What is DeFiLlama?

DeFiLlama is the largest DeFi data aggregator at the moment. It provides up-to-date information about Level 1 and Level 2 networks in blockchains (L1 and L2). Users worldwide can get free information about TVL (Total Value Locked), APY and other DeFi stats. The majority of adapters or the code used to collect the stats for blockchain network and associated DeFi protocols and Dapps are contributed by the respective community and maintained through the DeFiLlama Github repository.

Here are some of the uses of DeFiLlama

Total Value Locked (TVL) Tracking: DeFiLlama offers real-time data on the total value locked in various DeFi protocols, allowing users to gauge the size and growth of specific projects.

Chain and Layer-2 Analysis: Beyond just individual protocols, DeFiLlama provides TVL data for different blockchains and Layer-2 solutions, helping users understand where capital is flowing in the broader ecosystem.

Category Breakdown: DeFiLlama categorizes protocols based on their primary function, such as lending, DEXes (decentralized exchanges), yield aggregators, and more. This helps users identify dominant projects in specific niches.

Yield Farming Insights: For yield farmers, DeFiLlama provides data on the top-yielding pools, helping them make informed decisions about where to allocate their assets.

Bridge Flow Analysis: DeFiLlama tracks the net flow of assets across different bridges, giving insights into cross-chain movements.

Revenue and Fee Analysis: The platform provides data on the revenue and fees earned by various protocols, offering a perspective on their profitability and usage.

Historical Data: Users can access historical TVL data for protocols, enabling them to analyze trends over time.

Rankings: DeFiLlama ranks protocols based on various metrics like TVL, percentage growth, and fees, allowing users to quickly identify top-performing projects.

Integration with Other Tools: DeFiLlama can be integrated with other platforms and tools through its API, making it a valuable resource for developers and researchers.

In summary, DeFiLlama is a one-stop-shop for anyone looking to understand the DeFi landscape, offering a wealth of data and analytics to guide investment and development decisions.

What is ChatGPT?

ChatGPT is an AI chatbot that uses large language models to respond to questions and compose various written content, including articles, social media posts, essays, code and emails.

With the new AI tools like ChatGPT, it is easy to collect data from DeFiLlama. You need a subscription plan to ChatGPT Plus and install DeFiLlama plugin to your chat stream.

Here are the steps to perform that:

You could get dashboard data with stats and download those to spreadsheets with a regular DeFiLlama interface, but no natural language-based search option exists. That’s where the ChatGPT AI plugins come in handy.

You could search “Which DeFi protocols are generating the most revenue right now?”. ChatGPT will generate and present all the data in an understandable, presentable format.

That’s how AI makes your life easy, just like how it makes it easy to generate content like these. Cheers! :)

Credits: This post has flavors of AI used in the making.

Roll up: to become more prominent by successive accumulations.

In recent years, even after the beginning of crypto winter, the Ethereum ecosystem has witnessed impressive growth in user adoption with DeFi, smart contracts, and NFTs. However, with this expansion comes the challenge of scalability, which means accommodating more transactions at faster rates and lower fees. One of the promising solutions that has emerged to tackle this issue is rollups. This post will delve into what rollups are, their types, and how they contribute to Ethereum’s scalability.

What are Rollups?

Any software-based system built to cater to real-world use cases, whether AI or blockchain, is based on a layered architecture. When it comes to the Ethereum ecosystem, it finally got a stable layer 1 network with the Ethereum 2.0 upgrade.

Rollups are a layer 2 scaling solution that allows for increased throughput on Ethereum without needing to change the Ethereum mainnet (layer 1) itself. The basic idea behind rollups is to aggregate multiple transactions into one transaction, thereby increasing the effective number of transactions the Ethereum network can process per second.

How Do Rollups Work?

The fundamental concept of rollups is to take computation and state storage off-chain and only submit the resultant data to the Ethereum mainnet. Here’s a simplified step-by-step process:

1. Transaction Submission: Users submit their transactions to a rollup smart contract on the Ethereum network.

2. Off-chain Aggregation: These transactions are then bundled together off-chain.

3. Proof Generation: A Proof of these aggregated transactions is generated.

4. On-chain Submission: This proof and some necessary data are submitted to the Ethereum mainnet.

Because only proofs and a minimal amount of data are stored on-chain, the Ethereum network can accommodate many more transactions than it could if each transaction was processed individually.

Types of Rollups:

There are primarily two types of rollups: Optimistic Rollups and zk-Rollups.

1. Optimistic Rollups: These rely on the premise that most transactions are honest (optimistic world). They allow for immediate transaction executions off-chain but can be challenged within a specific time frame if believed malicious. If a transaction is challenged and found to be fraudulent, the party responsible for posting it loses a bond they put up as collateral.

2. zk-Rollups: They leverage zero-knowledge proofs, particularly zk-SNARKs (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge), to validate transactions off-chain. Since zk-SNARKs can be validated quickly on-chain, the Ethereum network can be confident in the validity of these transactions without doing all the computation itself.

Benefits of Rollups:

1. Increased Throughput: Rollups significantly increase the number of transactions Ethereum can handle per second.

2. Reduced Fees: Since rollups allow more transactions to be bundled together, users can often pay lower transaction fees.

3. Enhanced Security: Rollups benefit from the security of the Ethereum mainnet since the final data is still stored on-chain.

The Future of Rollups and Ethereum:

Rollups are not just a temporary fix; they are envisioned as a critical component of Ethereum’s future scalability strategy. With Ethereum 2.0 active, combining the benefits of rollups with the capabilities of a Proof-of-Stake (PoS) consensus and shard chains will further amplify the scalability and efficiency of the network.

In conclusion, rollups are pivotal in Ethereum’s quest to become a more scalable and user-friendly blockchain. By leveraging off-chain computation without compromising security, rollups provide a promising path forward for Ethereum’s bustling ecosystem.

credits: This post has flavors of AI used in its making!

Centralized crypto exchanges like Coinbase, Kraken, in crypto, are no different from traditional stock trading platforms like Fidelity, Charles Schwab, Robinhood, etc. They all have to operate within the regulatory framework of the SEC. A centralized agency cannot regulate crypto tech. That’s one of the characteristics of the blockchain tech. It has to be self-regulated.

In the last crypto bull run, we found many centralized crypto businesses become very popular quickly. And then, when FTX — the mighty centralized crypto exchange collapsed, we found a chain reaction of several other crypto exchanges collapsing. The crypto market lost billions at the time, falling below the $1 trillion valuation. Most CEXs filed for bankruptcy, and many customers, including myself, lost their investments in these exchanges.

Decentralized exchanges(DEXs), on the other hand, offer several advantages over centralized exchanges (CEXs), contributing to their growing popularity. Here are some ways in which DEXs excel over CEXs:

User Control: DEXs provide users with greater control over their funds. Instead of depositing funds into a centralized platform, users retain control of their private keys and trade directly from their wallets. This eliminates the need to trust a centralized entity with custody of its assets, reducing the risk of hacks, theft, or loss due to exchange malpractice.

Security: DEXs are generally considered more secure than CEXs. As transactions occur on the blockchain, users’ funds are not held in a single central wallet vulnerable to hacks. DEXs leverage the security features of the underlying blockchain, such as encryption and consensus mechanisms, making it more difficult for malicious actors to compromise the exchange or steal funds.

Privacy: DEXs prioritize user privacy. Since trades are executed directly between participants, users can maintain a higher level of privacy without the need for registration or identity verification. They don’t need to disclose personal information, reducing the risk of identity theft or data breaches. Most CEXs require customers to provide KYC details stored in their central database, which is more prone to identity theft.

Global Access: DEXs provide global access to anyone with an internet connection. There are no geographic restrictions, and users can participate in trading from anywhere in the world. This inclusivity allows users to tap into a larger pool of liquidity and engage in cross-border transactions without facing the limitations of traditional financial systems.

Transparency: DEXs offer transparent and auditable transactions. All trades and transactions occur on the blockchain, providing a publicly accessible ledger that anyone can verify. This transparency enhances trust among users, as they can independently verify the integrity of the trading platform.

No Central Point of Failure: DEXs eliminate the risk of a single point of failure. In centralized exchanges, if the platform experiences technical issues, suffers a cyber attack, or faces regulatory challenges, users may be unable to access their funds or execute trades. DEXs, on the other hand, distribute the trading process across multiple nodes, making it more resilient and less prone to disruptions.

Resistance to Regulation: DEXs are designed to resist regulatory interventions and censorship. Since they operate on a peer-to-peer basis without a central authority, it becomes challenging for regulators to shut them down or exert control over their trading activities. This aspect attracts users seeking a more censorship-resistant and autonomous financial ecosystem.

Few CEXs survived the FTX catastrophe, like Binance, Kraken, and Coinbase, but they are tangled in regulatory measures from SEC. The recent one is the SEC crackdown on retail Staking offerings by these CEXs.

CEXs in crypto will eventually die out, and there will be more self-regulated, censorship-resistant, and globally decentralized DEXs as crypto tech evolves.

Here is from my personal experience.

I have been doing DCA on Bitcoin & Ethereum on the BlockFi platform since 2019, as they offered good interest rates, and converting from fiat to crypto was very convenient. But after the BlockFi Chapter 11 Bankruptcy filing, my funds are blocked in the account awaiting legal confirmation.

On the other hand, I received 400 UNI tokens in my Uniswap wallet address in 2020 as part of the airdrop. At some point, they were worth $15k. I have used the funds to play around in DeFi and participated in Liquidity Pools. The best part is I can still see all the activities I have performed in the Uniswap wallet address from 2020 because they are all on the blockchain. All my funds are intact and easily accessible when I connect to the wallet address.

While DEXs offer numerous advantages, it’s important to note that they also have certain limitations. These include lower liquidity, slower transaction speeds, and the potential for front-running or other manipulation techniques. Nonetheless, DEXs continue to evolve and innovate, addressing these challenges to provide a more robust decentralized trading experience.

What is Staking?

Staking in blockchain refers to locking up a portion of a cryptocurrency for a chosen period to support the security and operation of a blockchain network. Staking is only possible on blockchains that run on the Proof-of-Stake (PoS) consensus mechanism, a specific method certain blockchains use to select honest participants and verify new blocks of data being added to the network. This is much faster, energy efficient, and scalable than the mining-based consensus mechanism used in Bitcoin. When a crypto investor stakes their holdings, the network can use them to create new blocks on the blockchain. The more crypto you’re staking, the better the odds your holdings will be selected.

Proof-of-Stake (PoS) is a blockchain consensus algorithm that uses validator nodes based on staked tokens. Validators are randomly selected to create new blocks and send them out to other nodes on the network. Time in PoS is divided into slots and epochs, and one validator is randomly selected to be a block proposer in every slot. Validators receive incentives for proposing new blocks and attesting other validators’ blocks. At the same time, they can lose a portion of the stake if they go offline and fail to validate or lose their entire stake if they attest to a malicious block or for deliberate collusion. PoS creates blocks by relying on validators, who are users who stake tokens.

Investors can earn newly minted crypto coins in the blockchain network as a reward for staking. Staking is similar to depositing money in a bank, where an investor locks up their assets and earns rewards or interest in exchange.

Liquid Staking is the next level in Staking on a PoS-based blockchain network.

Liquid staking is a Smart Contract based solution that enables users to stake directly on a proof of stake (PoS) network such as Ethereum and receive a liquid staking token (LST) or Liquid Staking Derivative (LSD) programmatically minted by the protocol when the user stakes. This LST or LSD provides access to liquidity while the user stakes.

The key difference between Staking and Liquid Staking is that Liquid Staking is more liquid.

In Liquid Staking, users can retain the liquidity of their tokens even though they are locked in the blockchain. The Liquidity Tokens (LSDs or LSTs) minted are usually on a 1:1 ratio of their original token staked. The Liquidity Tokens can generate more yield in other DeFi protocols. Some examples of Liquidity Tokens available on the Ethereum Mainnet are Lido’s stETH, RocketPool’s rETH, Stakewise’s SETH2, and Coinbase’s cbETH. Each LSD has its mechanism, pricing, and methods for generating secondary liquidity.

Access to Liquidity anytime is the main advantage of Liquid Staking. But there are drawbacks as well.

One of the side effects of Liquid Staking is Yield Commoditization which can lead to Centralization and Cartelization.

A common argument with yield commoditization by liquid staking is that big staking pools with huge capital and professional validators have an advantage over small retail stakers in executing proprietary MEV strategies. This will drive out competition from small retail stakers and lead to cartelization.

What is MEV in terms of Proof of Stake Protocols?

Maximal extractable value (MEV) refers to the maximum value that can be extracted from block production in excess of the standard block reward and gas fees by including, excluding, and changing the order of transactions in a block. MEV accrues entirely to validators because they are the only party that can guarantee the execution of a profitable MEV opportunity. But a large portion of MEV is extracted by independent network participants referred to as “searchers.” Searchers run complex algorithms on blockchain data to detect profitable MEV opportunities and have bots to automatically submit those profitable transactions to the network. ~ Ethereum Docs

But there is hope with roadmap protocol level changes planned on ETH2 to attain better security and decentralize yield commoditization, making Proof-of-Stake Consensus more resilient.

One of these is called Proposer-Builder Separation or PBS.

Present-day Ethereum validators create and broadcast blocks. PBS aims to separate block production from block validation by creating a new stakeholder called the block builder. The block builder is an entity that determines which transactions are included in a block. This means that validators merely need to choose the builder proposing the highest value block instead of ordering transactions. This will democratize access to sophisticated MEV strategies and promote fair competition between small and big staking pools.

Another one is Distributed validator technology or DVT.

Currently, each Ethereum Validator runs on a single node. By Distributed Validator Technology, a validator’s private key — used to sign on-chain operations like block proposals and attestations — can be split across several node operators. As a result, the duties and responsibilities of a validator can be distributed and shared across a cluster of node operators instead of a single node. This means multiple parties spread over different geographies can run a single Ethereum Validator. This will prevent a single point of failure on validator nodes and promote solo stakers. DVT will prevent bigger staking pools from turning malicious as the staking keys are spread across different machines and are difficult to collude.

#NewsOfTheWeek

COMP token price surged over 50% in the last seven days. One of the reasons that fueled this surge is Compound Finance founder Robert Leshner stepped down from the protocol to launch his own mutual fund to connect blockchains and traditional markets. Here is the #NewsOfTheWeek

But do you think Liquid Staking is an Infinite Money concept and hence not digestible with our understanding of a traditional financial asset? Reply with your comments. Cheers!

Staking is in crisis in the US after SEC started cracking down on retail staking on centralized exchanges in early 2023.

Staking in crypto is a process by which individuals lock up a portion of their cryptocurrency to support the security and operation of a blockchain network that uses the Proof of Stake Consensus mechanism.

Why is SEC cracking down on Staking? SEC is treating Staking in crypto the same as lending, and all these centralized exchanges offering Staking as a Service will fall under the same regulatory framework as securities involved in Stocks and Bonds. The crypto exchange Kraken agreed to pay $30 million to settle allegations that it broke the agency’s rules by offering a service that allowed investors to earn rewards by “staking” their coins.

SEC’s actions have benefited decentralized Staking platforms in DeFi, like Lido, in getting more customers who have quit Staking on centralized exchanges. Even though there are uncertainties with Staking in the US, the DeFi protocols run by smart contracts are hard to target with the regulatory framework of the SEC.

But Ethereum Staking is in a deeper inherent crisis that can make it more centralized and vulnerable to blockchain networks' 51% attack vector.

Lido has become the market leader in Ethereum Staking with 7.18 million staked ETH, or 36% of the total 19.6 million staked.

The DAO crypto media platform Bankless has reported that: 

“Lido is nearing the first of three thresholds at which an attacker more easily manipulates Ethereum.”

Ethereum advocates are now calling all Ethereuns worldwide to spread out their ETH staking into other decentralized platforms to reduce the reliance on the Lido platform alone. That’s where the RocketPool decentralized staking platform comes into the picture.

Rocket Pool is an Ethereum 2.0 staking pool. The protocol seeks to lower both the capital and hardware requirements for staking on ETH 2.0, adding to the decentralization and security of Ethereum. To achieve this, Rocket Pool allows users to stake trustlessly towards a network of node operators. ~ Messari

Rocket Pool which started in 2016, is an ETH staking protocol that is community-owned, decentralized, and trustless and enables staking in ETH 2.0 with as little as 0.01 ETH. You can stake in Rocket Pool in two ways—people who wish to participate in tokenized liquid staking using rETH and people who wish to stake ETH and run a node. Here I will show the steps to get started with tokenized liquid staking.

First, you must launch the Rocketpool page and click the Stake button. This will prompt you to connect your wallet. I have used MetaMask here. 

Once you have connected your wallet, you can enter the amount of ETH you like to stake and receive the liquid staked rETH token in return.

Liquid staking tokens unlock the inherent value that staked tokens hold and enable them to be traded and used as collateral in DeFi protocols.

You’ll need to confirm the transaction on your MetaMask wallet to complete the transaction.

Congrats! You have staked with the ETH 2 Network and are now part of a better-decentralized future of the Ethereum Network.

If you are new to crypto, especially Ethereum, you will be overwhelmed by the number of different wallets you need to maintain for different networks and the private keys you need to store securely.

That’s when you need a MetaMask wallet, a mobile or web-based self-custodial wallet for EVM-compatible networks. The self-custodial is key here. Unlike other wallets like Coinbase, which is maintained and owned by a company MetaMask is a wallet where you own your data and tokens and the private key on your device.

You can install the MetaMask wallet as your browser plugin from ***here ***or your smartphone’s mobile app version. The instructions here are based on a browser plugin app.

MetaMask is a software cryptocurrency wallet used to interact with the Ethereum blockchain. It allows users to access their Ethereum wallet through a browser extension or mobile app, which can then be used to interact with decentralized applications — dapps.

Launch the MetaMask wallet app from your browser by clicking on the icon on top.

You can use the MetaMask wallet interface to connect to EVM-compatible networks in your Ledger hardware wallet.

To connect or configure different EVM-compatible networks to MetaMask, you need certain data specific to the network you are trying to connect to. You can find this data from the blockchain network site, but that’s when a website like ChainList comes in handy.

ChainList is a list of EVM networks. Users can use the information to connect their wallets and Web3 middleware providers to the appropriate Chain ID and Network ID to connect to the correct chain.

First, connect to this website — https://chainlist.org/ with your MetaMask wallet.

You can choose any network on the homepage or search for a particular Ethereum-compatible network in the Search Networks field and click the Add to Metamask link.

You will get an Approve page on your MetaMask browser app. Click Approve and follow the instructions on the MetaMask window.

That’s it! You have successfully added a Binance Smarch Chain Mainnet to your MetaMask wallet.

TL;DR

The Graph blockchain network is an indexing protocol for querying data on blockchain networks like Ethereum and IPFS.

Anyone can build and publish open APIs, called subgraphs, making data easily accessible.

The Graph is an essential component in the blockchain apps ecosystems like Dapps, DeFi in particular.

The Graph currently reports 4 billion monthly queries on Graph-hosted services from dapps like Uniswap, Synthetix, etc.

The Graph has decent token economics which is all performed with the one staking token called GRT.

The Graph has the first-mover advantage in this space like Chainlink in the Oracle ecosystem.

What is the Graph Protocol?

The Graph protocol is an open-source, decentralized indexing protocol for blockchain data. Currently, the protocol works in the Ethereum platform but is getting integrated with other blockchain networks like Bitcoin and other Layer-1 blockchain networks. Data is critical for Dapps running in the Ethereum ecosystem. The Oracles like Chainlink solve one-half of the problem by making real-world data available to blockchain networks. The other half is solved by Graph protocol in a decentralized fashion to keep up with the blockchain philosophy. The Graph protocol index the blockchain data available in the blockchain networks for Dapps to query and use as required. When I explored this project further, I realized getting blockchain data is more painful than getting the different web applications data tied to various applications on the internet. Any blockchain network data is scattered into various pieces. The Block data is shared between various nodes in a blockchain network. The State data have data associated with smart contracts. Transactions data are the list of transactions enclosed in a block. The Transaction receipts data contains data related to each transaction execution, including gas cost, transaction status, etc. The log data contain event data like data related to token transfers. The only way various Dapps can get the required blockchain data is by collecting all the blockchain data into a separate database and indexing it. This is what a blockchain explorer like Etherscan does. The process is called the ingestion service. The downside is this requires a huge DB and is done by a centralized entity that collects the blockchain data and transforms it into queryable data.

The Graph is the Google of Blockchain data.

Google search engine indexes web data to make searching efficient, and Graph is doing something similar in a more decentralized fashion to blockchain data. DApp developers can build a component called a subgraph which is the queryable data from a blockchain. E.g., A Uniswap subgraph will have all the data related to trading in Uniswap, which can be queried. Subgraphs will be registered in a graph node. You can find the details of subgraphs in Graph explorer. The query language used in Graph protocol is GraphQL which is a smart REST API tool developed by Facebook.

How does the Graph protocol work?

The following are the Network participants of the Graph protocol. Indexers — They are the Graph node operators. They participate in the network by staking GRT Token and running a Graph node. Their job is to index the relevant subgraphs. They earn rewards in GRT Tokens for indexing subgraphs and collect fees when consumers query their subgraphs.

Consumers — They are end-users or other Dapps that query indexers to get data.

Curators — They are like the curators on the Medium platform. They use their GRT tokens to signal what subgraphs are worth indexing. Curators are incentivized in GRT tokens based on how popular a subgraph becomes.

Delegators — They can be anyone who likes to participate in the Graph Network. They will have to stake their GRT on behalf of an indexer to earn a portion of the indexer’s rewards and fees.

The Graph council is the future model for decentralized governance of Graph protocol like something similar to MakerDAO. They will form a Decentralized autonomous organization to do governance of Graph protocol.

The Graph Token

The GRT Token is capped at 10 billion, and new token issuance is at 3% annually. A portion of the protocol query fees is burned at a ~1% rate. You can stake the Graph token directly from The Graph *website *or use staking websites like *Stakingrewards.com *and earn passive income while participating in The Graph network.

Bitcoin: A Peer-to-Peer Electronic Cash System

The title hints at what the white paper intends to explain. Bitcoin explains real-world electronic cash that can be exchanged using the internet, just like we do with fiat money in the real world.

The white paper tells the problem it is trying to solve in our current digital monetary system. You spend a dollar bill at a store and get something in return. You cannot spend that same dollar bill again to purchase something else. But with the digital version of the dollar bill, you can take a copy of the same dollar bill and spend at two or more places simultaneously, contributing to the ‘double-spend problem.’ In digital money, this problem is solved by intermediary businesses and banks by keeping track of each transaction and adjusting a digital ledger book accordingly. The Bitcoin solution removes the intermediaries' and mentions using hashing to seal transactions to preserve authenticity. Hashing is converting a digital data set into a unique shorter string used to identify original data. Then to make the digital ledger immutable, the paper suggests chaining the hashed data into a data structure by spending computational work such that to change the ledger will be a rework of the whole computational work.

1. Introduction

The paper introduces the limitations of a trust-based monetary system where you need to involve some trusted institution to enable reversible transactions. The new system proposed mentions replacing trust with mathematical cryptographic proofs and a peer-to-peer global computer system that functions by itself using an incentive mechanism that comes with the network protocol.

2. Transactions

The new digital money is a chain of digitally signed transactions in a universal ledger. During the transfer of digital money from one person to another, the current owner signs the previous transaction hash with their private key* and adds the public key* of the payee. All transactions are pseudonymously announced in the ledger for the payee to verify the chain of past transactions. The system has a mechanism for the entire network to reach a consensus on a single history of all immutable transactions.

*The public key is public and open to anyone in the system. However, the private key is private, only stored on the user’s device, and is used to decrypt data. Bob wants to send Alice an encrypted email. To do this, Bob takes Alice’s public key and encrypts his message to her. Then, when Alice receives the message, she takes the private key known only to her to decrypt the message from Bob.

3. Timestamp Server

Timestamping transaction block is a mechanism to prevent duplicate transactions. A timestamp server is essentially a node in the Bitcoin network that takes the hash of a block of transactions and publically broadcasts the hash on the network. A timestamp is added to the hash for the point of time the PoW is identified and the block hash broadcasted. Also, each timestamp includes the previous block timestamp in its hash. This hash serves as proof that a set of transactions existed at some point in time, and network participants can verify the order in which transactions blocks are broadcasted.

4. Proof-of-Work [PoW]

Proof-of-Work is at the heart of the Bitcoin blockchain, which regulates the competing nodes to add new blocks to the ledger. Proof-of-Work is essentially computing power spend by miner nodes. A new block is accepted when a miner comes with a winning PoW first, and the miner earns Bitcoin as a reward. Finding the winning PoW is very difficult, and each miner spends expensive specialized computations to achieve this. The miner’s goal is to create a hash matching a current target set by the Bitcoin protocol. They must create a hash with enough zeros at the front for which the probability is very low. But miners across the world execute trillions of such computations in a second to reach the goal first. Once a winning PoW is reached, the Bitcoin protocol will set the next target. The goal of PoW is to prevent counterfeit Bitcoin and the double-spending problem. In essence, PoW is the bank implementation that regulates bitcoin transactions.

5. Network

This is how a Bitcoin network works at a high level. New transactions are broadcast to all nodes. Each node collects all simultaneously occurred transactions into a block for convenience. The nodes compete for PoW, and when success usually takes 10 minutes, broadcasts the block to all nodes. One of the reasons why the Bitcoin network is mentioned as unscalable and not good for high-volume transactions is that most nodes will have to verify all transactions in a block and reach consensus by adding the new block into the blockchain. Nodes always consider the longest chain as the correct one and keep extending it.

6. Incentive

Bitcoin is an all-or-nothing system. In a sense, if the system exists as designed, it is good for all of humanity, and if someone tries to attack the system, it is bad or a loss for everyone, including the attacker. The incentive mechanism and the coin economics make Bitcoin special compared to past peer-to-peer systems like BitTorrent. The node operators in Bitcoin are incentivized to maintain the network and follow the protocol rules. Every time a PoW generates a new block, the miner of that block gets bitcoin till the protocol limit of Bitcoin supply lasts. Transaction fees are also collected from the transaction's sender to prevent spam transactions and give miner fees.

7. Reclaiming Disk Space

The Bitcoin blockchain network keeps growing infinite as more and more transactions are added to the network. This, in turn, keeps adding the storage space of participating nodes. To reclaim disk space, block data are arranged in a special data structure called Merkle tree, and data from old transactions are discarded, except the root data is kept in the block’s hash.

8. Simplified Payment Verification

SPV is a mechanism that allows users to quickly verify if a transaction is successful in the Bitcoin network without downloading the whole blockchain data. The user only needs only three things to perform SPV. The list of block headers, the transaction details, and the Merkle proof of the transaction can be obtained by a user by querying the bitcoin protocol. Bitcoin lightweight wallet clients make use of SPV to verify transactions really fast.

9. Combining and Splitting Value

Bitcoin is not an account-based ledger but a transaction-based ledger. In an account-based ledger, the flow of currency between accounts is verified. A transaction-based account has inputs & outputs and is chained to the previous transaction or source using hash pointers. At the most, a transaction can have any number of inputs and a max of two outputs, one is the actual payment, and the other is the return change if any. Since Bitcoin is transaction-based, the value of a coin can be split and transacted. For example, if you buy 1 bitcoin from a decentralized exchange, you might be getting .2 from one seller .7 from another seller, and .1 from another, all combined inputs to receive 1 Bitcoin as output. This is done for efficiency and anonymity.

10. Privacy

The Bitcoin network is pseudonymous. This means even though all transactions are published on the public ledger, they are not linked to a real-world identity. What is used as identities are public keys which look like a gibberish string of characters. Users can keep changing their public keys so that no one can really track specific transactions of a public key address and try to link some real-world entity.

11. Calculations

The Bitcoin network becomes more secure as it grows. The scenario of an attacker trying to generate an alternate chain is impossible because that will require winning multiple PoW in a row. Also, the 51% attack usually mentioned with the Bitcoin network will require more than half of the miners to conspire to compromise the network. This is also impossible as the cost required to achieve far outplays the benefits.

12. Conclusion

In summary, the proposed system for digital transactions replaces trust with a peer-to-peer system using proof-of-work incentivized to work for itself with digital signatures that control ownership.

Finally, Satoshi Nakamoto — a bunch of human brains, in my opinion, concludes by saying:

“The network is robust in its unstructured simplicity”

Crypto tokens or Altcoins, as we all know, are tradable, and they have a value associated with them based on supply & demand and sometimes speculations.

Before we go into these new jargons of investing, we need to understand the platform from where they originate — the DeFi space.

What is DeFi?

DeFi is a generic term used for financial applications that run on the internet in peer-to-peer blockchain networks. Previously it was called Open Finance. These are different from the latest fintech companies that run on the internet but without the blockchain part. Examples are Robinhood, Wealthfront, Titan, etc. ***The most important component of a DeFi application is one or more smart contracts that run without the intervention of humans and in a decentralized fashion following some consensus protocol. ***Unlike traditional financial applications, where you log in with your credentials, DeFi applications require the user to connect to the application using a digital identity called a wallet address or your public address in the blockchain network. DeFi applications transact with crypto assets while the regular fintech applications perform transactions with government-regulated fiat currencies and security assets. Overall, DeFi applications provide a brand new financial experience to end-users that is more open and not tied to Central banks or local jurisdictions while being riskier. Some general examples of DeFi applications are decentralized exchanges — DEXs, stablecoins, lending markets, etc. Popular DeFi apps are Uniswap, Aave, Compound, etc.

Why Yield Farming?

The Ethereum platform remains the biggest home of DeFi apps. The reason is its smart contract capability and the first-mover advantage. Ether is one of the earlier crypto tokens that has appreciated like Bitcoin. So holding to these tokens in some wallets or exchanges soon became a form of investment. When DeFi applications like Stablecoins and Lending Apps started becoming popular, they all faced the Liquidity problem. Liquidity is nothing but the number of tokens worth the total value of crypto assets locked in the smart contracts of specific Dapps. Why is Liquidity a big deal? Liquidity means money afloat in the business, which will enable it to ease its monetary functions. Traditional fintech applications can source liquidity from VCs or other investors. In a DeFi app, the best way to acquire liquidity is to get idle crypto assets from users by enabling deposits in the app to earn interest. At the basics, this process allows cryptocurrency holders to earn rewards on their holdings in yield farming. Uniswap is a DeFi app called an AMM — Automated Market Maker. Uniswap is always willing to trade in any pair of crypto assets that have a market in Uniswap. Consider a pool of USDC/DAI in Uniswap that is created by any number of liquidity providers or crypto depositors. The liquidity pool will continuously readjust its token holdings to preserve each asset's 50–50 balance in the liquidity pool. The price of each token in the pool is determined algorithmically based on the asset ratio in the pool. If the pool has only 2 USDC and 2 DAI, the price fluctuates more when someone deposits 1 DAI and takeout out 1 USDC. But if the pool has 100 USDC and 100 DAI, the price fluctuation of pool assets will be negligible for the same transaction. Liquidity is the key factor of success for any DeFi app.

Yield Farming is a broader term that signifies any efforts made in a DeFi space by an investor to maximize their returns on crypto-assets invested in various Dapps.

Yield Farming became popular with the DeFi app Compound, which is a crypto lending protocol. There are multiple ways you can increase your yield by creating new investment strategies. Here is one example which might be outdated and definitely not investment advice.

DeFi users who try to maximize their yield in multiple DeFi products are the real yield farmers.

Tokenization gives Composability to DeFi.

Tokenization is one of the key features of DeFi products. When you provide liquidity on a platform, you get tokens in return that you can use in some other platform to increase your yield further. The composability or ‘Money Legos’ feature is an innovative feature of DeFi you cannot find in traditional fintech products. Your tokens are not locked in one protocol. For example, when you provide liquidity in Uniswap by depositing tokens, you will get Liquidity Provider tokens in return that can be deposited as collateral in Aave, another DeFi lending protocol. This way, tokens act as building blocks that can be programmed with smart contracts to interact with multiple Dapps to increase yield.

Why Liquidity Mining?

To attract more users to participate in their product and make the application more decentralized DeFi apps started giving crypto tokens to users investing in their dapps. These tokens are governance tokens, usually designed to be deflationary with limited supply and hence will accrue value over time.

Liquidity mining is one level above yield farming, where a user gets the usual yield by providing liquidity plus, on top of that, an ownership token on their platform. New coins are mined by providing Liquidity, hence the name.

A sample scenario

This will be a quick tryout for you into Yield Farming & Liquidity Mining. The best user experience of DeFi apps is through any integrated crypto wallet, and I prefer the Coinbase wallet. You can browse through various Dapps and connect to them within the wallet. One of the dapps I am going to use here is PoolTogether — a no-loss crypto lottery Dapp. Sometimes most of the Dapp projects give free tokens to early users, and if you have received POOL tokens, you can deposit that in a POOL token pool for a chance of winning the lottery or an earning of 10.22% APR. You are a yield farmer now. Now you may like to browse to another Dapp called Bancor, which gives liquidity mining opportunities. You can pick up any token pair to invest, and you will find all the tokens available in the bancor network are paired with the BNT token, which is the native token of Bancor. The APR rate is provided with each pool. The idea is simple, you stake your tokens with Bancor pools and get rewards in the form of BNT tokens which you can stake further and earn further rewards. At the same time, you can withdraw your originally invested tokens after the locking period. Now you are officially a liquidity miner in the DeFi space.

What is impermanent loss?

Impermanent loss is another DeFi jargon that is not complicated to understand but tricky to solve. Impermanent loss usually occurs when we compare the yield between holding certain cryptos in wallets and the yield from providing liquidity to certain liquidity pools in certain DeFi products. Before you try to understand, it is a good idea to understand AMM’s — Automated Market Makers in DeFi. You can read my post about Uniswap here.

AMMs are part of the DeFi ecosystem. They allow cryptocurrencies to be traded in a decentralized, permissionless fashion using public blockchains. AMMs use liquidity pools created from users' crypto assets and assets priced within the pool using algorithms. AMMs are disconnected from external crypto markets in their raw form. Arbitrageurs establish connectivity to the real-world crypto market. Let’s look at how an impermanent loss happens to a trader.

AMMs has a constant balance of assets that determines the price of tokens in a liquidity pool

The standard weightage for tokens in a two-token AMM liquidity pool is 50–50. Let’s bring back Bob & Alice. Alice deposits 1 ETH and 100 DAI in an AMM liquidity pool. The price of ETH is $100 at the time of deposit. This means Alice has a total deposit of $200 in the AMM. Bob has 9 ETH and 900 DAI in the same liquidity pool. The total value of tokens in the liquidity pool is $2000 with 10 ETH and 1000 DAI. So Alice has a 10% share of the pool. Imagine the price of ETH went up to $400 in the external market. This allows arbitrage traders to buy ETH cheap from the AMM by paying DAI. Arbitrageurs are incentivized to balance the total value of tokens on each side of the pool by selling DAI for ETH. When both sides of AMM are balanced in terms of the value, you will notice that the yield from ETH in the AMM is slightly lower than what you would have made by simply holding to the ETH token. Since the price of ETH is $400, the ratio of the number of tokens in the pool is changed to balance the token value on both sides of the pool. The pool now has 5 ETH and 2000 DAI, which amounts to a total liquidity value of $4000. If Alice withdraws her share from the pool, she will receive 10% of the value, 0.5 ETH and 200 DAI, which amounts to $400. She has made a decent profit from the pool. But think if she was holding 1 ETH and 100 DAI in her wallet. Her total profit would have been $400 from 1 ETH and $100 from 100 DAI, $500. This is what we call impermanent loss. The loss is not permanent because the loss is realized only if we withdraw from the pool. But I think it is misleading because the loss is permanent once you withdraw funds from a pool. Also, the impermanent loss can occur no matter which direction the price changes in a pool, and it is an unavoidable part of any AMM.

There are several ways you can mitigate the risk of impermanent loss in a DeFi liquidity pool. Assets with similar volatility in a liquidity pool can reduce the effect of impermanent loss. Also, liquidity pools with more than two assets and any flexible ratio are another way to reduce impermanent loss.

How does Uniswap v3 try to eliminate impermanent loss?

Uniswap v3 introduces a new concept that will use the capital provided by LPs [Liquidity Providers] more efficiently than in v2. The liquidity provided by LPs is usually allocated into different small price brackets from zero to infinity, and the LPs gain fees when trades happen in any of the price brackets where their liquidity is used. This is an inefficient way of using the capital because most of the time, the liquidity provided by LPs is not used. In Uniswap v3, liquidity providers use the concept called concentrated liquidity, where they can specify the price range where their capital will be used. When trades happen above or below the specified price range, the capital provided by LPs becomes inactive. This gives the advantage for LPs to make use of their liquidity more efficiently and with lower capital than in v2 but more fees collected. This also reduces price slippage in trades by adding more liquidity in popular price ranges.

Slippage is the price difference that occurs between the time when order is placed and executed due to volatility and higher volume of trades in AMMs

The downside with Uniswap v3 compared to V2 is that it has become an active trading DeFi protocol where LPs have to constantly monitor and adjust their liquidity price ranges to generate maximum fees.

How Bancor v2.1 tries to eliminate impermanent loss?

Bancor v2.1 is designed so that the protocol ensures that the liquidity providers get back the same value originally deposited in the pool plus the trading fees collected through a concept called Impermanent Loss Insurance. Bancor relies on its token, Bancor Network Token — BNT, to generate fees called swap fees/transaction fees that occur whenever tokens are swapped into and out to BNT. BNT tokens are used as an intermediary currency when each token is traded in Bancor. Bancor protocol adds Bancor as co-investment to any liquidity pool created in the platform, and hence swap fees earned from BNT token can be used in the pools.

Impermanent Loss Insurance accrues over time, by 1% each day, until 100% protection is achieved after 100 days the assets are locked in the pool. There is a 30-day cliff, which means that if a liquidity provider decides to withdraw their position before 30 days passes, they’d incur the same IL loss experienced in a normal, unprotected AMM. If an LP withdraws any time after 100 days, they receive 100% compensation for any loss that occurred in the first 100 days, or anytime thereafter.

If fees earned by the protocol from its co-invested BNT are greater than IL [Impermanent Loss] compensation, the protocol can offset IL for LPs without emitting new BNT. If there are insufficient tokens in a pool to fully compensate LP for IL in the staked ERC20 token, the protocol will pay part of the IL protection in an equal value of BNT.

You might have heard the name Uniswap if you are following the crypto space, especially the DeFi space. But you might have never really understood what it does. There are chances you have heard it as a crypto token swap utility or as a decentralized Crypto exchange — DEX or as a liquidity pool enabling yield farming or even as an AMM in DeFi — Automated Market Maker. The fact is that Uniswap is all of these in one place.

In a typical limit order-based crypto exchange, the ‘price’ of ETH is quoted as the mid-market between the highest bid and lowest ask. A trade happens when two parties can agree on a buyer's bid & seller's ask price. This usually doesn’t occur by itself, and that’s where Market Makers play a key role. Consider the buyer’s bid price is $99, and the seller’s asking price is $100 for a token in the crypto exchange. The difference in this price is called the spread price. So when the seller places a market sell order, the Market Maker immediately fulfills the order for the best bid price of $99 with his capital. The Market Maker sells those tokens for $100 when buyers place their bid order, making a $1 per share profit. Market Maker's success depends on net buy & sell orders on a profit spread for a time. This model, unfortunately, doesn’t work well in a DeFi space because of the slower transaction rate and the higher gas fees involved. Uniswap completely sheds the idea of a centralized order book maintained by a centralized exchange to determine an asset's price. Instead, Uniswap lets the users source liquidity for the trading assets by utilizing something called — ‘liquidity pools.’

Liquidity Pools & Liquidity Providers are the core of Uniswap.

Unlike other centralized exchanges like Coinbase, Binance, Kraken, etc., Uniswap functions as a DEX — Decentralized Exchange. It makes use of two smart contracts — Exchange contract & Factory contract. Factory smart contract adds new tokens listed in Uniswap. Exchange smart contract facilitates all token ‘swaps.’ Uniswap’s automated liquidity protocol incentivizes users on the platform to become liquidity providers — LPs. Each token listed on Uniswap has a pool of two tokens that anyone can contribute to, and the prices of each token are determined algorithmically. In this system, a trader doesn’t need to wait for a counter order to happen. Instead, a trade can happen instantly at a known price provided there is enough liquidity in the pool.

Anyone can be a liquidity provider in Uniswap by depositing equivalent values of two tokens into a pool. Currently, they should be ETH or any ERC20 tokens. The liquidity providers get ‘liquidity tokens,’ representing in value their share of the entire liquidity pool. Uniswap charges users a 0.30% fee on all trades which is added to a reserve pool. LPs can redeem the liquidity tokens for the share they represent in the pool. The liquidity tokens are burned during the process. When a liquidity provider burns their pool tokens to reclaim their stake of the total reserve, they receive a proportionally distributed amount of the total fees accumulated while they were staking. Do not think of the ‘liquidity tokens’ as UNI tokens. UNI tokens are different and are used as governance tokens in Uniswap.

How is the price of tokens calculated in a Liquidity Pool?

Uniswap uses a constant product market maker algorithm which is as simple as:

x * y = k, where x and y are the numbers of tokens and whose product will always give a constant value k. E.g., Consider the ETH/USDC pool, which has an initial supply of 12000 USDC and 6 ETH when the ETH price is $2000. The k value, in this case, is

12000 USDC * (6*2000) = 144000000

When someone makes a trade in this Uniswap pool and buys 2 ETH by spending 4000 USDC, the pool token prices adjust to keep the k value constant.

16000 USDC * (4*2250) = 144000000

You can see here the price of ETH increased in the Uniswap pool to $2250. This provides an opportunity for arbitrage traders to buy ETH from other centralized exchanges, which still have $2000 for 1 ETH, and sell it for $2250 in Uniswap. This process eventually rebalances the price of ETH in Uniswap to match the market price. Thus centralized exchanges still play a key role in maintaining liquidity in Uniswap and Uniswap is not a replacement for centralized exchanges.