financial system, then fully functional decentralized exchanges are an important step. The original innovator was Uniswap, again built on the Ethereum network. Here you can use an Ethereum based wallet such as Metamask to connect and “swap” supported tokens for each other (eg. trade your ETH to MKR) or provide liquidity to the pools.
With DEXs people deal directly with each other for transactions via smart contracts on decentralized blockchain protocols, thereby eliminating the need for middlemen such as CEX and bankers. The onus of responsibility is on the individual themselves. Once you own the keys to your wallet then you are responsible for the decisions you make and what you do with your value. Using UNI, the protocol token airdropped to users in 2020, you can even vote on governance of the platform itself.
Uniswap is the original and most well known Ethereum based DEX. You can connect with your own Ethereum wallet such as Metamask or Trust Wallet. Uniswap allows you to exchange for other crypto directly through the simple interface. Kyber is another example of a DEX in the Ethereum DeFi stack.
These DEXs make use of Automated Market Maker mechanisms (AMM). Instead of using the CEX style buy/sell order book to dictate market prices, the AMM allows users to provide liquidity to pools and creates an implied exchange rate depending on the volume of each asset in the pool.
So you too could be a liquidity provider (LP) by contributing your crypto to the pools and earn a fee for doing so. These are usually a pair of coins such as ETH and DAI for example. The pool will always adjust the implied exchange rate of each coin depending on the previous trade made so the coins and ratios vary.
A USD pegged stablecoin like DAI will be reliable pricewise, but the price of ETH may fluctuate, and if funds are withdrawn from the liquidity pool following fluctuation there could be “impermanent loss”. To avoid loss following fluctuation the accumulated fees must be higher than the difference in the price since you first added to the pool.
CadiaGem 3. ‘Use strategies to mitigate impermanent loss’
The LP space is rapidly evolving. Uniswap V3 and Kyber help improve capital efficiency and reduce slippage rates compared to the original AMM model. There are also strategies to mitigate against impermanent loss, and many protocols offer attractive incentives to add liquidity. We will bring you the full LP report next week so you can better understand the options.
Uniswap | Home (Screenshot below)
MetaMask - A crypto wallet & gateway to blockchain apps
Best Cryptocurrency Wallet | Ethereum Wallet | ERC20 Wallet | Trust Wallet
Derivatives (Synthetix)
Synthetix allows you to use your crypto to trade real world assets similar to traditional markets. These are synthetic versions of assets based on real world values, known in the TradFi world as Derivatives.
Examples of the derivatives available include fiat currencies (EUR, USD, JPY), equities (Tesla, Google, Apple stocks) and commodities (gold, silver, oil). The price of these assets is sourced via a price feed from Chainlink, blockchains most trusted oracle, by tracking the assets on stock markets and forex exchanges.
You can also profit by predicting cryptocurrencies will go down in price by purchasing ‘Inverse coins’.
When the price of an inverse coin is rising it means the cash/spot value of the coin it actually represents is falling. You’ll see names of these derivative coins, such as ‘iBTC’ or ‘ShortBTC 3x’.
These trades can now be done on Synthetix own Ethereum Layer 2 DEX called Kwenta so the transaction costs are much much lower than on the base layer.
Another example of where you can trade Derivatives is on dYdX a DEX which has become popular because it’s running on Ethereum Layer 2 and the transaction costs are negligible. On dYdX there are derivatives called Perpetuals which help to balance the market and allows traders to avoid slippage, instead paying an hourly fee to hold the position. Or if the majority of the perpetual market thinks the opposite of you then you’ll even get paid to hold that position. This exact mechanism is determined by the percentage of longs vs shorts and the funding rate at any given time.
Synthetix (Screenshot below)
Kwenta | derivatives trading with infinite liquidity
We hope this article has served as a useful introduction to the world of DeFi, as you go beyond simply buying crypto from your preferred or local CEX. Really, this is the pure vision of how blockchain technology should be applied of course, overcoming the centralization present in TradFi and large companies in the current tech era.
There are a plethora of constantly developing and expanding use cases being applied, with many more services and options becoming available. Please proceed with caution, as you’ll be taking security further into your own hands.
At Crypcadia we’re sticklers for security. So we’ll always look closely at the issues of security, risk management and diversification as the foundation of ensuring ongoing success. So look out for our features in the coming weeks!
Many benefits and opportunities will open up for your finances, by gaining further decentralized independence from TradFi as you literally become your own bank!
Consider the large sums bankers earn and there’s now an opportunity to BYOB- be your own bank- shoulder all the responsibility and all the rewards!
Keep going with your Cryptoverance and we’ll see you again soon!