However, the high volatility associated with most digital assets and cryptocurrencies has limited their appeal as reliable means of exchange, trade settlements, remittances or other forms of payments (Schaubhut, 2023). In response to this issue, Stablecoins are devised as a distinct type of cryptocurrency designed to maintain a stable value similar to fiat currencies like the US dollar, or a commodity, like gold (Afeef, 2024). This stability is achieved through various mechanisms, including collateralisation, seigniorage, or algorithmic measures to minimize volatility (Au, et al., 2024).

Stablecoins essentially provide a bridge between the volatility of cryptocurrencies and the stability of traditional fiat currencies typically conveyed through permissionless blockchains. Unlike most cryptocurrencies, which can be highly volatile, stablecoins are pegged to stable assets like the US dollar, gold, or other commodities, which minimizes fluctuations. This stability makes them ideal for daily transactions, micropayments and remittances. Similarly, stablecoins facilitate near-instantaneous cross-border transactions, often at a fraction of the cost associated with traditional banking or remittance services. This is particularly beneficial for international transactions, or wire transfers which can take several days and incur high fees through banks.

Aside from the evident benefits of faster settlements and cheaper fees (as illustrated in the diagram above), Stablecoins offer other considerable advantages relative to existing payment systems, including strong (public) auditability properties, native programmability, seamless interoperability and most importantly self-custody options. These reasons account for the exponential growth of stablecoins which has witnessed a prolific increase in market capitalization from barely a few billion ($) to over $170billion as of October 2024 (Coinmarketcap, 2024).

The Coinbase Institutional Trading Insights reveals that stablecoins settled over $10.8 trillion worth of transactions in 2023, and this figure is expected to exponentially increase in 2024. However, a deeper look into the main implications of the increased adoption of Stablecoins paints a different picture specifically across Emerging Market and Developing Economies (EMDEs).

Bridging the Gap between the Unbanked and the Global Finance System

Most crypto-related products are fondly regarded as “Solutions in Search of a Problem”, or contrarian technologies created to satisfy the innate speculative desires of Nerds. Stablecoins has however broken this Jinx based on its demonstrated success as the Crypto-first killer application with an undeniable Product Market Fit. Although stablecoins initially emerged as a crypto-native settlement mechanism for crypto traders and exchanges, they have crossed the chasm and have found mainstream adoption globally in the ordinary economy. Today, it is clear that users globally value the ability to hold or transact tokenized representations of fiat currencies (mainly USD) using permissionless blockchains, rather than relying on banks, or other financial intermediaries which may be unreliable or inaccessible, especially within Emerging Markets and Developing Economies (EMDEs).

Burchardi (2023) describes stablecoins as a wellspring of digital finance and bedrock of financial inclusion in Emerging Markets and Developed Economies (EMDEs), as it enables individuals without access to traditional banking systems, especially in regions that have limited banking infrastructure to indiscriminately participate in the financial ecosystem. As long as there is an internet connection, users can access stablecoins on blockchain platforms, making it possible to send, receive, or hold stable value assets without needing a bank account. This has ushered in a new era of monetary sovereignty built on permissionless blockchains, which are widely described as transformative “chains,” replacing the literal and metaphorical chains of financial exclusion with freedom and access. As a result, Visa (2024) emerging market study indicates that the rate of Awareness, Interest and Adoption of stablecoins within Emerging Markets and Developing Economies (EMDEs) significantly exceeds other developed regions globally.

Further insights into the increased adoption of stablecoins within Emerging Markets and Developing Economies (EMDEs) reveal that stablecoins serve as a hedge for individuals in countries with high inflation or currency devaluation, providing a means to preserve purchasing power by holding a digital asset pegged to a more stable currency, like the US dollar. Typically, Individuals and even businesses in countries such as Nigeria, Argentina, Brazil, Venezuela, and Turkey amongst other regions with volatile national currencies often convert their local currency into stablecoins to maintain the value of their assets, and foster wealth preservation (OECD, 2023).

Moreover, many of the global payment gateways such as PayPal and Stripe did not offer their services to developing regions, particularly Sub-Saharan African countries which consequently has adverse implications in terms of financial inclusion, entrepreneurship, and economic empowerment in the region. Limited access to these widely adopted payment platforms restricts individuals, freelancers, remote workers and local businesses from participating fully in the global digital economy, making it challenging to receive remittances, engage in international e-commerce, and process online payments (Guan, 2023). This exclusion stifles business growth, limits job creation, and restricts economic opportunities, particularly for Small and Medium Enterprises (SMEs) that might otherwise expand their reach to international markets.

However, the emergence of stablecoins offers a viable solution to bridge this gap, fostering greater financial inclusion. Unlike traditional payment gateways, stablecoins are democratized and accessible to anyone with a digital wallet and internet connection, enabling individuals and businesses in Sub-Saharan Africa to bypass the limitations imposed by the absence of PayPal or Stripe. Therefore, stablecoins facilitate cross-border transactions, allowing businesses in EMDEs to engage with global customers, vendors, and clients without relying on conventional payment infrastructure. This expands their market reach and enhances their competitiveness in a globalized economy.

The Technology Adoption Model (TAM) posits that the acceptance and utilization of new innovations are primarily propelled by two core factors which are: (i) Perceived Usefulness and (ii) Perceived Ease of Use. In this case, the increased adoption of stablecoins in EMDEs, as viewed through the Technology Adoption Model, reflects a convergence of these factors: the perceived usefulness in providing stable, low-cost, indiscriminate and accessible financial solutions and the ease of use enabled by mobile and digital wallet technology without requiring extensive paperwork, identification, and physical verifications. As these factors gradually align with external variables like supportive regulatory environments, enlightenment and community influence, stablecoins become a natural choice for those seeking financial inclusion, economic empowerment and global connectivity in emerging markets (Brothwell, 2024).

Finally, since stablecoins are often built on programmable blockchain platforms, they can be easily integrated into Decentralized finance (DeFi) applications, enabling a variety of automated financial services. This allows users to take out loans, earn interest on savings, and participate in viable investment opportunities typically unavailable within their traditional banking system. Thereby, emphasising the potential of Blockchain-based stablecoins in creating an Unchained Economy, especially within EMDEs since the fluid, borderless nature of stablecoins, facilitates inclusion in a financially interconnected world. This further indicates the main reasons why the percentage of Active Holders of stablecoins and curious participants of this technology continues to increase in Emerging Markets and Developing Economies (EMDEs) compared to Developed markets.

Risks and Path Forward

Just as with any nascent technology or disruptive innovation, there tend to be some associated risks and imminent factors hindering widespread adoption, and usability. The realisation of the full benefits of stablecoins particularly across EMDEs is contingent on several multi-faceted factors that span across politics, regulation, and compliance all of which present significant hurdles that any medium of exchange or store of value must cross. Out of these factors, the primary barrier to stablecoin adoption in EMDE is regulatory uncertainty, as governments grapple with establishing clear frameworks, which can particularly limit institutional adoption. Presently, in some developed regions, efforts have been made to establish concise regulatory frameworks and standards for the adoption and utilisation of Stablecoins. A prime example of this is the Market In Crypto Asset (MICA) regulation proposed as part of the European Union (EU) digital finance strategy which covers a wide range of rules for stable-coin issuers, cryptocurrency exchanges and service providers.

However, most countries within Emerging Markets and Developed Economies (EMDEs) are lagging behind in terms of developing a clear and concise regulatory framework for the utilisation of stablecoins. In certain cases, the Governments and Central Banks in emerging markets have often taken hostile or restrictive policies toward crypto and stablecoin adoption to mitigate its perceived risks towards local monetary stability and control. These policies include implementing outright bans, limiting access to crypto exchanges, sanctions or restrictions on the use of digital assets for payments, as seen in countries like Nigeria and India. Such measures stem from concerns about financial sovereignty, capital outflows, and the potential for crypto to facilitate illicit activities. The Financial Stability Board FSB (2024) study however indicates that the major stablecoin issuers presently applies a myriad of standardised regulatory requirements such as Anti Money Laundering (AML), fraud proofs, consumer protection, governance, audits and disclosures so as to enhance compliance of consistent financial and legal practices.

Based on the significant strides of stablecoin issuers to apply various regulatory standards and requirements to stablecoin as indicated in the above diagram, Brothwell (2024) opines that it is evident that many countries across EMDEs are simply hesitant towards providing regulatory clarity for stablecoins to avoid competition with their Central Bank Digital Currencies (CBDCs).

Stablecoins vs Central Bank Digital Currencies (CBDCs) Adoption in EMDEs

The rapid proliferation of stablecoins has accelerated the development of CBDCs, as governments aim to capture the utility of digital currencies within a secure, structured and regulated basis, while addressing concerns about financial stability and systemic risks. According to PWC (2024) digital asset report, over 90% of central banks worldwide are actively researching or experimenting with CBDCs with many emerging market economies at the forefront of this exploration and development of CBDC initiatives so as to enhance financial inclusion, improve payment efficiency, and enhance economic growth.

The key differences between stablecoins and CBDCs lie in issuance, purpose, accessibility, regulation and redemption all of which have significant implications for users (Kosse, et al., 2024). Stablecoins are issued by private companies and are pegged to assets like the US dollar, but they carry risks related to regulatory oversight and transparency around reserves, thereby impacting user trust. In contrast, CBDCs are issued by central banks, offering government-backed stability but with less privacy for users, as transactions are often monitored more closely to comply with financial regulations.

For users, stablecoins offer greater accessibility and flexibility in cross-border transactions and decentralized finance (DeFi) applications, while CBDCs was initially intended to provide more security and stability but may limit the same level of privacy and decentralized control, giving governments influence over digital transactions. In the light of the regulatory uncertainty, and other issues limiting the mass adoption of stablecoins and other digital assets especially amongst institutions within emerging markets, it remains an open question whether Central Bank Digital Currencies (CBDCs) could infact serve as proficient alternatives to fulfil the functions that stablecoins are meant to address.

However, empirical data so far within EMDEs indicates that CBDCs are by no means effective substitutes for stablecoins. Presently, CBDCs are not as widely adopted as stablecoins in Emerging Markets and Developing Economies (EMDEs) largely due to utility, flexibility, and market familiarity issues. As explained earlier, Stablecoins, often pegged to the US dollar, are attractive in EMDEs as a hedge against inflation and currency devaluation, providing a stable store of value, unlike CBDCs which are typically pegged to (weaker) local currencies.

Also, the distributed nature of stablecoins makes them easier to access globally, while CBDCs are often limited for domestic purposes and sometimes restricted in cross-border use. Furthermore, the slow rollout and limited integration of CBDCs globally have left a gap that stablecoins fill for remittances and savings across EMDEs, while offering lower costs and faster transaction speed. This is because stablecoins are widely integrated into global crypto exchanges, or DEFI protocols making them versatile for cross-border payments, while CBDCs remain largely limited to specific domestic or experimental use cases. In countries such as Nigeria, for instance, the eNaira CBDC has so far witnessed limited adoption with only around 0.5% of Nigeria’s population actively using it two years after launch, despite significant government incentives. In certain corners, it is widely mocked as a comical technology with minimal utility and interest, especially among the younger demography.

Many young Nigerians, and other citizens within Emerging Market and Developing Economies (EMDEs) have minimal trust in government-centered technologies whilst others especially entrepreneurs, freelancers and remote workers, rely on stablecoins for seamless cross-border payments. Stablecoins are widely accepted and facilitate global transactions, while CBDCs like the eNaira in Nigeria have limited international utility. This further explains the reason for the surge in Stablecoin adoption in countries like Nigeria whilst local CBDC have had limited adoption within the same timeframe.

New Trends and the Path Forward in Stablecoin Development

The growth and profitability of stablecoins like Tether have sparked enormous interest among financial service companies. Major stablecoin issuers earn substantial revenue by investing reserve assets in interest-bearing instruments. In 2023 for example, Tether reportedly generated over $1 billion in quarterly profit from US Treasury bills alone. This low-risk, high-return model appeals to financial firms, as they see an opportunity to generate significant passive income by holding customer deposits as collateral (PWC, 2023).

The earlier analysis of the main reasons for the adoption of stablecoins across EMDEs reveals that many global payment gateways like PayPal and Stripe typically do not offer their native services to developing regions, particularly within Sub-Saharan African countries which consequently has had adverse implications for financial inclusion. Thereby, increasing reliance on Stablecoins. However, in recent times, both PayPal, Stripe and other financial services providers have made significant strides in the aspects of stablecoin development and distribution. The recent development of PayPal’s PYUSD stablecoin has the potential to boost financial inclusion in emerging markets by providing a stable, dollar-pegged digital currency accessible on PayPal’s extensive platform and other permissionless blockchain networks such as Ethereum and Solana. PYUSD enables cost-effective cross-border payments, allowing businesses to save on fees and transact easily with international clients.

Similarly, Stripe’s recent acquisition of Bridge signals a significant step towards the mainstream adoption of stablecoins. Stripe, a leading global payment processor, will leverage Bridge’s stablecoin infrastructure to provide seamless and efficient payment solutions for businesses worldwide. This integration will expose a vast number of businesses and consumers to stablecoins, potentially driving adoption and accelerating the transition towards a digital economy. Additionally, Stripe’s strong regulatory relationships, institutional partnerships and global reach can help legitimize stablecoins and pave the way for more favourable regulatory frameworks, further boosting their acceptance.

Other renowned players in the financial sectors have made substantial progress in terms of stablecoins integration. For example, Visa presently powers 50+ wallet partners, enabling fast, and seamless issuance of Visa credentials, thereby empowering stablecoin users to quickly and securely pay with Visa at over 130 million merchants worldwide. Visa is also piloting the use of stablecoins like USDC to expand settlement capabilities for issuers and acquirers globally providing increased flexibility for modern treasuries. The firm has partnered with Allium Labs to create the Visa Onchain Analytics Dashboard, an easily digestible tool, that provides clear insights into stablecoin activity.

Most recently, the crypto project World Liberty Financial linked to the former United States (US) President and Republican Party Candidate Donald Trump is reportedly planning to launch its stablecoin so as to further strengthen the Dollar Dominance as the Global reserve currency while increasing financial inclusion in emerging markets by offering easy access to dollar-denominated assets through blockchains.

Presently, the United States Dollar (USA) significantly dominates the total share of stablecoin currency adoption relative to other global currencies. Although, major Stablecoin issuer recently launched the EURC stablecoin which is pegged to the Euro, whereas Tether announced the launch of a Dirham-pegged stablecoin on TON Blockchain, thereby providing broader access to a variety of global currencies via decentralised blockchain networks.

Conclusion

It is evident that the ongoing blockchain revolution would lead to the transition of all asset classes, information and artefacts from just being “Online” to being “Onchain”. Although in past years, there have been major efforts to move a variety of assets such as Arts, and Real Estate onchain either as Non-Fungible Tokens (NFTs) or Real-World Assets (RWAs) respectively. However, both NFTs and RWAs have only gained limited internal adoption mostly embraced by minuscule crypto degens and nerds. However, having a digital representation of fiat currencies tokenised on the blockchain through Stablecoins has proven to be the most beneficial for the masses and has crossed the chasm of adoption beyond the crypto sphere. As a result, Stablecoins has presently become a beckon for global financial inclusion.

Retrospectively, it is important to understand that the fundamental ethos of the blockchain sector is built on core foundational values such as Decentralisation, and Censorship Resistance. However, the irony lies in the discrepancies between the decentralised ethos of successful blockchains such as Bitcoin and the centralized nature of successful stablecoins such as Tether. While Distributed Ledger Technologies (DLTs) was initially conceived to be a decentralized network system with no single (central) points of failure, the most widely adopted stablecoins are issued by centralized entities such as Tether and Circle, often subject to regulatory oversight, systematic attacks and potential censorship. This centralisation contradicts the core ethos of permissionless blockchains, which aim to eliminate intermediaries and empower individuals. Furthermore, attempts to create decentralized or algorithmic stablecoins, like Terra or Basis Cash, have faced significant challenges and failures. These projects often rely on complex algorithms and market mechanisms to maintain price stability, but they are vulnerable to market volatility, manipulation, and systemic risks.

This paradox highlights the inherent difficulty of balancing decentralization with stability. Nevertheless, Stablecoins still remain the most promising segment of the digital ledger technology sector, as they offer a unique opportunity to bridge the gap between the traditional financial system and the digital age, empowering individuals and businesses in emerging markets to participate in the global economy.

References

Afeef, A. M., 2024. The role of stable coins in mitigating volatility in cryptocurrency markets. *International Journal of Applied Economics, Finance and Accounting, *7(8), pp. 91–98.

Au, H., Hsu, W. S., Shieh, P. H. & Yue, L., 2024. Can Stablecoins Foster Cryptocurrencies Adoption?.. *Journal of Computer Information Systems, , *11(7), pp. 7–8.

Brothwell, R., 2024. Stablecoin shifting from speculation to everyday usage New Jersey: BSV Blockchain.

Carter, N., Khosrowshahi, W., Harris, H. & Ambrose, C., 2024. *Stablecoins: The Emerging Market Story, *USA: CastleIsland VC.

Feyen, E., Frost, J., Natarajan, H. & Rice, T., 2021. *What does digital money mean for emerging market and developing economies?. *5th Edition ed. Austin, Texas: Springer International Publishing..

Guan, Y., 2023. Examining User Perceptions of Stablecoins: Understandings and Risks.. *Understandings and Risks. In Posters at the Symposium on Usable Privacy and Security (SOUPS)., *9(111), pp. 78–80.

IMF, I. M. F., 2021. Sweden: Financial Sector Assessment Program Update: Technical Note on Contingent claims analysis approach to measure risk and stress test the Swedish banking sector. *IMF Staff Country Reports, *7(8), pp. 71–89.

Kosse, A., Glowka, M., Rice, T. & Illaria, M., 2024. Will the real stablecoin stand up. *Monetary and Economic Department, *8(9), pp. 78–90.

OECD, O. f. E. C.-o. a. D., 2023. *National treatment for foreign-controlled enterprises established in OECD countries. *7th Edition ed. London, United Kingdom: Organisation for Economic Co-operation and Development.

PWC, P. W. C., 2023. *PwC Global CBDC Index and Stablecoin Overview, *Boston, Mass: Price WaterHouse Coopers (PWC).

Schaubhut, L., 2023. *Unleashing the Disruptive Potential of Stablecoins: An Analysis of Key Success Factors and Challenges in Shaping the Future of the Financial Industry, *Lisbon, Portugal: Universidade Catolica Portuguesa.

Visa, 2024. *The Crypto Phenomenom: Consumer Attitudes and Usage, *San Francissco: Visa.

The increased adoption and usage of Ethereum have consequently led to network congestion and limitations in transaction throughput. Thereby hindering the capacity of the network to effectively scale towards accommodating the growing user base across a wide-array of verticals such as Defi, DAO and Gaming. The Ethereum scalability dilemma remains a complex issue that has garnered enormous research and development efforts. Multiple scaling solutions such as sharding, plasma and rollup-centric scaling approaches have been implemented in a bid to increase transaction speed and throughput without sacrificing security or decentralisation. Thereby, enhancing user adoption and developer innovation on Ethereum.

Overview of Rollups

Overtime, rollups have progressively emerged as one of the most promising approaches towards scaling Ethereum by processing transactions off-chain and batching them onto the mainnet for security. This reduces the load on the mainnet and enables higher transaction throughput while inheriting Ethereum's security via cryptographic proofs. Rollups typically come in two forms which include the optimistic rollups and zk-rollups. Optimistic rollups use fraud proofs to ensure the validity of off-chain transactions, while Zk-rollups adopt zero-knowledge (zk) proofs to provide an additional layer of privacy and security.

Different roll-up designs presently cater to diverse user needs, thereby fostering experimentation, innovation and specialization within the Ethereum ecosystem. Therefore, this article will conduct a comparative analysis of general-purpose and application-specific rollups as solutions to Ethereum's scalability challenges. The key distinctions, trade-offs and impact of each approach will be highlighted.

General Purpose Rollups

General-purpose rollups are designed to enhance the scalability of the Ethereum network by performing transaction execution and computation off-chain while periodically anchoring them on the Ethereum mainnet. They are structurally architected to provide a broad approach to scaling and are suitable for various types of decentralized applications (DApps).

A real-world example of a general-purpose rollup is Arbitrum which utilizes optimistic rollup technology to achieve scalability, allowing for high throughput and low-cost transactions while inheriting security from the Ethereum mainnet through optimistic fraud proofs. Arbitrum's design enables seamless interoperability with Ethereum smart contracts and applications.

General purpose rollups typically support Ethereum Virtual Machine (EVM) compatibility, thereby enabling existing dApps to easily migrate. This flexibility ensures that developers can seamlessly build and deploy various types of versatile applications across different niches, thereby fostering ecosystem growth.

However, the broad architecture of most general-purpose rollups limits optimization for unique and specific use cases. Thereby, fostering the need for application-specific rollups.

Application-Specific Rollups:

Application-specific rollups focus on optimizing scalability for specific types of DApps or use cases by customizing the rollup design and functionality to meet the specific requirements of unique applications unlike in the case of general-purpose rollups. The core benefit of application-specific rollup is that it enhances the customizability of DApps on Ethereum, offering tailored design for specific applications so as to allow unique features and optimisations. This consequently facilitates unmatched scalability as it enables DApps to achieve high throughput and near-instant transactions for specific use cases due to direct peer-to-peer communication.

A practical example of this can be seen in the case of ImmutableX which is an application-specific rollup that provides developers with tailored execution environments specifically designed for gaming on Ethereum. Thereby enabling significant performance improvements and cost efficiency for these unique functions which consequently enhance user experiences.

In the realm of Decentralized Finance (DeFi), scalability and efficiency remain significant challenges. Aevo emerges as a promising solution by acting as an Application-Specific Rollup (ASR), designed to address these limitations and enhance DeFi's overall functionality. Aevo, as an ASR, could facilitate faster and cheaper trading for DeFi exchanges by processing transactions on a separate layer 2. This can significantly improve user experience and attract more traders to the platform.

However, the main trade-off for application-specific rollups is that they are typically not suitable for broader applications beyond their target domain due to the precision in design resulting in limitations in scope.  This consequently leads to the issue of limited interoperability due to the difficulty of interacting with other DApps outside the exact application-specific rollup ecosystem. Furthermore, the security mechanisms vary depending on the specific design, requiring careful evaluation. Also, application-specific rollups usually have a steeper learning curve for developers since they require specialized knowledge and tools for the development and deployment of DApps.

Conclusion

It is evident that rollup-centric scaling solutions represent ongoing efforts within the Ethereum community to address the scalability dilemma and ensure the network's continued growth as a global decentralized platform for smart contracts and decentralized applications (DApps). Both general-purpose rollups and application-specific rollups play crucial roles in scaling Ethereum. Therefore, understanding their characteristics, benefits, and trade-offs allows developers and users to make informed decisions. This article underscores that general-purpose rollups offer a balance of flexibility, openness, and versatility, while application-specific rollups provide unmatched scalability for specific use cases that typically would not be feasible using a general-purpose rollup.

Finally, it is promising to note that there are even more exciting Ethereum scaling solutions in the works. One of which is the nil; zkRollup which securely scales Ethereum to over 60,000+ TPS through zkSharding for general purposes, and can also be optimised for application-specific purposes such as privacy-centred games like Chess. Thereby empowering web3 developers to build scalable, secure, and composable applications.

As a young African, I have always viewed Bitcoin and other decentralized Finance protocols as a form of protest against the present centralized financial paradigm that is characterized by surveillance, censorship, and massive corruption. Hence, the ability of common people to openly support, invest and contribute to developing these decentralized systems has opened the gateway for a cross-border, universal, and non-violent collaborative effort to fight for human sovereignty, financial freedom, and independence.

Thesis Overview All the above are solid projects that solve real-world problems for users ranging from cross-chain transactions to data aggregation and the tokens are strategically positioned to capture enormous value long-term.

• Render (RNDR): A distributed GPU rendering network aiming to revolutionize the digital creation process for artists, studios, projects, and mining partners.

• Thorchain (RUNE): A decentralized cross-chain liquidity protocol that swaps native cryptocurrencies between blockchains in a noncustodial manner without wrapping or pegging assets.

• Arweave (AR): A decentralized Storage Network (DSN) that connects people who have extra available computer disk space with those who need more computer storage.

• Optimism (OP): A fast, stable, and scalable L2 blockchain powered by Optimistic Rollups.

• Loopring (LRC): A non-custodial DEX that Leverages Zero-Knowledge Proofs (ZKPs) to bundle transactions together for efficiency and higher throughput.

• OCEAN: An open-source protocol that aims to allow businesses and individuals to exchange and monetize data and data-based services.

• Lido (LDO): Lido is a liquid staking solution for ETH 2.0 lowering the entry barriers for staking ETH.

• Other minor positions include StarGate (STG), Cosom (ATOM), Dusk Network (DUSK), and Fantom (FTM).

  Fund Management

• The Fecund Trust Fund (1) portfolio was opened in December 1, 2022 when the Total CryptoMarket Cap was about $700 billion. We are still in the process of accumulating units of tokens for our Portfolio.

• Part of my growth in the cryptocurrency market is the ability to recognize my intrinsic strengths and weaknesses.

  • Over the years, I recognized that part of my strength lies in my capacity as a Fundamental Analyst to recognize future trends and crypto assets that would accrue the most value in relation to the anticipated trends.

  • Similarly, part of my weakness lies in the active management of positions either through trading, resizing, profit taking etc.

  • Hence, for the Fecund Trust Fund (1), the strategy would just be to hold all assets until December 2025.

  • This is a small fund, we don’t even have an operational website yet, Yikes!!!.

  • But I would be documenting and sharing my progression here.

This is an unedited rough draft of the lessons learnt during the 2021 Bull run and 2022 Bear Market.

Essentially, I am documenting this because “Even through History does not Always Repeat, It does Rhyme”.

Capital + Courage in the time of market crash is a blessing. o The best gains from the 2021 Bull run were made by those that were courageous to invest at the depth of the March 2020 Crash. o Dips/Crashes provides the best entry points for maximum (10x, 100x, or 1000x) profits. o A black swan event or major capitulation occurs every 4-6 months in crypto. Meaning between 2-3 capitulations per-year which wipes out weak hands, and creates a perfect entry to investors. Therefore, having liquidity at these times is bliss.  Cash is never trash, as without cash it is impossible to take advantage of dips, crashes, capitulations etc.

Long-term holding on solid coins outperforms day trading. o Holding requires a lot of discipline and patience, although it pays off long-term. o Part of the mistake most investors make was taking profits from their Winners and putting them into their losers. However, this is an ineffective strategy because in most cases, Winners keep winning & vice Versa. Hence, in a bear market, Ride your winners and cut your losers. o Although, during the initial phase of the bull market, there were pumps in meme coins such as Doge, Shiba Inu, Cumrocket, etc. Nevertheless, coins with great fundamentals and work products such as AXS, SOL & FTM went parabolic.  This is because protocols such as Axie Infinity established the (Play-To-Earn) Narrative  While Alt Layer 1’s such as Solana were adopted due to thier lesser fees and higher transaction speed

Noticing trends changes and investing early is key to maximum profits. o Initially, in the 2020 bull reason, there was the DeFi (Decentralized Finance) explosion. o Explosion in Layer 1 tokens. o Then the NFT Explosion. o Explosion in Layer 2 tokens. o Most times, consensus opinions never comes to fruition, in 2021 almost all Analyst predicted a $100k Bitcoin, but it bottomed at $69k. Whereas by the end of 2022, almost all Analyst predicted that Bitcoin would go down to $10k. However, it did not.

The power of hodling o Timing is market is extremely hard and sometimes futile. o According to fundstrat research, if you miss out of the ten (10) best days a crypto price movement, you would be significantly down. o Hence, the best investors are those who notice a future trend early, accumulate, hodl and wait for the market momentum to kick-in. o Time in the market >>> Timing the market. o If you miss out of 10 (ten) days of the biggest rally in the S&P 500 within a decade, then your returns are cut to less than half. (There’s almost no scientific way to time this 10 days out of 3650 days).

Do not be emotionally attached to any token. o Maximalism limits objective thinking and proficient risk management o Always treat the market as PVP (Player versus Player) meaning its you against other crypto holders, hedge funds, VC etc. o Also treat the market as PVE (Player versus Environment) means you need to understand the macro environment and other system.

People (to never fade) o Arthur Hayes o Gareth Soloway o Chris Burniske o Most influencers and public figures are almost always late to the party. Hence, if a trade, token, or coin is consensus, it is almost already too late to bet on it

Timing o “To survive long-term in the crypto markets, you must have a balance dose of curiosity and skepticism, especially around different phases in the market cycles”. o Historically, the best time to invest in crypto is 100 days before the Halving. o Historically begin averaging-in around 100 days before the halving and start exiting-out around a year after the halving.o The best period to hold with conviction is 100 days before the halving for a year. o The best time to sell is 18 months after the Halving (Although you can commence DCA out at least 12 months after the halving), as the bear market is inevitable. o Immediately a year after the halving, trade with tight stops. o Start preparing to short the market from the All-Time Highs at least 18 Months after the previous halving, as this is when Euphoria is at its peak.

Shorting o Historically, the best time to short the crypto market is 18 months after the Halving as the bear market is inevitable. o Knowledge of both fundamentals and technical are important in shorting. o Insights on vesting schedules, token unlock etc. are important as most tokens are dumped by VCs and seed investors during the unlock periods. o Many tokens would lose its value by over 95% in the bear market, and some would even go on a death spiral (i.e., Luna, FTT) etc. Hence, the ability to adequately position and short early would offer maximum result.

Bitcoin Dominance o At the height of the Bear market, most of the altcoins must have completely shrunk, with Bitcoin gaining over 50% dominance. o At the peak of the Bull market, Bitcoin dominance is usually the lowest, typically below 25% followed by an altseason. This is usually the best period to take profits.

Ponzinomics o A lot of altcoins and new paradigms such as Play-to-Earn, Run-to-Earn etc. in crypto is essentially a Ponzi, with no solid fundamentals, where a couple players go in early, make money and get out at the top. The Bagholder mostly get rekt. o In the bear market, the short-sellers would massively profit because most crypto would be down -90% or more. o Most of the successful crypto investors play the game as a PVP (Player vs Player) Ponzi)  Get in early when there is fear, position yourself for profits or generational wealth, wait for retail and institutional adoption, sell why the hype is at the highest.

Charts o In the Bull Market from (Mid-2024 to Late 2025), all crypto prices would go up (Long).  The Charts would look like a Hockey stick. o In the Bear Market from (Late 2025 to Late 2026), all crypto prices will go down (Short).  The Charts would look like the Eiffel tower.  Begin accumulating Gems for the Next Cycle during the tail end of the Bear (Usually Nov – December).

Bear Market Lessons  Having experienced my first bear market in 2022 which took a significant financial toll on my portfolio, but ended up being one of the most priceless experience dealing with the financial markets (particularly crypto, which is the most volatile market).  Before analyzing the Bear Market, it is important to note that in previous cycle Bitcoin topped first around November 2021, while other Altcoins continued to rally significantly and eventually topped by December/January 2022.  Around this period: o NFTs were being sold at Outrageous prices. o Defi protocols were offering outrageous APR on tokens. o Crypto projects were raising overpriced rounds by VC that were in FOMO mode. o Traditional Bankers, VCs, and Web2 talents were resigning in droves into Web3. o The Euphoria on Crypto Twitter was Insane. o The rate of Leverage in the System was at an astronomic rate. o Countries, Family Offices, Sovereign Wealth Funds, Hedge Funds and Companies were adding Bitcoin and other Crypto Assets unto their Balance Sheets. o Mainstream Media, Influencers and Social Media was going Agog on the Crypto/Web3 Narrative. o Anyone taking profits during this period was mocked on CT, with the famous slogan HFSP (Have Fun Staying Poor). o Crypto companies were buying Naming rights for Major Stadiums, Humongous Marketing Campaigns and Irresponsible Flex going on. o DAOs were raising millions of Dollars for purposes such as buying the constitutions etc. (Many of these endeavors had nothing to do with Crypto advancement in any way). o Bitcoin Dominance was significantly down less than 25%. o Inflation rates was shooting High at Unsustainable rates, Although Jerome Powell and the Federal Reserve were still Dovish insisting that “Inflation was Transitory” (Turned out they were wrong). o The M2 (Money Supply) was increasing exponentially. o Most of the VCs Particularly (Three Arrows Capital) were trending the Narrative of a Super Cycle.

Notes on the Super Cycle Narrative.  Firstly, it is obvious to state that Bitcoin has been on an Endless Super-Cycle since 2009 when it went live.  Nevertheless, the crypto market moves in a four-year cycle pattern, comprising of three UP years (that I call the Super cycle) and a down year. The Image below further demonstrates this.

 For instance, 2014 was a DOWN year, while the three succeeding years (2015, 2016, 2017) were UP years. Afterwards, 2018 was a DOWN year, while the three succeeding years (2019, 2020, 2021) were UP years. Similarly, 2022 was a DOWN year, and I believe based on the historical patterns, (2023, 2024, 2025) would be UP years.  The mistake most people make however is that instead of understanding that the Super Cycle commences after ever Bear (Down) Year, they assume that a Super Cycle will continue after the Bull Market.

Bear Market Lessons  In a crypto bear market, all that could go wrong, would eventually go Wrong. o Overleveraged Hedge funds would default, blow-up and get liquidated. o Uncollateralized, Under-collaterized or Algorithimic stable coins will loose their peg. o Most projects would loose 90 – 95% of their value. o Major rug-pulls by projects. o Exchange blow-offs. o Massive layoffs o Don’t fight the fed (Learn about Quantitative easing and tightening and its impact on the market). o

One of the main challenges with truly decentralized blockchain networks such as Bitcoin or Ethereum is the scalability constraint which occurs whenever the amount of data passing through the blockchain hit a limitation due to the insufficient capacities of the blockchain throughput. Ideally, a public blockchain network should be able to handle an infinite number of Transaction Per Second (TPS), otherwise referred to as throughput. This is because as crypto enters its next wave of adoption, the need for scalability has increased exponentially in a bid to facilitate mass adoption and onboarding of the next billion sets of web-3 users. However, the Ethereum blockchain presently processes only about 15 TPS. This significantly lags behind centralized payment protocols such as Visa Electronic Payment Network can process roughly about 25,000 TPS.

The difference predominantly lies in the level of security and decentralization that public blockchains such as Bitcoin and Ethereum offer. In thier case, every transaction must be accepted, mined, distributed, and validated by a global network of nodes. This takes an enormous amount of time, computation and processing power. Furthermore, the advent and exponential increase in the adoption of Defi protocols and Non-Fungible Tokens (NFT) have led to a resultant increase in the network load.* *Hence, indicating that the capacity of the Ethereum network is limited. Consequently, the cost of using the Ethereum network increases prominently with more users competing with each other for backspace or to conduct transactions on the Ethereum network.

Although the Alternate (Layer-1) competitors such as Solana, Avalanche, and Aptos aim to tackle the scalability issue, it is evident that they have significantly sacrificed decentralization and security (to a large extent) in a bid to enable faster throughput and affordable fees. However, the danger of this approach is that the Alternate Layer-1 blockchains have chosen to recreate Web2 incentives in a quest for scalability. This does not in any way align with the fundamental values of Web3 because sacrificing decentralization would simply imply forgoing the purpose of crypto. Hence, scaling blockchain networks alone is not enough. Rather, there is the duty to scale in a manner that the core values of Web3 with respect to decentralization, and security are not compromised.

How Ethereum L2 work

Ethereum Layer Two (L2), is a collective terminology that is used to describe a specific set of scaling solutions, that fundamentally maintains the security measures and decentralization tenets of the Ethereum network.

In this case, the Ethereum blockchain (Layer1 network) would function as the primary Data Availability Layer (DAL) for layer 2s. This, therefore implies that Layer 2 projects would post their transaction data onto the Ethereum mainchain, thereby relying on Ethereum for data availability. In addition, Layer 2 scaling solutions inherit the underlying security and decentralization tenets of the Ethereum mainchain.

All of this requires no fundamental changes or alterations to the layer 1 protocol which in this case happens to be Ethereum. This consequently enables the Ethereum Layer-1 blockchain to handle data availability, security, and decentralization, whereas the layer 2s focuses on scaling, thereby taking the transactional load away from the Layer-1 blockchain, while the finalized proofs post back to the layer 1. Therefore, by abstracting the transactional load from the layer 1, the Ethereum blockchain, in this case, becomes less congested, and more scalable.

Similarly, Rollups have proven to be useful because they increase transaction throughput, reduce fees, and expand participation. There are two kinds of rollups with different security measures:

§ Optimistic rollups assume transactions are valid by default and primarily runs its computation through a fraud proof method.

§ Zero-knowledge rollups runs computation off-chain and submit a validity proof to the main-chain.

Some of the popular Layer 2 scalability solutions like Optimism, Starkware, and Arbitrum provide scaling for blockchains so that a growing number of exchanges and platforms are able to use the Ethereum network without the hassle of high gas fees or lengthy processing times for transactions.

In Conclusion, the Ethereum blockchain is arguably the most widely used blockchain. However, this does not imply that it doesn’t have its associated challenges, just as explained in this report primarily in terms of the slow transaction times and expensive gas fees that hinders mass adoption. Hence, Ethereum Layer 2s built on top of the Ethereum blockchain aims to keep transactions secure, speedy, and scalable. The practical use cases of Ethereum Layer 2s can already be seen on the practical horizon with systems such as mainstream photo-sharing application Instagram using the Polygon network for its upcoming in-app NFT minting functionality. Furthermore, the largest NFT marketplace Opensea recently offered support for Arbitrum in order to provide users access to NFTs without incurring high gas fees.

Each individual solution has its own pros and cons to consider such as throughput, gas fees, security, functionality, scalability, and interoperability. No single layer 2 solution currently fulfills all these needs. For example, some of the Zero Knowledge (ZK) do not offer seamless support for Ethereum Virtual Machine (EVM). In addition, validity proofs are extreme for Optimistic Rollups to compute for smaller applications with less on-chain activity.

Despite these challenges, Ethereum layer 2 solutions still have serious potentials to transform the blockchain landscape and provide the needed scalability needed to facilitate mass adoption.

Similarly, the present state of the internet, prior to the advent of the blockchain technology, has left a lot to be desired for digital artists and creators. Even though modern internet platforms such as social media have created a digital avenue for artists and other creators to easily showcase their creations, however, the value in most cases is accrued back to the platforms rather than the creators. Also, most web3 platforms are characterized by centralization and censorship of contents, which limits creativity and privacy protections. In addition, there is no systematic way of verifying the authenticity of digital content such as art posted, which makes it easy for others to replicate (pirate). Thereby, making it extremely difficult for creators to be duly credited and renumerated.

These challenges, therefore, buttress the practical importance of Non-Fungible Tokens (NFTs).

A Non-fungible token (NFT) is described as a unique digital asset that represents real-world objects such as art, music, videos, in-game items, or real estate whose ownership is verifiable on a blockchain. Typically, various forms of assets ranging from digital goods that exist within virtual worlds, to claims on physical assets such as real estate properties can be represented as NFTs.

Generally, it is a known fact that talent is evenly distributed globally, however, opportunities are highly concentrated. Hence, blockchain technology provides a democratized avenue for talents globally such as artists to access viable economic infrastructures and opportunities to effectively showcase their artistic works to global audiences. Core Infrastructures, particularly NFT Marketplaces such as Jpg Store, enable creators and consumers to freely exchange value in a decentralized manner without losing their privacy or sovereignty. For instance, an upcoming artist in Nigeria can sell his work for millions of dollars to interested parties across the world and still gain due acknowledgment and reoccurring royalties, even without having to host an exquisite art exhibition or auction Gala in Manhattan.

On the social front, a Politician in an authoritarian regime whose bank accounts have been frozen by the government can directly release NFTs as a way of gathering campaign donations. Thereby enabling the delivery of the true dividends of democracy to citizens without centralized monopolies. In the same vein, poor customers can collectively pool funds together in order to acquire fractional ownership of proprietary assets such as unique artworks or even real estate represented as NFTs. Thereby democratizing the process of creating and acquiring of unique digital or even physical assets in a decentralized, borderless and permissionless manner.

NFT Creation Process

As explained earlier, a non-fungible token (NFT) is a unique data unit on a blockchain that can be directly linked to various assets. Thereby providing an immutable proof of ownership. While it is assumed that the process involved in creating an NFT might be cumbersome or highly technical. However, in actual sense, it is rather really simple.

A standard NFT creation process is outlined below:

1. An individual must first select the unique asset which they would like to convert into an NFT.

2. Thereafter the asset must then be minted on a blockchain. Minting, in this case, simply refers to the conversion of digital files into an NFT collection whose records are stored on the blockchain. The NFT, therefore, represents that digital asset on the blockchain, and the proof of ownership can be easily verifiable through the immutable record of the blockchain. There are various blockchains that can be used for minting NFTs some of which include Ethereum, Cardano and Solana amongst others.

3. NFT marketplaces such as Bluemove and OpenSea enables creators to list and trade their NFTs after it has been minted on the Cardano or Ethereum blockchain respectively. Typically, listing an NFT for sale involves the use of standard digital wallets that are compatible with the underlying blockchain which the NFT was minted. For example, in order to list an NFT on an Aptos NFT Marketplace such as Bluemove, the creator must set up an Aptos-compatible digital wallet such as the Fletcher Wallet and also have some cryptocurrency such as ADA for transaction fees.

Applications of Non-Fungible Tokens (NFTS)

The concept of Non-Fungible Tokens (NFTs) emerged as one of the biggest technological breakthroughs in recent times, and this is mainly because the practical application, use cases, and potentials of NFTs are endless, with new applications constantly emerging so as to offer more value for both creators and consumers. Nevertheless, NFTs still remains a nuanced innovation in its initial stages. Some of the present applications and uses of NFTs are outlined below

PFP and Avatars: This represents one of the most popular use-cases of NFTs, and it is commonly used as a form of unique identification, while in some cases for status signalling or as a digital flex due to the rarity or unique trait of the NFT. Also, people use NFTs such as Crypto Coven as their PFPs as a way of identifying with the culture or causes that the NFT Project represents.

Music NFTs: At this point, many people are aware of the inefficiency of the music industry with respect to providing artists with sustainable means of making a living off their work. Most of the existing streaming platforms are cannibalistic in the sense that they take a large percentage of the revenue of musical artists, and in some cases even censor the types of content that would be posted. To counter this challenge, the concept of music NFT was developed to act as a tokenized version of music audio, video or an entire album. Therefore, artists can leverage on the blockchain technology to bypass various middlemen such as record labels, or streaming platforms. Thereby having the unique opportunity to connect directly with fans and earn money while still retaining the creative control of their work.

This way, a musician in Sri Lanka without a label can release their music directly to fans as NFTs and earn without the fear of content censorship or monopolized control from any streaming platform. In addition, music NFTs platforms such as Royal allows fans to invest in an artist’s work, thereby making the fans co-owners of the music thereby enabling them share in the revenue from the music release. Also, musical artists can release NFTs which can grant Fans exclusive access to concerts, and tours.

In-game NFTs: Most blockchain-based Play-to-Earn (P2E) games enables players to earn and own in-game assets like weapons, skins, digital accessories, characters, and virtual land in the metaverse, which are all essentially NFTs that could be traded to earn financial rewards.

Collectibles: The recent boom in sports trading card as evidenced by projects like NBA Top Shot, has propelled the rise of NFT collectibles which can have varying degrees of rarity, and value for the holders, just like physical collectibles.

Digital certificates: NFTs can also be used as certificates of authenticity offered as proof-of-ownership assigned to individuals or groups. Since NFTs are data units stored on a blockchain in an immutable, permissionless, and transparent manner, it is then easy to identify the authenticity of degree certificates, or real estate certificate of ownership which are NFTs on a blockchain. Thereby limiting the case of certificate fraud or forgery. In addition, platforms such as Mirror enables writers and researchers to mint their blogs as NFTs and earn royalties.

DAO Membership Pass: Decentralized Autonomous Organizations (DAOs) and social groups of all forms in this modern dispensation tend to rely on NFTs to provide exclusive membership access and privileges for members within their communities. It is very similar to elites with AAA card or AARP members whose membership cards offer them exclusive flights, or hotel access. For instance, members of the BAYC communities owning either the Bored Apes or Mutants Apes are given some exclusive privileges like access to the BAYC discord in addition to access to free NFT collectible airdrops such as the Mutant Ape, Bored Ape Kennel Club dogs, and the Otherside Metaverse Land.

Community incentivization using NFTs is important since most aspects of web-3 are open-source which implies that it is easy to fork (copy) everything, however, community and culture cannot be forked.

Criticisms and Solutions

Non-Fungible Tokens (NFTs) are still regarded as a bubble, despite all the promising use cases. This is largely due to some fundamental flaws and challenges associated with the technologies and overall NFT ecosystem which is important to outline and even explore practical solutions.

Blockchain Scalability Constraint: The exponential rise in the interest for Decentralized Finance (Defi) services and Non-Fungible Tokens (NFTs) particularly on mainstream blockchains such as Ethereum has resultantly led to enormous scalability limitations ranging from lower throughput, slower response time, and high gas fees for NFT mints. These issues tend to affect many, particularly the retail investors within the NFT Ecosystem.

However, innovative solutions have emanated some of which include layer-2 scaling solutions such as Optimism or Arbitrum, as well as alternative Layer One (1) blockchains such as Cardano with high throughput and low transaction fees. In addition, Cardano is an environmentally friendly blockchain with an efficient settlement layer that enables users instantly mint or trade NFTs on the blockchain with lower fees and higher throughput.

Poor Interoperability: Most NFTs that are minted on a particular blockchain cannot be accessed, exchanged, or traded on the NFT marketplaces of other blockchain networks. The lack of interoperability makes it difficult for NFT creators to effectively target mass users across multiple blockchains, and this sometimes leads to the forks of NFTs across other blockchains.

Nevertheless, there has been some apparent progress amongst NFT Marketplaces such as OpenSea and Magic Eden offering cross-chain support for Solana and Ethereum networks respectively.

Creator Onboarding Challenge: The success of any NFT project depends on a myriad of factors asides from the aesthetics of the art. Some of the critical success factors include community enthusiasm, network effects and incentivization structures for users. Therefore, even highly talented artists with low literacy levels or limited networks tend to experience challenges in terms of NFT promotions in order to propel the needed awareness and network effect necessary for NFT success. To this effect, creator-first NFT Marketplaces such as Bluemove provides holistic services such as Launchpads in order to host, promote and market NFT project launched on the platform.

Hence, Alfred and his classmates from a remote city in Nairobi, with limited social reach can be able to host their NFTs and gain enormous traction and awareness amongst art enthusiasts in Toronto Canada, and Manhattan, New York. In addition, creator-first NFT marketplaces such as Jpg Store enable the students to constantly earn royalties for any sale of their NFT.

Rug Pulls and Scams: Finally, there has been an increasing rate of scams, rug pulls and minting of plagiarized arts within the NFT ecosystems. Hence, the need for the implementation of enhanced verification systems such as the Jpg Store verification.

Progressively, Initial Desk Offering (IDO) is regarded as a successor to both the ICOs and IEOs as it is a novel fundraising method in the crypto space by leveraging on the permissionless model of Decentralized Exchanges (DEXs).

Overview of how Initial DEX Offerings (IDO) works

Initial DEX Offerings (IDOs) were introduced to compensate for the shortcomings and centralization issues of the “traditional” ICO and IEO crypto crowdfunding model, because an IDO is facilitated by decentralized exchanges (with no central control mechanism) to organize the fundraising, as opposed to a centralized exchange.

An Initial DEX Offering (IDO) fundamentally works because Decentralized Exchanges (DEXs) can be used to bootstrap instant liquidity for tokens through its liquidity pool providers. To facilitate trading, projects (mostly using the Proof-of-Stake consensus mechanism) tend to contribute liquidity to the DEX by allocating a portion of their funds. The proof-of-stake consensus mechanism requires investors to store their funds in the supported token, for the chance to validate and earn rewards in exchange for their “stake” in the network.

Unlike IEO which requires a long-vetting process and exchange fees before fundraising, almost any project can launch using an initial dex offering. Although, this also has its demerits as it has sometimes leads to the launch of many poor-quality projects or outright scams. To get an allocation in an upcoming IDO, most platforms typically require their users to hold their own native tokens so as to increase the odds of participation. Therefore, in order to avoid lotteries, most DEXes give guaranteed allocations based on the number of native tokens a user holds. Thereby, incentivizing larger holders.

Investors can immediately begin trading the project token following the project’s launch. Once the IDO is live, early investors can sell their tokens at a premium. With a liquid exchange, the gas fees for executing a new smart contract are negligible because sufficient liquidity is provided for trading pairs. The smart contracts help to manage the asset token and liquidity pool.

Process for Initiating an Initial DEX Offering (IDO)

Although launching an IDO can be independently conducted in a decentralized manner, without the need for Know Your Customer (KYC) or other bureaucratic requirements. However, there are still some procedural phases which must be duly followed. These phases include the following:

1. Devising a business strategy

2. Creating a market collateral

3. Assessment of the DEX Launchpad requirements

4. Cryptocurrency creation and token launch

Devising a business strategy for the project/token

This process involves the creation of a strategy for the token offering which would be launched on a DEX platform. During this phase, it is important for the project teams to explicitly simplify the main problem that the project is attempting to solve, the funding allocation plans, the decision on the blockchain that the project would run on, as well as further tactics on how to maintain the project momentum even after the IDO.

Creating a market collateral

A website and a project whitepaper are the minimum marketing collateral required for an IDO launch.

Firstly, a fully functional website with enlightening details relating to the project enhances the brand image of the project, which consequently aids in boosting investors’ confidence to participate in the Initial DEX offering (IDO). Also, clarity, in terms of the outline of the project goals, and future roadmaps in the whitepaper further increases the motivation and willingness of investors towards working collaboratively to enhance the actualization of the project objectives.

The whitepaper should typically contain educative content regarding the project and other associated aspects such as the tokenomics so as to enlighten the potential investors and users of the project. Finally, in addition to the website and whitepaper, some form of social media presence (through platforms such as Github, medium, telegram and Twitter) helps in attracting not just investors for the IDO, but other curious early adopters and core contributors to the protocol as well.

In certain cases, some Launchpads provide marketing services to increase the visibility of the IDOs launching on their platforms.

Assessment of the DEX requirement

This stage simply involves the evaluation of the various launchpads, so as to ascertain if the project meets the platform's requirements (based on consensus or whitelisting) for IDOs.

Cryptocurrency creation and token launch

After devising the project business case, creating the market collateral, and then deciding on the most suitable DEX launchpad for an IDO, the next phase involves creating the cryptocurrency. Presently, the process of launching a cryptocurrency has been simplified using technologies such as Cointool that enable individuals or project teams with limited technical skills to figure within a short timeframe. Asides from the token generation event, the challenge in most cases, deals with establishing real-world value and utility for the cryptocurrency that would attract users and investors,

After the Token Generation Event (TGE) and Initial DEX Offering (IDO) is completed, the decentralized exchange can then list the token for trading. The listing is accomplished through the use of an automated market maker (AMM). In most cases, rather than setting a fixed price, the issuer can conduct an auction, resulting in the token price being determined by supply and demand. Additionally, certain projects may offer incentives to investors to provide liquidity and earn more token rewards. This can assist the project in gaining and maintaining momentum.

Difference between ICO, IEO and IDO

Although a brief outline of the major cryptocurrency fundraising methods beginning from ICO, to IEO and then IDO were outlined earlier in the article, it is important to clearly highlight their differences or areas of similarities.

Unlike IEOs which rely on centralized exchanges, IDOs are self-organized and decentralized as projects can directly exchange the tokens without any need to pay an exchange ‘intermediary’ fee as in the case of IEO. However, for ICOs, the issuers manage all the responsibilities. This contrasts with an IEO, which is managed by a centralized exchange.

IDO on the other hand could be seen as a mix of ICO and IEO. The key difference is that IDO replaces the centralized exchange (CEX) with a decentralized one (DEX). This, therefore, solves some of the challenges present in an IEO, such as issuers not being allowed to list tokens with competing exchanges or the requirements for token issuers to pay a sizeable token stack in order to be listed on an exchange.

ICOs are also highly centralized, which makes them vulnerable to rug-pulling and other unethical practices that put investors at high risk. ICO tokens are often minted after the sale, and token minting takes place on the company’s website. This approach comes with significant costs. That’s because the token issuer requires the token to be listed on the prominent centralized exchanges.

In addition, one of the main differences between IDOs compared to ICOs is that there is no premise at all. This typically boosts investor confidence, because a high pre-mine allocation in most cases increases the emission rate of the token over the long term. ICOs often offer insiders and early investors favourable terms that aren’t available to retail investors. Such favorability is impossible with IDOs because smart contracts do not provide the ability to do so. This is why IDOs are often viewed as a fairer fundraising method. Furthermore, unlike ICOs, where lockup periods are common practice, IDO tokens are instantly tradable which makes them attractive to most traders.

The table below outlines the main characteristics and differences between the three major cryptocurrency fundraising methods, using eleven different comparison criteria.

The table above indicates that there are enormous differences between ICOs, IEOS and IDOS in terms of the fundraising model, the platform used and intermediary fees, level of investor protection, the smart contract management, investor perception and even potential amount of funds that could be raised.

Issues and solutions

IDOs also has its associated issues and limitations which are important to address, for instance hackers have been known to exploit bugs in some IDO smart contract, thereby vanishing with the tokens. Another essential issue in this case, deals with the scalability or fundraising constraints associated with IDO. For instance, it is not uncommon for ICOs to be able to raise more than $1 billion. For IDOs, this is unheard of. However, in order to overcome this limitation, there is a growing trend whereby projects tend to launch their IDOs on multiple launchpads so as to capture a wider range of investors across multiple blockchains.

IDO Launchpads across blockchains

IDO launchpads pro entities with a decentralized opportunity to create a token-based project and raise funds for the project development and advancement. Importantly also, it provides an avenue for the average retail investor, to gain ownership in different crypto projects from inception. Thereby eliminating the barriers of entry and participatory rights that were previously reserved for institutional investors.

Some of the renowned and reputable IDO Launchpads across various blockchains are outlined below:

Avalaunch (Avalanche)

Avalaunch is the main launchpad offering projects within the Avalanche ecosystem a platform for decentralized fundraising. This platform offers a secure avenue for investors to gain exposure to vetted early-stage Avalanche ecosystem projects.

Avalaunch requires users to acquire and stake the native Avalaunch (XAVA) tokens to unlock access to IDOs. However, in a bid to make accessing IDOs as fair as possible, Avalaunch provides all users with a guaranteed allocation for each IDO they apply for. Although the size of this allocation is related to the number of XAVA staked and the chosen lockup period. Furthermore, in order to prevent whales from getting most of the allocation, there is a maximum per-person allocation limit in place.

Every sale on Avalaunch will be broken into three rounds, and each round begins with a different fraction of the total amount available for the token sale:

1. Validator Round — 10% of the total sale

2. Community Staking Round — 85% of the total sale

3. Public Round — 5% of the total sale

Each round has a different set of requirements which a user will need to satisfy in order to register for that round. A verification is required for all rounds. After completing the requirements, users still need to register for a sale during the set registration period in order to participate.

Validator Round (Requirements):

- Own and operate an Avalanche network validator node.

- Create an account and complete the KYC Application.

- Verify ownership of your node in the KYC application (This node must be active during both registration and sale to qualify.).

- Verification of the C-Chain wallet in the KYC Application.

Community Staking Round (Requirements)

- Create an account and complete our KYC Application.

- Verify the C-Chain wallet in the KYC Application.

- Stake XAVA in the Avalaunch Allocation Staking Application.

There is no minimum of XAVA you must stake, but the more you stake, the larger your allocation will be. The Avalaunch platform offers guaranteed allocations to all stakers, but there is also a maximum allocation set for each sale in order to enable fair allocation.

Public Round (Requirement)

- Create an account and complete the KYC Application.

- Verify the C-Chain wallet in our KYC Application.

Users do not need to stake XAVA to be eligible for this round, but because it is only 5% of the total sale, your allocation is likely to be smaller than the previous two rounds.

BSCPad (Binance Smart Chain)

The BSCPad primarily support fundraising for projects building in the Binance Smart Chain (now BNB Chain) ecosystem. BSCPad has hosted IDOs for well over 60 projects — averaging more than six launches per month. BSCPad employs a tier-based system to determine how users can participate in its IDOs. Users need to stake at least a fixed minimum number of the native BSCPAD tokens to access their tier on the platform and will either be part of the lottery round or guaranteed allocation round.

The current tiers, and respective staking requirements in the BSCPad are as follows:

• Bronze (1,000 BSCPAD): 1 lottery ticket

• Silver (2,500 BSCPAD): 3 lottery tickets

• Gold (5,000 BSCPAD): 7 lottery tickets

• Platinum (25,000 BSCPAD): Guaranteed allocation (pool weight: 10)

• Diamond (50,000 BSCPAD): Guaranteed allocation (pool weight: 30)

• Blue Diamond (75,000 BSCPAD): Guaranteed allocation (pool weight: 60) + private allocations

20% of the allocation is shared between lottery ticket winners (Bronze, Silver and Gold) whereas the remaining 80% is shared between guaranteed allocation tiers (Platinum, Diamond and Blue Diamond).

CardStarter (Cardano)

The CardStarter launchpad is a decentralized accelerator connecting early-stage projects within the Cardano ecosystem with a community of donors within the ecosystem. Each project launching on CardStarter must contribute to the platform’s insurance treasury, which would serve as a form of financial protection for investors against potential project failures. Prior to any IDO, the CardStarter accelerator program provides successful applicants with access to services such as:

1. Token Engineering,

2. Security Audits,

3. Social media awareness and branding support.

In terms of participation requirements, users need to stake at least 100 CardStarter (CARDS) tokens on the platform to participate in a lottery or must stake at least 1500 CARDS tokens to get a guaranteed allocation for each IDO.

DAOMaker (Ethereum)

There are numerous Ethereum ecosystem launchpads, however DAOMaker currently stands out due to its longevity, but also its reputation for facilitating the fundraise of some renowned tokens such as My Neighbor Alice, Lossless Protocol and Orion Money. Despite being one of the first platforms to democratize access to investing in new projects through IDO-like offerings, DAOMaker has also pioneered several token sale formats, including the Dynamic Coin Offering (DYCO) and more recently the Strong Holder Offering (SHO), thereby revolutionalizing the way investors gain access to new projects.

To participate in DAOMaker’s IDO, users need to hold at least 500 DAOMaker (DAO) tokens in their wallets and be registered to the DAOPad platform.

NearPad (NEAR)

NearPad is a launchpad platform specific to the NEAR ecosystem. The platform launched in September 2021 and plans to become the go-to fundraising platform for NEAR projects, and is also building a DEX and yield aggregator. Similar to other launchpads, NearPad uses a tier-based system to determine how users access IDO allocations depending on the number of the native PAD tokens which a user stakes.

Solanium (Solana)

As a Solana-centric launchpad, Solanium helps Solana ecosystem projects easily raise funds through decentralized swap pools, while providing a secure way to distribute tokens to IDO participants. Solanium uses a staking system that includes an in-built mechanism to incentivize long-term supporters. To participate in Solanium IDOs, users need to hold xSLIM tokens, which are obtained by staking either Solanium (SLIM) tokens or SLIM LP tokens.

The exact amount of xSLIM received depends on the number of SLIM or SLIM LP tokens staked and the selected time lock (click here to access the Solanium xSLIM calculator).

Depending on the number of xSLIM held, users are assigned to one of five tiers:

• Tier 1 (100 xSLIM): 1 lottery ticket

• Tier 2 (1,000 xSLIM): 12 lottery tickets

• Tier 3 (5,000 xSLIM): 100 lottery tickets

• Tier 4 (10,000 xSLIM): Guaranteed allocation

• Tier 5 (50,000 xSLIM): Larger guaranteed allocation

Gaming and Metaverse Launchpads

In addition to the various ecosystem-specific IDO Launchpads outlined above, there are some IDO Launchpads specifically tailored for gaming or metaverse-based projects.

Gamestarter (Initial Game Offering)

Gamestarter is considered more of an “IGO” platform, rather than a typical IDO launchpad. Gamestarter is a central hub for gaming and NFT-focused projects to begin their journey on the Binance Smart Chain, Solana, and Polygon networks. While many launchpads have a more generic outlook on the projects they pick, Gamestarter is focused on giving gaming startups an exclusive presence and provides a transparent means for retail investors to invest in crypto gaming projects using the Gamestarter (GAME) native token.

FireStarter (Initial Metaverse Offering)

Similar to Gamestarter, Firestarter the first Initial Metaverse Offering (IMO) focused launchpad. FireStarter is presently based on the Polygon network, supporting the fundraising and incubation process of NFT, GameFi, and Social Token projects. The platform offers an opportunity for investors to be part of the formation and growth of Metaverse-integrated projects in their early stages.

New NFT, GameFi, and Social Token projects can readily use this platform to raise funds, allowing the community to invest using the Firestarter (FLAME) token. Thereby, fostering projects that are entirely driven by community and magnified by culture, in a bid to expand the scope of the Metaverse. The FireStarter IMO Launchpad further provides marketing and community-building support for projects.

The Author (Andrew Sawa) is a Blockchain research analyst and crypto enthusiast. He has a BSc in Information Technology and a Masters Degree in Management. He has written extensively on various crypto topics, including DAOs, Defi, IPFS and Gamefi.

Overview of the Stock-to-flow (S2F) model for Bitcoin

Stock-to-Flow (S2F) is an investment model that typically measures the existing stock of an asset against the rate of production or the associated level of scarcity of the asset.

Stock-to-Flow (SF) Ratio = stock ÷ flow

In essence, if an asset has a scarce supply, for instance, gold and other precious metals, it is more likely to retain its value or purchasing power over time.

The Stock-to-flow (S2F) model for bitcoin was introduced by an individual with the Pseudonym (Plan B) in an article titled Modelling Bitcoin Value with Scarcity. This model fundamentally takes advantage of the fact that the inherent scarcity of Bitcoin (with a total supply of 21 million) would essentially increase its value over time, taking into account the four (4) year block halving, with the last block expected to be mined by the year 2140.

Every four years, the number of bitcoins mined is halved. After the 2016 halving, miners receive 12.5 bitcoins as a reward for each block mined. However, by the time of the halving in 2020, the Bitcoin mining reward was reduced to 6.25, which therefore implies that the rate of new Bitcoin created was reduced by 50%.

This inevitably and consistently reduces the flow portion of the ratio. When you reduce the denominator of a ratio, it increases the total value of the ratio.

Based on the Stock-to-Flow (S2F) model, Plan B forecasted a $100k minimum price target for Bitcoin during the 2021 bull market. This can be seen in the tweet below, which was religiously followed by many traders and investors within the cryptocurrency market:

However, contrary to Plan B Stock-to-flow (S2F) model forecast, Bitcoin topped at slightly above $69,000 as of November 10 2021 and is presently trading at $19,200 which is 72% lower than the Initial All-Time High (ATH).

This glaring inaccuracy has attracted enormous criticism towards the Stock-to-Flow (S2F) model for Bitcoin and even calls for the complete invalidation of the model due to substantial limitations and downsides.

Downsides and Limitations to Plan B Stock-to-Flow (S2F) model for Bitcoin

One of the fundamental downsides and limitations of the Stock-to-Flow (S2F) model for Bitcoin by Plan B is that it does not take into account aspects such as the fluctuations in the demand for Bitcoin, but rather the model is primarily based on the limited supply and scarcity of Bitcoin.

However, the increase in the number of other cryptocurrencies with additional functionalities such as Layer-1 smart-contract blockchains with increased levels of scalability has consequently resulted in significant declines in the bitcoin dominance even within the cryptocurrency market. Hence, recent events within the cryptocurrency market indicate that there are additional factors that influence both retail and institutional investors’ demand for a cryptocurrency aside from the scarcity of the asset alone.

Similarly, the Stock-to-Flow (S2F) model for bitcoin does not take into account other critical factors such as downwards volatility as a result of Black swan events or other unforeseeable occurrences which is very common within the cryptocurrency market. For instance, the Bitcoin Miners Ban in China last year negatively affected the hash rate, which led to a drastic drop in the Bitcoin price. In 2022 alone, there have been numerous unforeseeable events that have negatively impacted the price of Bitcoin, beginning with the Invasion of Ukraine by Russia, and other occurrences such as the UST collapse with led to a total wipe-out of over $40 billion dollars from the cryptocurrency market, with an accompanied contagion risk.

To further buttress this downside of the Stock-to-Flow (S2F) model, Vitalik Buterin, the founder of Ethereum asserts that “Stock-to-flow is really not looking good now”, and further explains that “Financial models that give people a false sense of certainty and predestination that number will go up are harmful and deserve all the mockery they get”.

Even Plan B himself finally acknowledged the fact that Prediction is hard, and further alluded that Predicting financial markets is impossible.

https://twitter.com/100trillionUSD/status/1539234751990603779/photo/1

Although there are indicators such as the Chaikin Money Flow (CMF), MVRV Z-Score and Gaussian Channel Indicator (GCI) which all comprise of various parameters for analysing the present fair-value or future prices of Bitcoin (BTC) and other cryptocurrencies.

However, as a volatile market with so many uncertainties and black swan events, it is impossible to completely rely on these models as reliable indicators of the price action of Bitcoin (BTC) or other cryptocurrencies.

Unlike the Traditional Finance (TradFi) ecosystem which is inherently centralized in nature, Defi is uniquely composable, permissionless, and transparent. Therefore, through Defi permissionless decentralized networks replace expensive centralized databases, whereas algorithmic codes replace fixed interest rates; and finally transparent tamper-proof smart contracts agreements replace the opaque procedures that characterize much of traditional banking.

The Total Value Locked (TVL) across Decentralized Finance (DeFi) blockchains has grown from less than $1 billion in April 2020 to a peak of over $250 billion in November 2021.

Nevertheless, this amount has significantly dropped as a result of the recent market downturn, the Terra Luna crash and other contagion risks that have negatively affected the crypto market.

Decentralized Applications (DApps) and their Importance

Decentralized Applications (DApps), are described as open-source applications that operate autonomously with their backend code (smart contract) running on a publicly accessible decentralized blockchain. Thereby allowing all network participants to keep track of the happenings within the application. This implies that, unlike traditional applications whose data are typically hosted on a centralized server, which consequently means that there is a single point of failure, thereby making the data susceptible to attacks. In the case of decentralized applications, the front-end remains similar to that of traditional applications, whereas the backend is typically a decentralized blockchain network such as Ethereum or Bitcoin having distributed censorship-resistant nodes. Therefore, it is extremely difficult to completely bring down a DApp as it would require a hacker to infiltrate all the distributed hosting nodes within the blockchain network since there is no central point of attack, as in the case of traditional (Web2) applications.

Financial DApps primarily rely on smart contracts to execute the transactions between multiple parties without the need to rely on an intermediary such as settlement networks or financial clearinghouses that mostly charge huge fees and can also be compromised. Therefore, the rule of operations of decentralized applications cannot be altered or modified by any single authority or institution. This is because smart contracts completely replace the intermediary role of centralized financial institutions simply with self-executing lines of code built into a blockchain. Thereby, implying that all finance dApps are censorship-resistant, inherently permissionless and free of any interference or control from a single entity.

As a result, users of financial dApps tend to enjoy substantial benefits, some of which include safeguarding of privacy and confidentiality, since there are no intermediaries within the financial value chain. In addition, developers enjoy flexibility because the codes are open source, and can be utilized or even forked.

It is also important to note that Financial-based dApps typically have cryptographic tokens used to reward network contributors such as liquidity providers. Additionally, there must be a clearly defined consensus mechanism for the token generation.

As time goes, it is predicted that most decentralized applications (dApps) might eventually outpace centralized applications in terms of network valuation, adoption rate, and utility. This is primarily as a result of the structural flexibility, transparency, superior incentivization and distributed nature of these applications.

APPLICATIONS OF FINANCIAL DAPPS

In terms of applicability, financial dApps tend to provide different user groups with a vast array of functionalities which ranges from decentralized exchanges, derivatives trading, as well as savings, lending and borrowing functions.

Decentralized Exchanges (DEXs)

These are autonomous decentralized applications that serves as a peer-to-peer (p2p) marketplace where cryptocurrency traders can make direct transactions without the need for a central intermediary. The daily trading volume across the major Decentralized Exchanges (DeXes) runs in billions of dollars even despite massive capital wipeout and general market downturns experienced since the beginning of 2022. This further signifies the increased confidence of market participants to freely exchange value with others directly through decentralized mediums with no central intermediaries or counterparties.

This type of infrastructure is entirely different from centralized exchanges, since DeXs are non-custodial solutions that enables cryptocurrency buyers and sellers make transactions without having to give control of their funds or wallet’s private keys to a centralized custodian. Hence, all transactions on decentralized exchanges are facilitated through the execution of smart contracts. Using DEXs such as Uniswap and SushiSwap does not require the typical Know Your Customer (KYC) procedure. The diagram below shows an overview of the DEX Daily number of transactions by DApp.

Although, there are certain Terms and Conditions (T&C) that needs to be met, one of which is that the user’s wallet must be compatible with the smart contract on the DEX network. Decentralized exchanges enable permissionless access to various financial services such as token swaps, yield farming, liquidity provision, and staking. Typically, DEX has their native token which is used to pay for transaction fees and also gain governance rights to influence changes over the protocol.

Synthetic Asset and Derivatives Trading

The evolution of Defi has facilitated the emergence of innovative financial products, and one of these innovations is the concept of synthetic assets. Synthetic assets derive their value from real-life financial assets such as stocks, commodities, and other underlying digital assets. DApps such as Synthetix which is hosted on the Ethereum blockchain, enable users to create synthetic assets and track their real-world value even without actual ownership over the assets themselves. Therefore, users all over the world can gain exposure to US equities, stocks, gold and other tokenized financial assets without ever having to own the actual asset which they represent.

A derivative, on the other hand, can simply be described as a mutual contract between multiple parties which is fundamentally based on the value of an underlying financial asset. DApps such as DyDx provides derivatives trading functions through which traders can speculate on the future price movements of different cryptocurrency assets, in hopes of making profits even without having to acquire the asset itself. Corporate businesses and traders also use derivatives for hedging purposes, in a bid to mitigate risks against another position which they have taken in the market.

Lending and Borrowing

The democratization of financial services through dApps has enabled frictionless economic activities such as borrowing and lending in the crypto space.

DApps such as Aave are non-custodial liquidity market platforms that facilitate the offering of crypto loans through which users can participate as depositors or borrowers in an open, transparent, and trustless manner. These DeFi lending and borrowing services allows depositors to provide liquidity or loan their crypto assets to accrue interest. Similarly, users could also borrow by simply using their deposited assets as collateral while enjoying the trustless benefits that the underlying blockchain provides.

The Aave protocol has a Total Value Locked (TVL) of around $5 billion, which is primarily spread across the Ethereum, Polygon and Avalanche blockchain, just as represented in the diagram below.

The lending and borrowing services provided by various DApps have helped in decentralizing access to essential financial services in an unbiased manner. Similarly, other DApps such as Sturdy finance are DeFi lending protocols for interest-free borrowing and high yield lending, whereby the staking rewards are uniquely used to pay interest to depositors.

Limitations of Decentralized Applications

Although finance DApps represents a formidable alternative to traditional financial services, however, the evolution of these DApps is in its very early stages. As a result, there are still some core limitations associated with these applications.

Some of the main technological drawbacks associated with decentralized applications are mainly rooted in the existing limitations of the underlying blockchain. As established, most financial DApps are powered by blockchains such as Ethereum which is presently the leading blockchain-based DApp platform, and this blockchain still has some substantial scalability issues specifically in terms of network congestion, and limited speed. This consequently metamorphoses into high network fees, slow transaction pace or completely failed transactions in financial dApps. Thereby affecting the overall performance and productivity of these applications.

The final limitation relating to Decentralized Applications involves the regulatory risks. The anonymity of peer-to-peer transactions, and lack of intermediaries on decentralized exchanges coupled with the global reach of DeFi, present amplified compliance risks for all actors within this space. DeFi is still in its infancy, therefore, in the absence of clear regulatory guidance, financial DApps face vast compliance issues due to unclear regulatory obligations.

Presently, the United States Securities and Exchange Commission (SEC) is investigating Uniswap Labs, the main developers of the Uniswap DeX. The enforcement attorneys associated with the Uniswap investigation are seeking more clarity on investors’ use of UniSwap, and this could implicate a host of considerations, ranging from consumer protection to anti-money-laundering enforcement and potential federal securities law violations.

What are Decentralized Autonomous Organizations (DAOs)?

A Decentralized Autonomous Organization (DAO) is described as a community-based entity with no central authority, as decisions are typically made from the bottom-up. The rules of a DAO, including the community protocols and incentive structures, are coded as smart contracts and deployed on a blockchain. Once deployed, these rules are autonomously executed in a consistent manner and cannot be changed except through a collectively agreed consensus approach. After the smart-contract creation, the DAO then determines a way to receive funding and enact governance. In most cases, tokens are sold to raise funds. Typically, to gain membership and voting rights in a DAO, an individual needs to own the governance tokens that are tied to the project. DAOs can take different forms, structures, governance, and rules depending on the community objectives and goals.

In general, projects can implement their DAO structures through three basic procedures which are: smart contract creation, funding and deployment. The projects and tools for these functions are analyzed below.

DAO Projects and Tools

Aragon

Aragon is a decentralized application (dApp) on the Ethereum blockchain comprising of a suite of tools and services that enables the formation and management of decentralized communities such as DAOs. Blockchain projects and other types of organizations can use Aragon to form governance structures, fundraise, manage community finances, resolve disputes, and reward contributors. Aragon essentially provides broadly applicable templates for projects to define the boundaries and protocols for their communities. This is in addition to other financial management tools that enables tokenization and incentivization structures for community participants in a decentralized manner.

The basic prerequisite for using Aragon to create a DAO are:

1. A web 3 compatible browser and an Ethereum wallet such as Metamask, or an Ethereum compatible hardware wallets such as Trezor or Ledger with a minimum balance of 0.2 ETH. This is to facilitate the payment of gas fees when deploying a DAO or making transactions within the organization. Also, Aragon provides an option for projects to deploy thier DAO on Polygon or Harmony so as to reduce the fees associated with DAO deployment, management and voting.

2. Alternatively, using Aragon services on its testnet is possible through the Rinkeby Test Network. Although test-ETH is still required in the Rinkeby test network to pay for gas fees when deploying a DAO or making transactions within the organization.

3. An Ethereum Name Service domain. Aragon uses Ethereum Name Service to assign names to DAO.

Aragon suite of products and full-stack community solution frameworks includes the: Aragon Client and Govern (for DAO deployment), Aragon Voice (for community management), and the Aragon Court (for dispute resolution).

Aragon Client (V1): This is Aragon’s core application used by projects for creating and deploying a DAO. The AragonOS is the main Operating System (OS) that runs the DAO, alongside smart contract enforcements which ensures that only authorized accounts (members) or programs have permission to perform specific actions within an organization, based on the requirements of the project. This application comes with pre-installed templates to enable projects seamlessly set-up DAO membership conditions, token allocations and voting mechanisms. In addition, it further gives organizations the flexibility to integrate plugins or apps such as multi-sig wallets that could expand existing Aragon functionality for DAO management.

The token application feature of the Aragon client service enables projects to manage membership and voting power in an organization. Hence, adding new members to a DAO simply entails minting and assigning a token to them. On the default organization template, one token equals one vote. The token application further shows associated token information such as the token supply, current list of token holders, balance of organization token held and other distribution options.

Aragon Govern (V2): This is basically an enhancement of the existing features of the Aragon Client (and is presently in its beta state). The Aragon Govern DAO framework fundamentally relies on optimistic governance, thereby empowering projects to operate a frictionless governance model with on-chain execution*. *By default, this DAO framework does not require the community to vote on every single proposal, rather the DAO operates by continuously executing actions unless these are challenged. Projects can seamlessly create a DAO on the Aragon Govern platform by simply specifying all the DAO identifiers such as the name, associated tokens, membership criteria, proxies, and other configuration details.

An Aragon Govern DAO works with the principle that community participants will respect the DAO agreement and act in the best interest of the respective community. However, to prevent bad actors from executing non-confirmatory actions, all transactions come with a cool-off period, allowing all community members to review it before it can be executed. During this period, the community can challenge any proposal or transaction. Thereby, ensuring an extra layer of security. Challenged actions are all resolved by Aragon Court, a subjective dispute resolution system.

Aragon Voice: This is a gasless voting and verification service for DAOs. Proposals are processed on Aragon’s layer 2 protocol known as Vochain, and the vote metadata is stored on an InterPlanetary File System (IPFS). This, therefore, facilitates decentralized, permissionless, and scalable governance solutions for DAOs that make use of ERC-20 tokens (although more token types would be included eventually). Aragon Voice can also be used for permissionless signalling, deterministic on-chain execution, as well as dispute resolution when combined with Aragon Govern and Aragon Court services.

Aragon Court: Aragon Court is the core components of the Aragon OpenStack that enables dispute resolution within a DAO, particularly for subjective disputes that cannot be solved by smart contracts. This is achieved by having a set of guardians (judges) drafted for each dispute indicating who will vote to guarantee a certain ruling. The Aragon court guardians are drafted by activating the ANT tokens in Aragon Court’s smart contract. Hence, the more tokens a guardian has activated, the higher the probability of getting drafted.

However, unlike traditional courts, Aragon Court guardians are not asked to rule impartially on disputes, but rather,* *are asked to rule the way they expect the majority of other guardians to rule. Every time a guardian is drafted for a dispute, a portion of their tokens is activated and locked until the dispute is finalized. To incentivize consensus, guardians who do not vote in favour of the final ruling have their locked tokens slashed. Whereas the guardians who vote in favour of the final ruling are rewarded with dispute fees and tokens from the guardians who voted for a minority ruling.

Finally, Aragon further allows projects to hire an internal Aragon Expert that will tailor a DAO to best fit their community needs.

ANT TOKEN

The ANT token, an ERC-Token, is Aragon’s native cryptocurrency, that grants holders the ability to vote on key decisions about the project’s future. Also, the ANT token is the main coordination mechanism of the Aragon network DAO (anDOA). Therefore, ANT token holders can make proposals, vote, and participate in dispute resolution within the Aragon network DAO. In 2017, an initial coin offering (ICO) was held, raising 275,000 ETH by selling ANT coins.

SNAPSHOT

Snapshot is an off-chain multi-governance application that enables clients such as DAO to create proposals through which community members can vote on them, without incurring any gas fees since all processes are performed off-chain. In this case, the votes are simply signed messages that are verifiable online. This application is open-source, and it offers clients multiple voting systems such as (single choice, quadratic voting, and approval voting depending on the project requirements). In addition, Snapshot also enables flexible voting options (such as the choice to vote with NFTs, ERC20s, and other contracts).* *Before creating a proposal, the project must first create a space on Snapshot.

The main prerequisite for creating a DAO space on snapshot is:

1. An Ethereum Name Service (ENS) domain, and

2. Snapshot compatible blockchain wallet such as MetaMask, Portis, Fortmatic, or Argent.

Afterwards, to create a project space on snapshot, a client can simply link their ENS Domain to Snapshot by modifying the snapshot URL with their ENS domain name, and then login with the wallet that owns the ENS domain .

The Spaces profile settings on snapshot gives clients the flexibility to customize their project spaces with the appropriate branding choices including custom color schemes, avatar, proposal description, terms, and thresholds in line with the community needs. A Proposal threshold is the minimum number of tokens required to create a proposal. Snapshot offers a proposal validation function to validate if someone can post a proposal or not.

PROPOSAL CREATION AND VOTING TYPES

A DAO can simply publish a proposal within their project space on snapshot by first connecting with their wallet provider, and then selecting “New Proposal” after which all necessary details about the proposal title, summary, duration, snapshot block number and voting type would be filled. Snapshot also enables clients to integrate the plugins of other DAO management tools such as Aragon, Gnosis, SafeSnap, and Quorum in order to add more features to their DAO Proposals.

Depending on the Voting type, the voting power for each vote by voter can be distributed across multiple choices they may make.

Some of the main voting types includes:

1. Single Choice Voting: In this case, every voter may select a single choice within the community proposal to allocate their entire voting power to.

2. Approval Voting: Each voter may approve any number of choices on proposals. Each selected choice will receive equal voting power.

3. Quadratic Voting: Every voter within a DAO can spread their voting rights across multiple choices, and the results are then calculated quadratically.

4. Ranked Choice Voting: Each voter may rank any number of choices. Votes are initially counted for each voter’s top choice.

5. Weighted Voting: This voting method was initially introduced by the float protocol, and just like the quadratic voting, it enables voters to spread voting power across a number of choices.

OVERVIEW OF PROPOSAL VOTING STRATEGIES ON SNAPSHOT

A strategy is a JavaScript function that defines how the voting power is calculated. Strategies are being used on Snapshot to calculate the result for a proposal. A project would need to select a specific voting strategy for their proposals.

Typically, snapshot proposal votes are measured by the amount of voting power held by the community member. Only the community members that hold relevant amounts of tokens at the time of the creation of the Snapshot block number would be able to vote on the proposal.

The default strategy is to calculate the balance of ERC20 tokens for each voter in which (1 token = 1 vote).

A proposal can have multiple strategies for voting, and snapshot also enables projects to customize their voting strategies as well, depending on the community needs. Other options available to community projects are:

- NFT voting with an ERC-721 or ERC-1155 based strategies.

- Only allow certain members to vote using whitelist strategy.

- Delegate voting power using a delegation strategy.

- Weighting voting power using a quadratic strategy

Importantly, snapshot enables community-based projects such as DAOs to combine the different strategies above for a single proposal.

MULTI-SIG WALLETS

Multisignature (Multi-sig) wallets, as the name suggests, are cryptocurrency wallets that requires two or more private keys to sign-in and make transactions. This implies that the storage and security mechanisms of multi-sig wallets requires multiple cryptographic signatures to access the wallet. Multi-sig wallets offer a built-in mechanism for investment groups or communities-based entities such as Decentralized Autonomous Organizations (DAOs) to diminish the dependance on a single person in terms of funds management. In this case, the co-signatories to a shared multi-sig wallet also referred to as “co-payers”, are collectively determined by the group. Multi-sig wallets also overcome the security risks associated with mono-sig (single-key) wallets, by increasing the number of failure-points that hackers encounter. In addition to this, most multi-sig wallets offer additional features such as oversight of funds and transactions of the wallets. This therefore makes it ideal for DAO and other community-based entities in a bid to enhance transparency and accountability of funds.

How Multi-sig Wallets Works

The underlying mechanism behind a multisig wallet works similarly to bank vaults, in the sense that more than one key is required to open the vault. Presently, there are numerous multi-sig wallet options available for DAOs and other community-based entities, some of which includes Gnosis Safe (which can be integrated with Aragon Client) and BitPay amongst others.

A project must first decide on the type of multi-sig wallets to adopt depending on the community requirements and security preferences. Typically, projects can choose the number of signatories allowed to open a multi-sig wallet, as well as the minimum number of keys needed to unlock the wallet.

For instance

- A [2–3] multi-sig wallet is one that is shared by three co-payers and requires at least two signatures from the three co-payers in order to sign-in and make transactions.

- Whereas a [3–3] wallet is a multi-sig wallet is shared by three co-payers and requires all three signatures to access the wallet and make transactions.

By default, there is no co-payer hierarchy as it relates to the operational mechanism of multi-sig wallets. This therefore implies that any co-payer can create a transaction proposal, and all the co-payers can choose to either agree or reject the transaction proposal.

Recovery

Multi-signature wallets assign a unique recovery phrase to each of the wallet co-payers. To recover a multi-sig wallet, the number of recovery phrases needed is equal to the number of signatures required to access the wallet.

Therefore, on multi-sig wallets where the number of co-payers is equal to the number of signatures required to access the wallet, for instance [2–2, 3–3] wallets, if a co-payers recovery phrase gets lost, it implies that there may no longer be enough co-payers to sign transactions.

The document presents a list of other complementary tools for DAO creation and management.

DAO Limitations and Solutions

DAOs are still subject to some limitations, of which one of the most significant is the regulatory uncertainty. However, part of the undeniable trait of the blockchain industry, is that it is constantly pushing the boundaries of defining what is valid and acceptable in the society. To this effect, some governments have begun to give DAOs legitimacy within their respective jurisdictions. An example of this is the State of Wyoming, which recently passed the DAO Bill in 2021, legally recognizing Decentralized Autonomous Organizations (DAOs), and giving them the same legal rights as Limited Liability Companies (LLC).

In general, a DAO can serve as an avenue for projects to kickstart new initiatives, or for existing projects to coordinate around jointly developed value in a permissionless, transparent, and borderless manner. Members of a DAO are also incentivized to be committed because they benefit directly when the DAO’s goals are achieved. However, another limitation in this case, is that many of the self-described DAOs in existence are neither decentralized, nor autonomous, as most still suffer from enormous centralization-related issues such as generous token allocations to core team members and early investors, as well as minimal community-wide participation in the DAO proposal votes. Thereby minimizing the level of community involvement and network effects to warrant the use of the word “decentralized”. This further goes to show that decentralization, can easily be described, yet very lofty to achieve in practical terms.

Notwithstanding, certain centralized links such as domain ownership are sometimes inevitable, the use of the right legal entity structure along with an efficient DAO governance model that incentivizes community participation, in the long run, is seen as the holy grail for various crypto projects. As a result, the Blockchain Advisory Solution (BCAS) has duly recognized the need to assist projects towards decentralizing itself, to the extent that respective projects can be run autonomously, with enormous community involvement and equitable incentivization structures that would increase network effects.

Therefore, the decentralization and legal risk audit service offered by BCAS, fundamentally involves a comprehensive audit on the level of decentralization attained by the project in question, as well as highlighting any incumbent legal risks, both vis-à-vis any legal structure in place, as well as any potential liability attaching to relevant team members. In addition, practical recommendations and on-hand implementation assistance would be provided (as an added service offering). This consequently enhances the level of transparency, accountability and inclusiveness relating to the respective project(s). Thereby maximizing the trust and engagement of community members, while minimizing associated legal risks.

These issues, have therefore, necessitated the need for a distributed and scalable web architecture. The Interplanetary File System (IPFS) fundamentally attempts to address the present deficiencies of the HTTP, through a novel peer-to-peer (p2p) file sharing model that is more scalable, and efficient. This implies that IPFS is a highly ambitious project, with profound potential impact on the future state of the internet. Hence, this research examines the main components, features, and operational mechanism of the IPFS. The real-world applications, use-cases and legal implications would also be discussed extensively.

IPFS

IPFS is an open-source, distributed, peer-to-peer (p2p) hypermedia protocol for accessing, storing and sharing data, files, websites, and applications. The fundamental ideology behind the IPFS centres around transforming the way in which networks of people and computers communicate. Today’s World Wide Web and HTTP model is structured on centralized ownership and access, meaning that clients only get files from whoever owns/hosts them, (if they are granted access). However, the IPFS is based on the principle of collective possession and participation, where many users (peers), possess each other’s files and collaboratively participate in making them readily available and accessible to others.

Figure 1 — HTTP vs IPFS Architecture

The diagram above illustrates that the IPFS does not rely on centralized servers, as in the case of the HTTP model, but rather a client (peer) computer can be used to host and distribute web files, data, and contents. This, therefore, creates a decentralized architecture that makes it difficult to censor contents since the data, files, or webpages on IPFS can come from several points or locations. Thereby creating a more robust, resilient, and interconnected internet structure.

Some of the main features and properties that define the Interplanetary file system are outlined in the table below:

How the IPFS works

IPFS fundamentally works based on three (3) core components, which are:

1. Unique identification via content addressing

2. Content discovery via Distributed Hash Tables (DHTs)

3. Content linking with Directed Acyclic Graphs (DAGs)

Content addressing

Instead of the location-based system used by the HTTP, which involves the use of URLs and Domain Name Servers (DNS) to route web client’s requests to the servers hosting the file. The IPFS, in this case, uses content-addressing, in which every file or content is given a unique Content Identifier (CID) which is a cryptographic hash. The use of these unique content identifiers ensures that duplicates are automatically removed across the network and version history is tracked for every file. This leads to an immutable, persistently available file system where web pages or data do not disappear because of a failed server or webhost. This is mainly possible because IPFS stores the object history for all files, so that all versions are accessible throughout time. Thereby, enabling configurable synchronisation of all data, files, or websites, which implies that websites would no longer be vulnerable to cyclical “404” error messages, due to downed servers or interrupted chain of HTTP links.

The contents of an IPFS object are primarily stored in two fields which are:

i. The data field, which is an unstructured binary data block of size of 256 KB.

ii. An array of links to other IPFS objects under the same directory which are used to increase the network efficiency.

In addition, an Interplanetary Linked Data (IPLD) system is used to translate between different hash-linked data structures. Thereby, enabling the unification and interoperability of all data, files, and contents across distributed systems within the IPFS protocol. The IPLD further provides libraries for combining pluggable modules to resolve a path, selector, or query across many linked nodes, therefore allowing users to explore data regardless of the underlying protocol.

Content Discovery via Distributed Hash Table (DHT)

A hash table is generally described as a data structure that stores information as key/value pairs. The IPFS protocol uses distributed hash tables as the fundamental component for content routing to find the specific peers that are hosting the contents that a client has requested. Using distributed hash tables, data is spread across a network of computers to enable efficient access and lookup between nodes. Therefore, DHT enables decentralization and fault-tolerance since nodes do not require central coordination, which implies that the IPFS protocol can function reliably even when nodes fail or leave the network. Also, DHTs can scale to accommodate millions of nodes. This consequently result in a system that is more resilient than client-server structures.

Content Linking with Directed Acyclic Graphs (DAGs)

The IPFS protocol uses the Merkle Directed Acyclic Graphs (DAGs), which is simply a blend of a Merkle Tree and a Directed Acyclic Graph (DAG) which ensures that data blocks exchanged on p2p networks are accurate and harmonized. This verification is done by unifying all data blocks using cryptographic hash functions. Also, the use of a Merkle DAG structure enables the creation of a Version Control System (VCS), through which the IPFS stores the object history of files in a synchronized manner. A common example of this is Github, which allows developers to simultaneously collaborate on projects. Files on Github are stored and versioned using a Merkle DAG, thereby enabling other developers to independently edit versions of a file, store these versions and later merge edits with the original file.

The version control system in IPFS is further enhanced by the Interplanetary Naming System (IPNS), which enables content linking, so that files can be accessed using the node ID address, allowing users to retrieve updated contents even without knowing the new hashes of such files. This further highlights another key characteristic of IPFS that it is a Self-Certifying File System which means that data served to clients is authenticated by their own filename and the node providing it.

Applications of IPFS

Despite being a fairly new technology, the applications and use cases of the Interplanetary File System [IPFS] are presently being exploited in a myriad of contexts. It is, however, important to specifically highlight the symbiotic relationship between IPFS and the blockchain technology (being a distributed and interlinked immutable ledger). The combination of both technologies enhances their applications in diverse scenarios, which includes enabling off-chain storage and anonymous file sharing in a distributed manner using timestamps. This means that blockchain projects do not need to store their data or files on-chain. Thereby reducing blockchain bloating, because IPFS provides a convenient and secure off-chain solution that can enable blockchains scale.

Although, other distributed file systems such as BitTorrent can coordinate the transfer of data between several nodes or peers, however it is mainly restricted to the torrent ecosystem. In contrast, the IPFS implements a generalised version of this protocol called BitSwap, which enables further possibilities for built-in storage platforms like Filecoin. For this reason, Filecoin, a distributed storage network, is based on IPFS, where node operators are incentivized to host files and gain cryptocurrency rewards. Similarly, Audius, which is a decentralized music service, uses the IPFS for hosting its audio files. Another notable example that highlights the practical application of the IPFS, can be seen in the case of Pinata, which is an NFT hosting service that uses IPFS to back up crypto collectibles for partners like Rarible and Sorare.

Finally, browsers such as Brave and Opera presently provide native support for IPFS browsing. In this case, the Brave browser, gives users an option to access IPFS content through a public gateway or their own local node. This, thereby, provides a gateway for the increased adoption of IPFS.

Crabada is an ocean-inspired play-to-earn (P2E) blockchain game built on the Avalanche chain. Players collect Crab-NFTs (called Crabadas), which can be used to earn rewards through various gameplay mechanics. Although Play-to-Earn (P2E) games are commonly dubbed as glorified yield-farming, Crabada has managed to build a robust and sustainable in-game economy which allows players to utilize their in-game digital assets within playable games and the token rewards that can be earned also serves as a real source of income to players around the world.

Despite being launched in November of 2021, Crabada is presently responsible for over 30% of Avalanche’s daily transactions, bypassing most of the Defi Dapps and other existing applications on the network. From inception, Crabada had a fair launch through its Initial Desk Offering (IDO) on Avalaunch which involved the participation of numerous gaming enthusiasts that then formed the Crab community.

The main initiatives that have been implemented in order to enable inclusive community engagement and consequently facilitate the success of this project includes the Idle Gameplay Design, Community incentivization and economic rewards, and the attractive tokenomics design.

Community Incentivization structure

Part of the strategies which Crabada has initiated to enable effective community engagement is through the incentivization of its users (players) and community members. There are presently four (4) in-game methods of earning rewards using Crabada. These methods include:

· Mining,

· Looting,

· Battling,

. Breeding.

In this P2E game, players are able to create teams of 3 Crabadas to engage in either Mining or Looting. Each wallet can only have 3 teams at a time. The in-game characters (referred to as crabs) are divided into distinctive sorts with separate functions, powers, and characteristics. Therefore, part of the community incentive of this project is that Crabada groups can participate in different P2E game actions such as mining tokens (comparable to farming), renting tokens from opponents, breeding to generate new sorts of crabs, and participating in in-game battles to obtain in-game token rewards which include $ CRA and $ TUS.

Gameplay Mechanics

The main aspect that sets Crabada apart from other P2E games and has enhanced its community success balls down to its idle gameplay mechanics. This means that the act of looting and mining crabs is hands-free and does not need players to actively make every move in order to gain the in-game rewards. For instance, a Crab Egg has a 5-day hatching period, and offspring crabs have a 50% chance of inheriting either parent’s class. This means that the structural design element of this game fundamentally benefits community members that might not be hands-on to actively play the game constantly.

In compliance with the project roadmap, the project team in the first quarter (Q1) of 2022, further released more ways to earn such as the Player versus Player (PvP) battling and the Player versus Environment (PvE) battle modes. Thereby enhancing community engagement and user interactivity through these additional use cases that are not just digitally interactive, but also provide economic rewards.

Tokenomics

There are three main tokens in the Crabada ecosystem, and these are- $CRA, $TUS, and the $CRAM token.

$CRA is the governance token, that enables community members to contribute to key governance decisions regarding the project, thereby enhancing community inclusivity. Prior to launch, $CRA could be obtained through a Community Bootstrapping Event.

$TUS is the in-game currency, earned via gameplay and lending Crabs via the Tavern. Both $CRA and $TUS can be easily swapped via Trader Joe.

$CRAM is the final asset and is awarded once a week to $CRA stakers. These are amulets that can be used for in-game perks and exclusive rewards.

Social Interactivity

Finally, asides from the Crabada gameplay mechanics, technical design and tokenomics which have helped in enhancing the community strength, the project team is aware that all technical aspects of a blockchain can be replicated. However, social capital and community can never be forked, as the crab community remains the greatest asset to the project. To this effect, the Crabada project leverages various techniques such as storytelling through its articles and constant community support for both novice and experienced gamers on the project’s social media platforms in a bid to build relationships, and connect with members of the community. Furthermore, there also exists the Crabada Ambassadorship program that rewards active players and community members within the network through the concept of mentorship and guidance.

Finally, the Crabada project is also pioneering a Subnet-centric, P2E business model with proper latency and scalability appeals to fully capitalize on the categorical success of crypto gaming. Subnets satisfy the complex demands of P2E game logic superiorly against Ethereum sidechains.

Key Links

Discord: https://discord.com/invite/Djy57Zhau9

Medium: https://medium.com/@PlayCrabada

Telegram: https://t.me/playcrabada

Twitter: https://twitter.com/playcrabada?s=11

Website: https://www.crabada.com/

The Markets in Crypto-Asset (MICA) proposed draft regulation is part of the European Union (EU) digital finance strategy which was introduced in 2020, and covers a wide range of rules for stable-coin issuers, cryptocurrency exchanges and service providers. Generally, the MICA framework focuses on four cardinal objectives namely:

1. Having a unified legal framework for crypto assets.

2. Consumer protection against market manipulation and financial crimes.

3. Specification of guidelines for the issuance and utilization of “stable-coins.”

4. Containing crypto-assets mining within the EU taxonomy for sustainable activities.

Having a unified legal framework for crypto-assets

The MICA regulation intends to standardize the Distributed Ledger Technology (DLT) and virtual assets rules in the European Union, while reducing uncertainties and maintaining the European economy’s financial stability. Thereby, propelling the need to create a unified set of rules for the providers and issuers of “crypto-assets” within the country.

Firstly, the MiCA proposal defines crypto-assets as “a digital representation of rights or values that can be electronically exchanged and processed using distributed ledger technology or related technology.” Similarly, it defines a Crypto-Asset Service Provider (CASP) as any party responsible for providing crypto-asset services professionally for third parties.

Based on the MICA draft, providers of crypto-asset services (CASPs) will require prior authorization or license from the governments of the Member States. Also, CASPs will be subject to additional requirements relating to their capital needs, governance model and insurance coverage based on their size, services rendered and relevant risk.

Furthermore, issuers of asset-referenced tokens or e-money tokens must produce a white paper containing key information including a description of the functions and obligations attached to the crypto-assets, which would be submitted to the home member state regulator.

Once this regulation takes effect, MiCA will apply as a unified directive throughout all the European Union (EU) member countries and will provide a legal structure for crypto-assets and Crypto-asset Service Providers (CASPs).

Consumer protection against market manipulation and financial crimes

The MICA draft regulation addresses cryptocurrency exchanges (as ‘crypto-asset services’), and are tasked with maintaining transparency, consumer protection, and governance standards. Although the MICA draft makes cryptocurrency exchanges responsible for the loss of consumer assets because of cyber-attack, fraud, or negligence. However, it does not extend the compulsory insurance requirements. Also, “Consideration 8”, of the MiCA regulatory draft, specifically attempts to harmonize the proposed legislation with the existing Financial Action Task Force (FATF) recommendations on dealing with crypto crime and other Anti-Money Laundering (AML) regulations within the EU.

Furthermore, in a bid to enhance consumer protection against market manipulation, Consideration 64 of the MiCA draft highlights specific forms of cryptocurrency crimes, such as unlawful disclosure of inside information, insider trades, wash trading and market manipulation related to crypto-assets that could put other market participants at risk. As a result, the proposed MICA regulation stipulates that Virtual-Asset Service Providers (VASP) would be required to implement surveillance and enforcement mechanisms to deter potential market abuses, so as to protect users’ of crypto-asset and promote market integrity.

Specification of guidelines for the issuance and utilization of “stable-coins.”

A substantial portion of the MICA regulation was dedicated to “asset-referenced tokens” which are typically stablecoins that are designed to hold their value by being backed by other fiat currencies or other assets.

The proposed MiCA regulation lays out some standard requirements for both established and prospective stablecoin issuers. One of which is that all stablecoin issuers are required to own and maintain capital funds equivalent to at least 2% of their total reserve assets. In addition, the MICA framework also lays out further requirements for the significant (larger) issuers i.e. (any stablecoin issuer with a market capitalization of at least €1 billion, and records at least 500,000 transactions per day). In this case, the significant stablecoin issuers, do have additional requirements to fulfill under MiCA, including maintaining capital funds equivalent to 3% of their reserve assets.

Including crypto-assets mining within the EU taxonomy for sustainable activities

A provision of the proposed MICA regulation initially sought to prohibit crypto-based operations that rely on the Proof-of-Work (PoW) consensus mechanism which was regarded as “Environmentally Unsustainable”. The framework further asserts that energy-intensive crypto assets that are already in use in the EU will have to “set up and maintain a phased rollout plan to ensure compliance with the MICA requirements” before the legislation comes into effect. Another provision further requires white papers of PoW crypto assets to include an independent assessment of the network’s potential energy usage. This framework also asserts that “crypto-assets shall be subject to minimum environmental sustainability standards with respect to their consensus mechanism used for validating transactions, before being issued, offered or admitted to trading in the European Union.” This generated massive uproar across the cryptocurrency community, as it was considered a direct attack on bitcoin.

Although, based on a review of the proposed rule prohibiting proof-of-work assets, an exception was made for cryptocurrency mining operations conducted on a small scale, and in a manner that does not undermine the EU ability to reach its renewable energy goals. However, it is unclear how the regulators intend to distinguish between small and large-scale operations.

Progressively, upon further amendment of the MICA regulation, the provision regarding “environmental sustainability” aimed to limit the use of “proof of work” regarding the mining of cryptocurrencies in the context of mining, was voted out of the proposed regulation.

In conclusion, it is evident that the speedy development in both DLT as well as crypto-asset technologies, which contributed to the introduction of new infrastructures such as decentralized exchanges and financial paradigms such as decentralized finance (DeFI), has led to a greater global discourse. Therefore, the MiCA’s framework aims to put an end to all segregated national crypto-policies within the EU Member States, in favour of a single, holistic regulatory approach, which could allow EU crypto-asset service providers to function more efficiently across all EU markets, but under a unified regulatory framework.

This Article was written by Andrew Sawa a blockchain analyst and web 3 crypto content writer. Andrew is a first class graduate of Information Technology from Middlesex University, and has a Masters (with Distinction) in Information Management.

There are various mechanisms for achieving consensus within a blockchain network, some of which includes the: Proof-of-Work (PoW), Proof-of-Stake (PoS), Proof-of-History (PoH), Proof-of-Activity (PoA), Proof-of-Importance (PoI). However, this study would specifically focus on the comparative analysis of the two main blockchain consensus mechanisms which are the Proof-of-Work (PoW) and Proof-of-Stake (PoS).

POW

The Proof-of-work mechanism was initially introduced in 1993 as a way of preventing DDoS attacks and other security breaches and was later re-introduced in the Bitcoin whitepaper as a consensus mechanism for validating transactions and broadcasting new blocks on the blockchain.

Proof of Work (PoW) fundamentally involves solving complex cryptographic problems which resultantly leads to block rewards. To maintain network security, new blocks are validated by network members (miners) solving complex mathematical puzzles. These puzzles are difficult enough to prevent malicious behaviour, such as a miner attempting to validate a fraudulent transaction.

Consequently, each validated block contains a blockhash which represents the work that has been done by a miner, which is why this consensus mechanism is termed Proof-of-Work because miners provide proof for the work done which is then validated before proposing new blocks.

The diagram below provides a graphical illustration of the Poof-of-Work consensus mechanism.

POS

The Proof-of-Stake (PoS) consensus mechanism which is presently utilized by most of the Layer One (1) blockchains is commonly dubbed as an “efficient” alternative to the Proof-of-Work (PoW). However, the technical and structural ramifications of the Proof-of-Stake (PoS) significantly differ from that of the Proof-of-Work.

In the Proof-of-Stake (PoS) consensus mechanism, instead of investing in hardware (ASICS) infrastructures for mining, validators invest in the platform tokens of the underlying blockchain by locking up some of their coins as their stake in the network. For example, Ethereum would require at least 32 ETH to be staked before someone can become a validator. The rationale behind this is that participants with a financial stake in a network would act in a compliant manner and process blocks truthfully, so as to secure the network or risk losing their stake within the network.

A validator is pseudo-randomly chosen to generate a new block based on its economic stake in the network. Validators will verify (authenticate) blocks by placing a bet on them if they discover a block they think can be added to the chain. This way, all the validators get a reward proportionate to their bets and their stake increases accordingly.

The diagram below provides a graphical illustration of the processes involved in the Proof-of-Stake consensus mechanism.

The Proof-of-Stake consensus mechanism further has numerous varieties or variations such as the Delegated Proof of Stake (DPoS), Leased Proof of Stake (LPoS), Hybrid Proof of Stake (HPoS), Liquid Proof of Stake (LPoS) with each of these variations having its augmented solution to achieve a resource-efficient network governance model.

Having outlined the main processes and concepts behind the two main consensus mechanisms, the subsequent section provides a comparative analysis of both models based on the following criteria:

1. Efficiency/Sustainability

2. Degree of Decentralization

3. Security and Standards

Efficiency and Sustainability Comparison (PoW vs PoS)

It is evident, that the Proof-of-Work consensus mechanism involves the utilization of enormous computing power and energy consumption which has raised numerous debates in relation to its environmental sustainability. Numerous evidence suggests that the exertion of computational resources involved in the Proof-of-Work model is a feature, and not a bug because consensus requires some form of computation (work). This is why many Bitcoin advocates fault the Proof-of-Stake mechanism and likened it to being more of a governance model than a consensus mechanism

Therefore, the solutions towards solving most of the sustainability issues with the Proof-of-Work mining is through the use of renewable energy infrastructures in compliance with SDG-7 in a bid to enhance environmental sustainability as demanded by most governments and in regulations such as the Markets-In-Crypto-Act (MICA) intended to govern the use of digital assets within the European Union (EU).

However, other argument against the Proof-of-Work is that despite the proven fact that the cryptographic puzzles or calculations, involved with the PoW consensus mechanism tend to guarantee the security of the network, these calculations are not able to be utilized beyond that.

On the other hand, Proof of Stake network consensus requires no physical infrastructures, or complex computations and leaves no energy footprint that could be unsustainable to the environment. Even if the validating computer that is staking ETH is destroyed, the staked ETH can be recovered and redeployed using the associated private keys anywhere in the world. This, therefore, amplifies the efficiency and sustainability of the proof-of-stake model. In contrast, all the excessive capital requirements for maintaining the physical PoW network can be directly used to purchase the platform tokens which can then be staked by users in order to participate as network validators, thereby enhancing capital efficiency.

Security Analysis (PoW vs PoS)

The Proof-of-Work has proven to be a highly secure consensus mechanism over time because it makes the underlying network more difficult to hack owing to the fact that the network is constantly monitored by its participants. The network gets tougher per transaction, as the processes involved with solving the associated computational puzzles would require greater computing power. This consequently makes the entire network more secure and more expensive to attack (although the opportunity cost is increased energy consumption). In the Proof-of-Work model, a successful attack would require enormous computational power and time to perform the associated computations. Thereby making it inefficient in most cases, since the incurred cost of perpetrating an attack is typically greater than the potential reward gained in attacking the network.

Similarly, Proof-of-Stake is also secure as all validators engage in verifying transactions. Comparatively, the Proof of Stake (PoS) consensus mechanism is more vulnerable to hacks and security attacks by design. In theory, if a validator (or a group of network validators) gets to a point of owning 51% of staked coins, it implies that the network participant could essentially control the entire blockchain network and alter it, if there is a malicious intent. Thereby compromising the integrity of the network and its transactions. This “hypothetical” scenario is termed as a 51% attack, which might be feasible for smaller blockchain networks.

Degree of Decentralization

Decentralization is one of the most frequently used words in the blockchain space, although in most cases, actual decentralization is easy to define but extremely difficult to implement. As stated earlier, a decentralized system can be characterized by the level of node distribution within the system, preventing any entity from having a majority (>51%) stake in the consensus or governance of the network.

In this case, it is evident that as the Bitcoin network continues to grow, the requirements for participating in the Proof-of-Work consensus continue to increase in terms of expenses and complexities, which leads to the concentration of miners. This is because the control over a PoW chain balls down to the entity that controls ASIC production infrastructures and supply chain components. However, a counter-argument to this is that the Proof-of-Work consensus approach has served as an avenue for energy-rich, but economically poor third-world countries to participate the mining due to the abundance of renewable energy sources needed to power the mining operations. Thereby, leading to further decentralization of nodes within the network.

On the other hand, one of the arguments supporting the case that Proof of Stake leads to an increased level of decentralization is due to the absence of mining facility centralization, economies of scale centralization, and supply chain centralization. This is because the proof-of-stake model strips away any hardware requirements needed to act as a validator, so that general consumer devices are sufficient to verify transactions on the chain without the need for complex computations that lead to energy consumption. Therefore, reducing the economic cost of running a validator node to just the cost of capital (32 ETH). This consequently increases the total feasible number of possible validators within the blockchain network. In essence, minimizing the role of hardware or associated energy cost in network validation maximizes the level of accessibility of the chain and provides the possibility for the largest number of people to verify the chain.

Although the 32 ETH (currently ~$64,000) is still relatively expensive for a lot of retail participants, it is comparatively lower than the infrastructural requirements needed to power a proof-of-work mining operation. In addition, protocols like Lido or Rocketpool allow any amount of ETH to be pooled and delegated to a central repository. Thereby increasing the inclusivity of the consensus process even for users without the base 32 ETH requirements.

In conclusion, since the blockchain technology is a distributed ledger technology that offers immutability, transparency, and security of records, it implies that the mode of achieving consensus on the state of the network is of utmost importance to the overall functioning and state of the network, because there is no central authority for verifying or validating transactions.

As explained in this article, the choice of the consensus mechanism adopted by a blockchain has enormous technical, economic (monetary), social and even regulatory ramifications. That being said, both the proof-of-stake and the proof-of-work consensus mechanism are extremely important to their underlying networks, although efforts must be made in order to improve its efficiency (sustainability), security and level of accessibility to all network participants.

This Article was written by Andrew Sawa a blockchain analyst and crypto content writer. Andrew is a first-class graduate of Information Technology from Middlesex University, and has a Masters (with Distinction) in Information Management.