First, NFTs have reached a place where the project is either dead in the water or selling for buku bucks. Projects defying gravity are Cryptopunks with #7523 sold for $11.75 million, Beeple’s EVERYDAYS: THE FIRST 5000 DAYS sold for $69.3 million, and the recent rising star Bored Ape Yacht Club,  #3749 sold for $2.9 million. At these prices, not everyone can buy into these projects. That is where fractionalization changed the game. 

Fractional NFTs

Fractionalization allows individuals to own a piece of a very expensive NFT at a vastly lower price, of course. Fractional NFTs break a single NFT into smaller parts, much like a puzzle, and these pieces may be bought and traded.

First, let us clarify what non-fungible tokens and fungible tokens are before I tell you how we turn something non-fungible into something fungible. Non-fungible tokens are unique items that cannot be duplicated. On the other hand, Fungible tokens are interchangeable; $ 1 is always $1. 

The ERC-721 standard is used to create NFTs, which are indivisible tokens. A smart contract is linked to the ERC-721 NFT and deployed with an ERC-20 token which is divisible. This process allows the NFT to split into pieces, and anyone can own a percentage of the pieces. The ERC20 standard enables trading, exchange, and secondary market ownership not that different from buying a selling Ethereum. If one of the NFT's owners decides to sell, the aggregate value held by other stakeholders will not be affected.

Fractional NFTs can be created and purchased on a few platforms such as Otis, Unicly, Fractional.art, and Niftex.com.  

Pros

Accessibility - Splitting an NFT into smaller tokens makes them easily accessible to investors without deep pockets. Investors can benefit from the low entry price instead of breaking the bank whenever they want an NFT they like. 

Liquidity - The higher the NFTs price, it is not being bought and sold as frequently. When it is Fractional, it allows the holder to get some liquidity from their NFT while holding it by selling parts instead of waiting for the entire NFT to be sold.  

Defi - Fractionalization opens the door for staking and yield farming options for these newly created tokens. 

Cons

Not Regulated - Most crypto investments exist outside of traditional regulations, and your investment in a Fractional NFT is as good as the smart contract. Regulators could crack down on it because of its similarities to stocks in its token structure that allows for partial ownership. 

Smart Contract Risk - I touched on it before, but your investment is safe until someone exploits a bug in the system. Smart contracts are as good as the development team, and even when they are cautious, something could always go wrong.

Finally 

Fractional NFTs have not quite gotten their stride yet, but they are still a promising sector in the Defi space. Fractional NFTs add liquidity to the Defi market and allows for the creation of new investment vehicles. NFTs are still a young sector with many possibilities for expansion beyond profile images. Fractionalization is the democratization of an already democratized industry; it allows investors of all sizes to engage in this economy.

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Another day another NFT project, pixelated owls are the vibe.

According to their website, the PROOF Collective is a private members-only community of 1,000 dedicated NFT collectors and artists. Membership can be acquired by buying the PROOF NFT. Only 1000 were created, so this is a very tiny community, but with a floor price of 68ETH, you had to either be early or just early to get this one. The project was allocated through a dutch auction, with the price starting at 5ETH and decreasing over time to 1ETH.

Luckily for the rest of us, PROOF NFT is a card, and no one wants to use it as a PFP yet. Because of the previous rush, the PROOF collective hunkered down and created Moonbirds, a PFP NFT. All with the purpose of onboarding people into their exclusive community. Moonbirds is a collection of 10,000 utility-enabled PFPs with a rich and diversified set of rarity-powered traits.

Moonbirds project will be available to mint on the 16th of April. Each wallet will only be allowed to mint one Moonbirds. The best part is that you don’t need to wait a week before it’s revealed. You can view your “new friend” right away.

The owners of Moonbirds will also own their IP, allowing holders to create whatever they want with them.

Currently, the Moonbirds are stored using IFPS, but the team is working on moving this to on-chain rendering. So there can be no doubt that holders will forever have access to their NFTs.

Moonbirds Distribution

7,875 of the 10,000 were first going to be issued via a dutch auction and no pre-mint list, but that all changed overnight. The NFT will be launched through a raffle, and to get on the list, you’ll need to have 2.5ETH in your wallet, follow Moonbirds on Twitter and verify your Discord account.

These recent changes were made because the team is concerned about bots taking everything. They also reduced the mint amount from two to one. After the winners are picked from a guaranteed list, they get 3 hours to mint their NFTs avoiding a gas war situation. If those selected didn’t mint their NFTs, Moonbirds will defer to a secondary list and allow them to start minting. PROOF pass holders have three days to mint, so they can take their time as always.

2000 Moonbirds will go to the PROOF Collective Members. Two Moonbirds for each PROOF holder, perks for owners already paying off.

125 will go to the PROOF Treasury for future collaboration, marketing, and advisors. Something to note is that 25 will go to the PROOF core team members.

On secondary sales, PROOF will earn 5%. These funds will be used to hire and build out the PROOF team.

Rewards

The longer someone holds a Moonbird, they can unlock private club membership and additional benefits.

Moonbirds will have their discord channel that PROOF owners can access, allowing networking and community building.

Nesting is Moonbirds own version of staking. The longer a Moonbirds is nested, you can receive more benefits. Nesting will be available to holders a few days after the launch date, according to the Moonbirds website.

Nesting for a more extended period separates owners into tiers — diamond wings/diamond hands — they get special rewards for nesting for longer than anyone else. After the first 30 days of nesting, you get a swag pack of stickers to show people in IRL what you get for staking.

Because of regulations, the DAO isn’t set in stone, but the team wants to consider longer staking having higher weight in voting for the DAO if it is ever made. Instead of rewarding everyone with the tokens like board apes did when they launched, they want to reward day ones more than someone who bought in a week before the big announcement.

PROOF pass holders owning a Moonbirds will have a specific PROOF background on their Moonbirds, visually separating them from other Moonbirds owners. It will automatically validate you own a PROOF pass and make the changes on-chain to show a PROOF pass owner owns the Moonbird; the feature is not ready yet but is on the way. When sold, it will go back to the standard background, and buyers should be aware that the background will change when getting an NFT from a PROOF pass holder.

PROOF is working on its metaverse called Project Highrise, to which Moonbirds holders will have first access. Little is known about the metaverse, only that it’s “different.” Under promise and deliver, I guess.

Community

PROOF wants to build a holding community and incentivize members not to sell, but when the value of the NFT gets to life-changing money, are individual members supposed to care about the community or just cash out? That depends on the value PROOF is bringing to its members over time.

Finally

The PROOF team keeps insisting they don’t get any money, and this isn’t about them; that’s true, but PROOF holdings inc. is a company, and companies have a bottom line. Their goal currently is to raise a lot of capital to build more cool stuff and, in doing so, create value for the community. Despite everything, they are in this to make a profit. That’s what companies do; show me a company that isn’t here to make a profit. How revenue is used depends on the team, but 100% goes back into the company and not the owner’s wallets.

There has been a lot of concern over the minting price of 2.5ETH. Someone at PROOF said:

What price is inclusive? Is dropping to 0.01ETH ($310) inclusive or exclusive. So PROOF decided that $310 was still exclusive and zero ETH was a nonstarter, so 2.5ETH($8,000) is a perfect balance between zero and 0.01.

This was supposed to be PROOFs accessible project, but with the FOMO at their doors, PROOF might have to release four more NFT collections before everyone can get a piece of it.

I have a theory about the launch price of 2.5ETH attracting the kind of customers that won’t sell when the market price for Moonbirds goes to 15ETH. If they were to sell at 0.01ETH, anyone could get it, and then the price goes up to 15ETH; who will be nesting then? Are the nesting rewards enough to keep nesting, or would an individual investor prefer to sell? 2.5ETH isn’t money everyone has, and I think that’s what they are counting on.

With all the money they will raise during this period through sales and constantly adding new members to their team, it would be hard not to deliver on their promises. I am looking forward to seeing where this goes.

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The adage "not your keys, not your coins" is at the center of this discussion. Meaning crypto-assets purchased on exchanges are not necessarily yours but owned by the third-party intermediary, as they have control of the wallet's private key. 

Wallets

Cryptocurrencies are stored in digital wallets that facilitate the usage and management of various digital assets, not unlike a bank account. Turning every crypto holder into a bank makes security essential. 

The key features of a crypto wallet are its private and public keys. The public key is similar to an email address in that it is used to receive money or other assets transferred to a user's wallet. It is also known as an address. This address is shared publicly, but owners need to understand that anyone with their public keys can also track their entire transaction history on the blockchain. Users that are not comfortable with anyone tracking their financial activities need to have a good juggling act between multiple wallets to try and obfuscate their identity. 

The private key is like a password and should never be shared with anyone. Common crypto scams involve tricking newbies into giving over their private keys or playing on individuals' greedy nature by offering them access to a wallet with X amount of funds. Not financial advice, but nothing is for free, don't be greedy. 

A lengthy string of random, algorithmically produced characters represents each key.

Seed phrases play a vital part in any crypto wallet; recovery of a lost wallet is impossible without them. Seed phrases are a group of 12 to 24 random words that the wallet provides after creating it. Seed phrases should be kept in a safe location where no one can access them and should not be shared. If a wallet's owner ever loses access to their wallet, they can use the seed phrase to generate public and private keys again. 

The exchange controls the private keys of cryptocurrencies bought on them. Users can keep their cryptocurrencies in their wallets if they so choose. There are two types of off-exchange wallets: hot wallets and cold wallets.

Hot Wallets

Hot wallets' defining characteristic is their connection to the internet. For most users, it's the first kind of wallet they will own. Generally, the wallet is in the crypto exchanges' mobile or desktop application. Having a connection to the internet is essential in crypto as it aids in trading, purchasing, and a variety of other activities. The internet connection is what exposes wallets to a security risk. There will always be malicious actors testing the limits of every protocol or wallet to find a breaking point, to extract funds. Understanding how to mitigate this is important. That's why it's not a good idea to keep all of one's money in a hot wallet.

Cold Wallets

Cold wallets have no internet connection, and a byproduct of this is that they are a bit cumbersome to use. They are only connected to the internet when users need to transfer in or out of the wallet. Two types of cold wallets are hardware wallets and paper wallets. 

Hardware wallets have a distinct look since most look like a USB stick. Hardware wallets technically do not hold cryptocurrency; it is always on the blockchain. The wallets' purpose is to store private keys of said cryptocurrency, removing blockchain's access until it is needed again to activate new transactions. When users need to reaccess these funds, they can connect the wallet to its dedicated software, reinitiate network control of their asset, and transfer it wherever required. 

Paper wallets are exactly how they sound, a piece of paper with public and private keys printed on it. Some could have a QR code as well. Technically it is the most secure wallet someone could own, but early crypto adopters can attest to its frailty. Paper can be misplaced, stolen, susceptible to water or fire damage. The ink could run over time, ruining the readability of its contents. 

When creating a paper wallet, the keys are removed from the blockchain network, and coins are unreachable without them. To reaccess these funds, users need to scan the private key QR code into their hot wallets. 

Closing 

Most new crypto users have only used hot wallets because of their convenience and the exchange's security reassurances. We should never forget if you don't have complete control of your private keys, you are not in control of your finances. Crypto was created to remove third-party intermediaries between individuals and their money. Being your bank and being responsible for your funds is a frightening endeavor, but it can be enlightening if you want to attain any amount of financial literacy and independence.

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**

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The application of blockchain technology in finance is invaluable, but it does have inherent drawbacks known as the Blockchain Trilemma. It establishes a balance between security, decentralization, and scalability of the network. Blockchain security prioritizes the protection of the network from bad actors and attacks, while decentralization deals with how the network capabilities are divided across multiple computers globally. Decentralization ensures that the service cannot be destroyed because there is no head. A blockchain network is more like a hydra.

Security and decentralization are essential pillars in any blockchain network. The necessity of adding scalability to this network is challenging. Scalability focuses on the network's ability to handle high-frequency transactions and change. Without it, the blockchain network has no chance of replacing the traditional financial system. Compared to Visa, Bitcoin processes 4–7 transactions per second, while Visa does 1,700.

Currently, most DeFi projects are suffering from extremely high transaction fees. Due to the increase in traffic on the network, more users on the network congest it, and transactions are processed by paying fees (gas) to the miners. The current solution to congestion has been to place transactions that pay more in fees at the front of the line for processing. This procedure has single-handedly created the high transaction fee race currently. These high fees have been a barrier to entry for most individuals interested in crypto. Without a solution, the ones with the most coins will be the ones shaping the industry.

Layer 1 vs. Layer 2

Layer 1 would be the blockchain Ethereum is built on, while Polygon ($MATIC) refers to a layer 2 solution that relies on the overlaying network established by Ethereum. As a result of blockchain's current inherent congestion issues, layer 2 solutions have emerged to solve these problems. It cannot be completely perfect as layer 2 solutions give up something to achieve higher network speeds. To handle these issues, we examine the layer 1 and layer 2 solutions. By no means is this an extensive breakdown of possible solutions.

Layer 1 and Layer 2 simplified

Imagine the fastest snail that could exist. You want the snail to go faster, but the snail cannot. So you place a treadmill on top of the snail and then a turtle on top of the treadmill; now you have a fast turtle on top of a slow snail. That's layer 1 and layer 2 in a “snail shell.”

Scaling of Layer 1

Layer 1 scale focuses on increasing the number of transactions on the blockchain network. The Ethereum Foundation is proposing sharding, which is the splitting of a database to distribute its capacity. Ethereum (2.0) plans to implement this concept by breaking their distributed ledger, which is technically a database, into smaller pieces, or smaller chains, to improve transaction speed. This ensures their network stays decentralized and improves performance and security.

Another scaling solution is consensus protocol changes. Both Bitcoin and Ethereum use proof-of-work (PoW) to process transactions, which is very costly and slow. Proof-of-Stake (PoS), on the other hand, is faster and has a lower carbon footprint than PoW. Ethereum can process 15-20 transactions per second. This has resulted in high fees and slow process times, but once PoS can be implemented, it can increase speed and reduce fees tremendously.

Layer 2

Layer 2 has two popular solutions for scaling: rollups and state channels. Rollups utilize outside computational capabilities to process transactions, instead of having the network perform the calculations. Utilizing outside computational abilities eases the load off of Layer 1, which increases the transaction speed. With this method, only necessary information is added to the blockchain, making it inherit Layer 1 security while being scalable, and still maintaining decentralization.

State on the chain, a deposit is locked, known as the state, then a channel opens up off-chain for users to transact quickly. Once it is complete, the final last interaction is recorded on-chain, and the initial deposit, or state, is unlocked. Just like the rollups, part of the process is abstracted to increase speed, while utilizing the final security of layer 1.

Closing

Every DeFi project is racing to achieve improved transaction speeds without sacrificing security and the decentralized nature of this ecosystem. Layer 2 solutions might be adopted and expanded on by most emerging projects today. Although Ethereum is also attempting to solve this problem, high fees make it impossible for DeFi to be accessible to everyone. Soon enough, this will be a problem of yesterday, but today we can explore projects attempting to implement these solutions.

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Navigate to Polygon Technology

Click on Connect to a wallet.

Select metamask.

Next, connect with Metamask.

Connect

Sign

Click on polygon wallet.

Your balance for Matic and Eth would be visible.

Select the Metamask logo to add WEth to your wallet.

Add token.

Now you have WEth on the MATIC network in Metamask.

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Wrapped $ETH ($WEth) is the main currency to purchase CarrotPerson on OpenSea. Wrapped ETH is ETH on the Polygon Mainnet.

Users can also exchange $USDT for $Eth using Uniswap.

How to get ETH ($WEth) on Polygon.

Go to uniswap to SWAP your $USDT for $WEth.

Click on Launch App.

Select Connect Wallet.

Sign in and accept everything from the Metamask popup.

Select Matic/USDT, balance should be visible after connection.

Click on select a token and pick $WEth.

Select how much Matic?USDT you need to SWAP.

SWAP

Confirm SWAP

Accept on Metamask

Transaction processing could take 1 min to 10 min.

Completed

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Users can transfer MATIC, USDT, or any other cryptocurrencies that are supported into their MetaMask wallet.

Transfer Matic from Exchange to Metamask.

copy address to use to transfer/withdraw Matic from an Exchange (Binance) into Matamask wallet.

After the transfer, you should see the account updated after some time.

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Polygon ($MATIC) is an Ethereum token that powers the Polygon Network — a protocol and framework for building and connecting Ethereum-compatible blockchain networks. Polygon is what's known as a Layer-2 solution, designed to help scale the Ethereum network and improve its functionality.

Add Polygon Network to Wallet

Navigate to Polygon Scan, the bottom of the webpage, and click polygon network.

Approve on Metamask

You will be directed to switch to Polygon’s Mainnet now in the network dropdown.

Select Matic Mainnet

Add Matic Network Manually

Select Add Network

Enter in the polygon mainnet settings as follows.

Network Name: Polygon New RPC URL: https://polygon-rpc.com or https://rpc-mainnet.matic.network or https://rpc-mainnet.maticvigil.com or https://rpc-mainnet.matic.quiknode.pro ChainID: 137 Symbol: MATIC Block Explorer URL: https://polygonscan.com/

Save when complete.

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• Navigate to metamask.io website and download the chrome extension.

• Create a waller and save your seed phrase in a secure location.

Create your wallet and save your seed phrase in a secure location and do not share with it, anyone.

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STEPS:

• Do you need MataMask?

Downloading MetaMask Chrome Extension.

• Do you need Polygon RPC on your MetaMask?

Add Polygon ($MATIC) network into your MetaMask.

• Do you need crypto in your wallet?

Transfer $Matic from Exchanges.

• Need to exchange your stable coin for ETH ($WEth)?

SWAP stable coin to $ETH.

• Need to see Eth on MetaMask?

Connect $ETH to MetaMask.

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Matching buyers to sellers has always been an essential aspect of cryptocurrency. Exchanges facilitate the need for secure peer-to-peer exchange; without this, agreeing on prices within the global network would be virtually impossible.

Facilitating this transaction between unidentified parties has inspired two solutions(categories of exchanges): Decentralized Exchange (DEX) and Centralized Exchanges(CEX).

CEX

In a centralized exchange, customers do not own their cryptocurrency. It is held in the exchange's wallet and not in the user's wallets like Metamask. Customers can trade cryptocurrencies because the exchange guarantees they have the said asset in the exchange's control.

Trades occurring on centralized platforms are not executed to a blockchain, but internally in the exchange's database. New users are drawn to Centralized Exchanges because of their ease of use as transactions occur faster than they would on the blockchain. Centralized exchanges are also very liquid.

DEX

Decentralized Exchanges is an autonomous decentralized application (DApp) that permits cryptocurrency traders without relinquishing funds to a third-party entity like a CEX. Additionally, it is a trustless peer-to-peer exchange of crypto.

The purpose of the DEX was to remove the need for a third-party authority that oversees and authorizes each trade. Smart contracts achieve this level of automation without trusting any outside interference through a few methods, such as automated market maker, on-chain order books, and off-chain order books.

Automated Market Makers (AMM)

Automated Market Makers is a sophisticated smart contract that facilitates automated crypto trading by using a liquidity pool, allowing no human error during the processing of the transactions.

Smart contracts pool together funds by incentivizing their exchange users to contribute to the fund. Complex algorithms bring together buyers and sellers of cryptocurrency seamlessly. Exchanges like Uniswap fall into this category.

On-chain order books

On-chain order book transactions are added to the blockchain and confirmed by its network. Transactions are transparent: since the order book is public, anyone can submit their orders for inclusion. This network requires less trust from its users when trades are confirmed to the public blockchain. However, network fees could be costly around the high-frequency hours, and transactions may be slow to update at that time.

Off-chain order books- hosted by a third party

Off-chain order books do not post to the blockchain. They are hosted by a third party and as a result, are not as decentralized as the other options. If those in control are malicious, they could use the information they gain from filling the orders to benefit themselves.

Advantages

Privacy - KYC (Know Your Customer) for exchanges where they request users' personal information such as an address and ID pictures. In the age of data breaches, giving up personal data to a company can be problematic. However, for some exchanges to operate in specific countries, they needed to follow the local laws. DEXs are permissionless and do not require identification checks.

Security - DEXs do not hold users' funds or private information, hence they are not at risk of any data breaches.

Tokens - DEXs are known to have tokens that are not available in centralized exchanges. Unlisted tokens can be traded on DEXs as long as there is a market for them.

Disadvantages

Usability - trades on centralized exchanges occur very fast, as they do not interact with the blockchain. However, DEXs processing time for a trade depends on the network and its current volume.

Liquidity - DEXs might not be the most liquid of the exchanges when compared to centralized exchanges. Users might find it hard to find buyers or sellers for specific tokens at the price they want.

Fees - fees can fluctuate, but when the network is connected or busy the fees turn out to be very expensive.

Closing

One of the issues that contributed to the formation of DEXs was coming up with a method to optimize returns from your trading activity while ensuring security, convenience, and privacy.

Over the years, a slew of decentralized exchanges has sprung up, each improving on past attempts to improve the user experience and provide more robust trading platforms. In the end, the concept appears to be highly associated with the ethos of self-sovereignty: users don't need to trust a third party.

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The DAO is managed by a collection of Smart Contracts. Smart contracts are programmable agreements that are automatically performed and manage how two or more parties interact with each other based on specified criteria. This automates procedures that would otherwise require human intervention. Because smart contracts are immutable once they are on the blockchain, any modifications must be approved by the community.

Governance Tokens

Changes are made in a DAO by member proposals, which allows every member to have a voice. Proposals are made, the community has a set time to vote on them before they are enacted. Allowing community voting democratizes the traditional company structure.

DAOs can be made up of developers, investors, businesses, charities, and local projects. Almost any current organizational form may be reinvented in this way. DAOs utilize permissionless governance tokens. This means that everyone who holds a DAOs token is instantly a member of the DAO that issued it. However, some DAOs are private, and their tokens are not for sale. DAOs might issue their tokens in exchange for liquidity or provide network security for a Proof of Stake consensus mechanism.

Governance tokens are held by its members, which they use to vote on proposals or upgrades suggested by the community. The governance tokens give members control of the decision-making of the DA. It can also allow them to share in any profits encouraging responsible decision making by its members as they have an invested interest in its success.

Purpose of a DAO

The world is increasingly becoming smaller with the rise of the internet. Across many platforms, like-minded individuals are attempting to build future industries. Managing a large amount of capital and establishing trust over the internet is complicated. The DAO is a perfect solution for this as it is public, giving everyone the ability to read and verify the code that governs the organization.

When code runs an organization, it eliminates the chance of human mistakes and central leadership corruption. The DAO guarantees that the organizations' primary focus is always on helping the entire community rather than a smaller governing group.

How it theoretically works

Charities do a lot for people when their funds are allocated responsibly; cases of senior members of charities self-dealing are common, using its funds to pay for their private expenses.

Now let us imagine a charity being converted into a DAO. The construction of the DAO would eliminate the purpose of management and conflict of interest; being open-source anyone can verify that the charity is doing what they are expected to do with their funds.

Its members can propose to build a new playground in the city, they then vote on it. Usually, 1 token equals 1 vote, this could create a situation where the one with the most money makes the rules. The voting rules can be adjusted by the community to level the playing field by limiting the number of votes any member can have, ensuring that the richest members cannot control the DAO.

When the DAO votes on proposals to fund a community project, the funds could be automatically dispursed to the needed companies to complete the decided project. All of the funds the Charity DAO has under control can only be spent if members agree it should be.

Advantages

• They cannot be shut down.

• It is open-source, the community can fix the code.

• Fully decentralized and does not allow for powerplays between members.

• Members need to vote for any changes giving the community a voice.

• Implementation of goals happens automatically.

• Organizational procedures are all transparent.

• Proposals are well constructed; because it is costly to make proposals in a DAO. Improving the quality of ideas being presented.

Disadvantages

• Because there is no central authority, decision-making takes longer.

• Disagreements inside the community have the potential to split the organization.

• As a result, the structure of some DAOs is similar to traditional organizations, with the community member with the most tokens having the most votes.

• Tokens could be considered securities, leading to legal issues.

• Because the code is public, it is vulnerable to attacks.

• There are no business secrets within DAO because everything is public information.

Conclusion

Despite years of centralized control, the internet is allowing us to bypass traditional hierarchies. In the end, a DAO is managed exclusively by its members, who make crucial choices regarding the project's future based on how much money they control.

DAOs are gaining traction as the natural regulatory framework for online collaborators, particularly crypto-native organizations. Offline businesses want to benefit by removing their centralized control system too, so they have been investing in understanding DAOs. This might not be the future, but it is an option.

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Tokenomics involves the creation of tokens, a digital unit of currency that represents specific assets or use cases on a blockchain network. Tokenomics involves applying financial rules to a blockchain network. Its purpose in crypto is to incentivize positive behavior within the network by providing financial incentives to its participants in a sustainable manner. Giving financial incentives motivates participants to use the project in exchange for the monetary value offered by the network, creating a feedback loop that grows the network, ultimately benefiting that given project.

How it Works

Bitcoin ($BTC) is the most popular digital currency, and it established its token logic by capping the max supply to 21 million. This limited supply makes it a finite resource, and it becomes even more scarce due to its creation process (minting), which reduces the number of new coins created by half every four years (Bitcoin halving). It artificially creates scarcity and drives the price up over time. It is estimated that the last Bitcoin will be mined/created in 2140.

On the other hand, Dogecoin ($DOGE) rewards its miners with 10,000 tokens every minute. This essentially makes the supply unlimited. With a current supply of 132,67 billion as of January 2022, it is an inflationary supply as compared to Bitcoin, which is deflationary.

Alternatively, many coins have a max supply but are set very high. For example, Algorand ($ALGO) has a total capped at 10 billion.

Burn

The answer to balancing supply for some projects is to burn tokens, which has nothing to do with a bonfire. At set intervals, tokens will be transferred into a wallet that cannot be recovered. Cryptocurrencies are stored in digital wallets where users can retrieve their assets whenever they need them. They represent a real-world wallet and also function as a digital hall-pass when they interact with blockchain technology. The conditions that lead to burning generally involve operation costs, and the more frequently a token is used it is burnt. With a system like this implemented, it creates a deflationary mechanism that can be adopted by newer crypto projects can adopt.

Objective in Crypto

Tokenomics defines cryptocurrency value as it pertains to participants and the overall ecosystem. It is crucial to clarify a few foundation issues when creating tokens and evaluating them.

• Total that currently exists

• Future supply and creation date

• Owners and is the supply distributed equitably; are they carve-outs for developers?

• Will burning be implemented at some point?

Types of Tokens

Layer 1 and Layer 2 tokens are the main classifications of tokens. Ethereum, Near, and a few others have layer 2 tokens, most blockchains are monolithic. Layer 1 is on the underlying blockchain architecture. Layer 2, is the overlapping network that lies on top of the underlining blockchain network.

Layer 1 tokens are the infrastructure that allows other applications and protocols to build on. It is the primary underlying technology in that Blockchain.

Layer 2 piggybacks off the infrastructure created and developed by layer 1 to build its services.

Tokens can also be broken down into categories based on usage. They are security, utility, fungible, and non-fungible.

Security Tokens

Security tokens are assets like stocks and shares represented by digital tokens on the blockchain network. Its value is directly correlated with the value of the issuing company. They benefit from government regulations and utilize the speed of the blockchain network, reducing its potential to be a scam.

Utility Tokens

Utility tokens have specific usefulness. They may be used on a platform in exchange for a unique service or receive a preferred treatment for a service. Companies use it to stir up interest in their project and for use in the blockchain network.

Fungible Tokens

Fungible tokens are assets that are not unique. For example, $1 is always equal to $1 no matter who owns it. In crypto, a fungible token can also be Ether ($ETH); 1 ETH is worth 1 ETH despite where it was issued.

Non-Fungible Tokens

Non-Fungible Tokens (NFT) represent one unique and indivisible item, either physical or digital. The Blockchain is used to prove ownership of these digital items.

Conclusion

Establishing that Tokenomics contains more than the definition of the divided parts is essential. Understanding a project's future goals and objectives is major when considering a token. Bitcoin and Ethereum leverage their coins to incentivize members to use their networks.

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The current banking system works because it's centralized, but crypto aims to replicate this through innovative methods. Decentralized Finance or DeFi fits right into that by providing financial tools through smart contracts to its users without the interference of third parties such as brokers, exchanges, and banks.

Smart contracts are programmable agreements that automatically execute, and it governs how two or more parties interact with each other based on programmed conditions.

For any financial transactions to occur on any exchange, there must be Liquidity, and Liquidity in crypto means that participants can convert their coins into cash or crypto at any time without any delay.

There are a few DeFi tools that we can probably use to earn income on the side, but they do carry their risk as everything in finance.

Staking

Staking goes hand in hand with Proof of Stake (PoS); by leveraging the finances of its participants to verify and secure the network, it allows the introduction of new transactions into the blockchain network. Users with the highest stakes are randomly picked to validate a Proof of Stake blockchain transaction.

In exchange for verifying the network by staking funds, participants earn rewards. The rewards are chain-specific; if you stake carrots, you get carrots; if you stake Cardano (ADA), you get back Cardano (ADA).

When staking, coins are generally locked for a specific amount of time, either 30 days or up to a year.

The downside of staking is that the value of the coins staked can go down during this period, and participants aren't allowed to transfer or sell during that period. Even when it is removed, there is still a unlock period which is the time it takes for the funds to be accessible again.

This created a reasonably useful source of passive income for participants. Risk and security can depend on how the smart contract was created if standard practices were not followed.

Risks:

1. Slashing - cutting funds for verifying bad transactions

2. Volatility Risk - prices go up fast and drop even faster

3. Loss or Theft of Funds - wallet could be compromised and exposed to malicious actors

4. Waiting Periods for Rewards - coins value drop while locked up results in reduced returns

5. Liquidity Risk - low market cap of the token could make it difficult to sell or convert token

Yield Farming

Yield is generally what someone makes from investing. Yield Farming adds funds to a decentralized liquidity pool to earn returns on your investment. We could do this on platforms like Pancake swap, Uni Swap, and 1Inch.

This creates a convenient way to earn passive income through a liquidity pool of crypto assets.

Through the power of smart contracts, investors can lock their assets in a Liquidity Pool. While it is locked, other users can borrow the assets from that pool, and investors are rewarded with an Annual Percentage Yield (APY). It is the foundation as it facilitates exchange and lending services. It also maintains the Liquidity of the assets on different decentralized exchanges.

Automated market makers control yield farming. This sophisticated smart contract facilitates automated crypto trading by using a liquidity pool, allowing no human error during the processing of the transactions. One major risk occurs in creating the smart contract due to human error or malicious code. Liquidity is maintained in this pool as it does not require there always to be a buyer or seller on the opposite end of the transaction.

Major features of the AMM smart contract are:

Liquidity Provider- the investors that contribute their crypto to the liquidity pool with the desire to earn interest from it.

Liquidity Pools - contain the funds that aids users to buy, sell, borrow, lend, and swap tokens.

Risks:

1. Impermanent Loss - crypto is volatile by nature; the value of coins could go down while it is being held, resulting in some loss.

2. Contract Risk- contracts could have bugs that result in loss of funds.

3. Rug Pull - developers take investors' funds and abandon the project.

Liquidity Mining

Inventors who participate in a liquidity pool offer their assets to be used in crypto trading and not lending or borrowing. They contribute Liquidity to the network of cash flow within the network. Otherwise, there might not be enough cash moving through the network at a given time, hindering fast buying and selling.

The investor provides two assets in the form of trading pairs (coins that can be traded for each other), e.g.,  ETH/UDST or USDT/MATIC, and as a reward, they receive liquidity tokens (LP). They also get rewarded with governance tokens created when a new block is added to the chain. Governance tokens allow holders to vote and make decisions on the smart contract when issues arise and decide on changes when needed.

The rewards rate is based on their share of the total liquidity pool.

Governance tokens can be exchanged for rewards or cryptocurrencies.

Risk:

1. Impermanent Loss - crypto is volatile by nature; the value of coins could go down while it is being held, resulting in some loss.

2. Contract Risk- contracts could have bugs that result in loss of funds.

3. Rug Pull - developers take investors' funds and abandon the project.

Conclusion

All the options provide ways of creating income for their users. Before anyone rushes in to use these investment tools, they should have at least a baseline understanding of what is happening instead of only looking at how much returns they can get. Knowing it is profitable is one thing, but understanding it risks risk and functionalities is valuable as well.

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For the uninitiated, not all cryptocurrencies are Bitcoin or Ethereum. Ethereum was created to solve perceived problems in Bitcoin; with any technology, there will be advancements. Devs and the mining community are always working to solve Bitcoins’ various problems: one being energy consumption when processing a transaction and the other being the swiftness of the network.

Thus, we can buy a pizza pronto.

Verifying

Verifying a transaction is critical to cryptocurrencies: this is what allows us to get our pizza. Transactions can be verified by Proof-of-Stake (PoS) or Proof of work (PoW).

PoS works by participants putting their cryptocurrencies up for collateral with the express intent to approve transactions e.g., Tezos, Polygon.

PoW consumes “some” energy to do some fancy calculations in a race to be first while we wait X minutes to get our pizza, e.g., Bitcoin, Ethereum, Litecoin.

The nature of cryptocurrencies is that they are decentralized, so if your government offers cryptocurrencies, it's no longer decentralized, right? We can get a pizza if a centralized authority is responsible for verifying transactions but is this the crypto dream?

Cryptocurrencies were made to be decentralized so determining how to verify my pizza purchase can be kind of difficult. A problem that everyone, that includes Bitcoin, is trying to solve, without burning down half the Amazon rainforest.

PoW and PoS both are trying to add a new block of transactions into the ledger, but do their ends justify the means? I mean I still get a pizza either way, right?

When the Bitcoin network was small PoW made sense, but it’s not an environmentally scalable solution as the amount of energy it takes could make us a lifetime supply of pizza. Some people think that's a problem. Alternatively, PoS is faster and consumes less energy. It uses 99% less energy than PoW.

PoW

In a PoW network, every computer is trying to be the first to calculate the solution to a formula allowing them to add their transactions to the blockchain. For their efforts, they get rewarded with a new Bitcoin.

This deters bad actors because they would need a lot of energy and money to validate a bad transaction. To secure this network a few polar bears need to move to Hawaii; we all make sacrifices. Since PoW is a race to be the fastest it’s a bit more decentralized than PoS.

PoS

The foundation of PoS is staking, they use validators which means the more crypto they put the more influence they have over the network. Validators stake a certain amount of crypto behind a block they want to be added to the chain.

Validators can stake their crypto allowing them voting rights to prove legitimate transactions. For their efforts, they get back newly created crypto for making the network faster. Having validators approve a transaction is faster than expensive gas-guzzling computers doing the proof of work.

There is a problem here, if a validator with the most money gets chosen how is this decentralized?

PoS thought of a solution, validators that misbehave do face consequences. Validators have an economic incentive to do the right thing and if they don’t, they get slashed. This means when you are bad, they take some of your cryptos away, if someone adds to your block their crypto also gets cut too. Doesn’t pay to be bad.

Conclusion

Bitcoin miners set out to resolve its environmental crisis by moving more than 50% of their energy to renewable energy in response to the environmental concerns critics highlighted.

I can get my pizza with both methods but one network answers to the fastest computers at the cost of consuming way more energy than we can justify, while the other adds blocks to the ledger by putting your money where your mouth is.

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