IMF global financial stability report sees complex roles for cryptocurrency, DeFi

IMF global financial stability report sees complex roles for cryptocurrency, DeFi

Decentralized finance offers a mix of risks and benefits as it forms interconnections with traditional finance, the International Monetary Fund finds in a new report.

According to the International Monetary Fund’s Global Financial Stability report released Tuesday, the war in Ukraine — following hard on the heels of the coronavirus pandemic — has led to a tightening of global financial conditions. Rapid changes in fintech and the uses and misuses of cryptocurrency play into the jumble of challenges facing the global economy.

According to the report, the pandemic and war have led to an accelerated “cryptoization” in emerging markets due to increased speculative interest during the pandemic and then attempts to evade sanctions. Given compliance within the crypto industry, the use of cryptocurrency to evade sanctions is impractical, the report found. The use of mixers, decentralized exchanges and privacy coins may allow some circumvention, but it would be restricted by limited liquidity.

A related risk is the use by sanctioned countries of excess energy — possibly built up because of sanctions — to mine proof-of-work cryptocurrencies, although financial flows from that activity would also be relatively contained. Countries concerned about coming under sanctions in the future may come to find crypto more attractive as reserve currency — and major fiat currencies less so — thanks to the greater difficulty in immobilizing crypto.

All of those issues point to the need for a coordinated regulatory approach to crypto for maintaining effective control of capital flows. Improving non-blockchain payment technologies would also help maintain that control.

The report also said regulation is not keeping up with the rapid developments in many aspects of fintech. Decentralized finance, or DeFi, is becoming steadily more interconnected with traditional finance due to its adoption by traditional financial institutions. DeFi’s lack of governance makes it a risk to financial stability and creates an environment of legal uncertainty. It is vulnerable to market, liquidity and cyber risks, but it potentially offers benefits from higher efficiency and financial inclusion.

The IMF recommended regulators concentrate on the elements of the crypto ecosystem surrounding DeFi, such as stablecoin issuers and centralized exchanges, and encourage the creation of self-regulating bodies within the industry.

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FBI and CSIA issue alert over North Korean cyberattacks on crypto targets

FBI and CSIA issue alert over North Korean cyberattacks on crypto targets

The cybersecurity agency believes that the threat from North Korean hackers will not go away unless crypto firms take necessary but simple steps to ensure their security.

The Cybersecurity and Infrastructure Security Agency (CISA) and FBI have issued an alert on North Korean state-sponsored cyber threats that target blockchain companies in response to the Ronin Bridge hack last month.

The alert was issued on April 18 in conjunction with the Federal Bureau of Investigation and the Treasury Department which had warnings and mitigation suggestions for blockchain and crypto firms to ensure their own operations remain safe from hackers.

Lazarus is not the only hacker group listed by name as an advanced persistent threat (APT). Included among Lazarus are APT38, BlueNoroff, and Stardust Chollima. These groups and others like them have been observed targeting what the bulletin called “a variety of organizations in the blockchain technology and cryptocurrency industry,” such as exchanges, decentralized finance (DeFi) protocols, and play-to-earn games.

Their efforts filled their coffers with $400 million in stolen crypto funds in 2021 according to a report from Chainalysis. The regime has already topped that amount this year with the Ronin Bridge hack from which it extracted about $620 million in crypto in late March.

The CSIA does not believe the rate of thefts will see a downturn any time soon as it stated that groups are using spearphishing and malware to steal crypto. It added that:

“These actors will likely continue exploiting vulnerabilities of cryptocurrency technology firms, gaming companies, and exchanges to generate and launder funds to support the North Korean regime.”

Kim Jong Eun’s staunch refusal to dismantle his nuclear weapons program forced the U.S. to levy some of the harshest economic sanctions ever against his country. This has led him to turn to cryptocurrency to fund the nuclear weapons program since his cash flows through traditional means have been almost entirely sealed off.

While the alert goes into greater detail about exactly how these groups use malware such as AppleJeus to target blockchain and crypto firms, it also offers suggestions on how users can mitigate the risk to themselves and their users’ funds. Most of the recommendations are common sense security procedures such as using multi-factor authentication on private accounts, educating users on common social engineering threats, blocking newly registered domain emails, and endpoint protection.

Related: The aftermath of Axie Infinity’s $650M Ronin Bridge hack

The laundry list of mitigation strategies firms should take to ensure they are secure from harm include all sensible suggestions, however, the CSIA believes that education and awareness of the existent threat is one of the best strategies.

“A cybersecurity aware workforce is one of the best defenses against social engineering techniques like phishing,” it concluded.

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Beanstalk Farms loses $182M in DeFi governance exploit

Beanstalk Farms loses $182M in DeFi governance exploit

The stablecoin protocol saw its own governance proposal system exploited enabling the malicious actors to extract all of its $182 million in collateral.

Credit-based stablecoin protocol Beanstalk Farms lost all of its $182 million collateral from a security breach caused by two sinister governance proposals and a flash loan attack.

The problem for the protocol was seeded by suspicious governance proposals BIP-18 and BIP-19 issued on April 16 by the exploiter that asked for the protocol to donate funds to Ukraine. However, those proposals had a malicious rider attached to them which ultimately created the sinkhole of funds from the protocol according to smart contract auditor BlockSec.

This latest security breach of a decentralized finance (DeFi) protocol took place at 12:24 pm UTC. At that time, the exploiter took out $1 billion in flash loans from the AAVE (AAVE) protocol denominated in DAI (DAI), USD Coin (USDC), and Tether (USDT) stablecoins. They used these funds to accumulate enough assets to take over 67% of the protocol’s governance and approve their own proposals.

A flash loan must be executed and repaid within a single block and usually calls on several smart contracts at once to complete. Flash loans have been used in the past to perform hacks or security exploits of other protocols. Beanstalk Farms is a decentralized algorithmic stablecoin issuing platform on Ethereum.

This case was technically not a hack as the smart contracts and governance procedures functioned as designed. Flaws in their design were exploited, which project spokesperson “Publius” acknowledged in a meeting on April 18th when he said:

“It’s unfortunate that the same governance procedure that put beanstalk in a position to succeed was ultimately its undoing.”

Blockchain security analysis firm PeckShield notified the Beanstalk team via Twitter at 12:41pm UTC on April 17 that there might be an issue with the ominous statement: “Hi, @beanstalkFarms, you may want to take a look.”

At that point, it was too late. The exploiter had already made off with roughly $80 million in Ether (ETH) and Beans (BEAN) while the entire protocol lost its $182 million in total value locked (TVL) according to PeckShield. BEAN is currently down about 83% trading at $0.17 according to CoinGecko but troughed at $0.06 when the exploiter dumped their tokens.

The exploiter swapped BEAN for ETH and then sent the coins to Tornado Cash to cover their digital tracks. However, they also sent 250,000 USDC to the Ukraine Crypto Donation wallet.

At 11:49 pm UTC on April 17, Publius wrote that the project is likely lost since there is no venture capital backing to recoup losses, adding “We are f**ked.”

In a team and community meeting on the Beanstalk Discord channel on April 18, Publius doxxed the three individuals who developed the project. They are Benjamin Weintraub, Brendan Sanderson, and Michael Montoya, all of whom attended the University of Chicago together and conceived Beanstalk Farms. 

Montoya said that the team had reached out to the Federal Bureau of Investigation (FBI) Crime Center and would “fully cooperate with them to track down the perpetrators and recover funds.”

The protocol’s smart contracts have been paused and all governance privileges have been revoked by the team.

Related: North Korean Lazarus Group allegedly behind Ronin Bridge hack

The team did not respond when Cointelegraph asked if they believe the FBI has any legal recourse to help them, but Publius believes this is definitely a theft that should be investigated.

Beanstalk’s community has been mostly supportive of the team in the trying time despite their own tremendous personal losses. However, community member “Astrabean” believes the team should be taking more responsibility for the attack rather than accepting what happened as an honest mistake that the project must move on from. He stated that “I would have wanted you as leaders to take accountability for what happened.”

Community member “CharlieP” echoed those concerns about trust in the protocol. He asked the team “Are you saying you have no responsibility for this endeavor? If that’s the case, who are we to trust that this is not going to happen again?”

Publius responded that the project is just an open-source code experiment, not a business and that neither he nor the team should be held accountable for what happened. He added,

“When you ask us to take responsibility, it’s really inappropriate.”

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The integration of CeFi and DeFi through Binance Bridge 2.0

The integration of CeFi and DeFi through Binance Bridge 2.0

Read this guide to learn how to bridge assets from any blockchain to BNB Chain using Binance Bridge 2.0.

Integration of CeFi and DeFi through Binance Bridge 2.0

DeFi is driving the development of cutting-edge Web3 use cases such as nonfungible tokens (NFTs), gaming and the metaverse. With the Binance Bridge 2.0, DeFi can be brought to a broader audience worldwide while maintaining the same smooth user experience as CeFi.

Most of the “DeFi” ecosystem relies on centralized services because of convenience, which enables us to understand where the traditional world of centralized banking and the new world of decentralized money might intersect to everyone’s benefit.

Binance, with its first bridge, made it possible to bridge assets listed on Binance.com to other blockchains. To integrate CeFi and DeFi, the Binance Bridge 2.0 comes to the rescue by allowing you to wrap ERC20 tokens to BEP20 BTokens and start staking your Ethereum or other supported assets with DeFi protocols running on the BNB Smart Chain right away. 

Binance also implemented a whole new automatic token circulation control system. Except for a buffer size in hot wallets, the exchange will not keep a surplus of pegged tokens known as wrapped assets. Instead, when users withdraw pegged tokens onto the BNB Smart Chain, it will print more tokens.

The Binance Bridge 2.0 is a trusted bridge that operates on the BNB Smart Chain with transaction fees as low as a few cents and transaction speeds as fast as three seconds. It is safeguarded by Binance’s highest security standards and operates on the BNB Smart Chain. 

Nearly all Ethereum-based coins will be supported via the Binance Bridge 2.0, allowing direct access to BNB Smart Chain DApps. This cross-chain bridge improves interoperability between several blockchains and gives you direct access to the DeFi world of the BNB Smart Chain.

Related: What are DApps? A beginner’s guide to decentralized applications

How does Binance Bridge 2.0 work?

BTokens are tied to the underlying asset at a 1:1 ratio, and you can redeem your BTokens to the original asset whenever you desire.

As BTokens will be pegged at a 1:1 ratio to the underlying assets, they can be exchanged for the original cryptos. Bridged tokens that aren’t displayed on the platform will only be transferred to the funding wallet. Likewise, the platform’s bridged tokens would be moved to the funding or spot wallet. According to Binance, the most significant change is that you will be able to accomplish all of this straight from your Binance account rather than having to create a third-party wallet. 

The listed tokens will go straight into your funding or spot wallet while the unlisted bridged tokens will be stored in a separate self-custody wallet (SCW) within the Binance App. A self-custody wallet lets users store digital assets such as cryptocurrencies. To transact with blockchain-based financial applications like the Compound Liquidity Pool, SCWs, also known as non-custodial wallets, are necessary.

The cross-chain bridge will promote interoperability between multiple blockchains and allow users to immediately access the Defi on the BNB Chain, as stated by the platform. This advancement is projected to raise demand for the Binance platform, eventually reflected in its higher valuation.

Why is cross-chain technology important?

A cross-chain technology aims to allow value and information to be transferred between multiple blockchain networks. It’s becoming a major issue of debate, as it’s considered the final option for improving blockchain interoperability.

People have mostly been unable to reap the full benefits of distributed ledger technology because the chains operate in isolation. As a result, people have been unable to fully benefit from blockchain technology because of the incapacity of multiple blockchains to communicate. 

Cross-chain technology aims to address these concerns by providing interoperability between blockchains, allowing them to communicate and share information more easily. Ripple (XRP) is a good example of a blockchain project exploring cross-chain transactions. Ripple has already been assisting banks worldwide in settling cross-border payments in various fiat currencies and cryptocurrencies.

Other significant blockchain interoperability projects include the Polkadot (DOT) blockchain. It ensures a seamless connection between public networks, private chains, permission-less interfaces and oracles

In addition, the developers behind the blockchain interoperability solutions want to enable an internet where independent blockchain solutions will be able to exchange information via a Polkadot relay chain.

What is Binance Bridge 2.0?

Binance Bridge 2.0 is a new bridge service that gives all popular blockchain networks access to inter-blockchain liquidity.

Binance launches Binance Bridge 2.0 to connect Ethereum-based tokens (both listed and unlisted) as BTokens to the BNB Chain. You can use your wrapped BTokens to explore the metaverse, blockchain-based games, decentralized finance (Defi) and more in the BNB Chain ecosystem, reducing the need for swaps and overcoming other interoperability barriers that have plagued blockchain.

Therefore, Binance users will be able to use the bridge as a one-stop shop for all centralized finance (Cefi) and DeFi. The intent behind the first version of the Binance Bridge was to make multiple blockchains more interoperable. In addition, it allowed anyone to exchange their crypto assets into Binance Chain (now BNB Chain) and Binance Smart Chain (now BNB Smart Chain) wrapped tokens (and vice versa).

The technique for swapping tokens (supported only on Binance.com) contains two categories in the first version: Peg-In and Peg-Out. Using Peg-In, users can swap native tokens for pegged tokens on the BNB Chain or BNB Smart Chain. Meanwhile, the Peg-Out technique allows users to convert pegged tokens to native tokens on the BNB Chain or the BNB Smart Chain.

Regular deposit and withdrawal functionalities in the Binance Bridge version 2.0 allow users to bridge tokens between their original blockchains and the BNB Chain. In the future, Binance also wants to improve its mobile app to enable users to perform similar conversions with a single click.

This article aims to discuss the integration of CeFi and DeFi through Binance Bridge 2.0 and how the Binance Bridge works.

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The world doesn’t need banks, policymakers or NGOs — It needs DeFi

The world doesn’t need banks, policymakers or NGOs — It needs DeFi

DeFi can usher in a system where people don’t have to pay international corporations 10% to send money home in the internet era of Web3.

Where I grew up, on the southern border in Texas, a tremendous number of people have come to the United States to work and send money back home. They don’t make much money, but they pay considerable fees on their transfers. Their focus is not on getting rich, but on supporting those back home in their native country. They support their families as they do hard labor day in and day out. It costs them too much to do so.

Truth be told, my father was a migrant worker. He picked fruit in the fields. We sent money back to our family in Mexico. But the remittance providers chipped away at what little money he was able to make so that they had no hope of achieving the American Dream and prospering.

The world needs DeFi due to corruption. Big governments and international corporations are controlled not in the interest of the people, but the interest of their bottom line. Credit cards and personal loans have tremendous fees, as do remittances.

When migrants send home part of their earnings in the form of remittances, they represent a large source of foreign income for many developing economies. Remittances, which are particularly important for low-income countries, account for nearly 4%t of their GDP, compared with approximately 1.5% of the GDP for middle-income countries. Remittance flows are important because they are more stable than capital flows, and they tend to be countercyclical, meaning remittances increase during economic downturns or after a natural disaster when private capital flows fall.

DeFi lowers the fees migrant workers pay to send money home, saving them billions of dollars. Some remittances entail fees of more than 20%. Out of desperation, people pay these fees to send a considerable source of their income to households across Africa, Asia and Latin America, helping to lift families out of poverty by providing financial stability.

Related: Crypto education can bring financial empowerment to Latin Americans

Hundreds of billions of dollars are sent home every year. That’s far more than official development aid. Most remittances go to low and middle-income countries. In Kyrgyzstan, Nepal and Liberia, remittance comprises more than a quarter of national GDP, it said. The average costs are 7%, according to UNESCO’s 2019 Global Education Monitoring Report. What’s more, traditional banks cost remitters the most. Their average fees are 10%! Big banks have monopolies on remittances and they take advantage thereof. To serve the underserved, the world needs not banks, policymakers or NGOs, but DeFi.

The highway robbery of remittances

In my view, centralized finance makes an unfair margin on migrants who are simply using their own money. That’s why the world needs decentralized finance. There is no reason to pay fees when transferring money. So don’t. Use decentralized finance rather than paying a tremendous amount of money when sending money back home.

When I began to look at the decentralized exchanges, I learned no one could take your money from you, because you maintain possession of your keys. You can borrow, lend, trade on margin and so much more. DeFi coupled with stablecoins is a powerful combination, especially for the unbanked.

Thanks to crypto, not only can migrants send money to loved ones back home for less, but those loved ones back home can now earn passive income in the decentralized finance space. They can utilize reward systems like liquidity pools or staking, and behold the power of truly being their own bank. No need to give your hard-earned money over to a middleman; a bank. You do not need negative interest rates.

Related: Money in 2030: A future where DeFi and CBDCs can work together

DeFi projects are built for the benefit of others. Participants can make a profit benefiting others. Food is being put on people’s tables across the globe because of decentralized finance. That’s a beautiful thing. The sense of community in DeFi comes from giving power back to the people. It drives us all to do better for ourselves. It puts all of us in a better position to do good. When we work on improving ourselves, we have no problem bettering the people around us. Healthy competition propels us all.

DeFi offers a trustless environment in which transactions are managed by smart contracts. Blockchainers are rethinking and redefining finance before our very eyes.

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

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

RTR Crypto is the global project manager for FEGtoken. He worked as an ER nurse for seven years as well as one year in hospice nursing, and also served on the Texas disaster response team. He followed his father’s footsteps and began investing in stocks before becoming involved in crypto. His father lovingly told him he was an idiot. RTR left medical school in his third year to work alongside the FEG team on improving decentralized trading platforms and creating a safer crypto space for new and experienced investors.
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Decentralized finance: The best ways to participate and operate

Decentralized finance: The best ways to participate and operate

Breaking down the concept of DeFi and its ecosystem, as well as strategies and the risks for private and professional investors who plan to allocate capital to decentralized space.

Decentralized finance (DeFi) is a concept that has received a lot of attention since the so-called DeFi Summer of 2020 because its usage, often measured in total value locked (TVL), has risen dramatically since that time. In the last year alone, TVL rose by over 240% to a current $209 billion in “value locked” within DeFi projects, according to DefiLlama. Not only has it become interesting for investors to get into promising DeFi projects through their tokens (hoping for capital gains), but also to use these platforms to generate a regular and steady income through various activities. And, it’s been even more attractive in bearish markets.

It is exactly this appeal of solid risk-free returns uncorrelated to crypto market movements that lures many investors out on to the thin ice. Remember: There is no such thing as a free lunch. In this article, we will break down the concept of DeFi and go deep into its ecosystem, strategies and the risks all of which are relevant for private and professional investors considering allocating capital to this space.

Related: DeFi can breathe new life into traditional assets

From TradFi to DeFi

Let’s start at the beginning by shedding some light on the transition (or disruption) from traditional finance, or TradFi, to DeFi. Explained simply, DeFi sets out to disintermediate processes traditionally run by banks and financial institutions like borrowing, lending and market making by cutting out the middleman. It allows investors to directly interact with each other on a peer-to-peer (P2P) basis by providing loans or liquidity for trading and assume those roles/functions in return for generating fees, albeit while also carrying the risks. “The disruption of the banking sector, which we have seen in the recent years driven by FinTech players, has now escalated to the next level with DeFi laying the groundwork for a peer-to-peer ecosystem” states serial tech entrepreneur and AltAlpha Digital crypto hedge fund co-founder Marc Bernegger. We will explore the DeFi business model and ways to participate in it shortly.

Common factors used to classify the TradFi space include that it is trust based, as you need to trust your bank as the sole counterparty, large barriers remain for entering the system, as many emerging nations still have populations where 50-70% are still unbanked, and they are often slow, expensive and not very customer friendly. What can you expect if they are only open Monday-Friday, from 9:00 am to 11:00 am and 2:00 pm to 4:00 pm? This stands in strong contrast to the DeFi world built on code that removes the need for trusted intermediaries; the agreed-upon terms are recorded on and executed through blockchain mechanisms. Accessibility has drastically increased with the spread of internet coverage and cheap smartphones. The digital assets space can be accessed 24/7/365, with services and global network coverage being constantly expanded and improved.

While it might all sound wonderful, there is still a long way to go. The topic remains complex and hard to grasp for many. User interfaces and processes still have plenty of room for improvement and simplification, fees can vary, resulting in unreasonably high charges for smaller transaction amounts, DeFi hacks have been on the rise and being your “own bank” welcomes an entire slew of operational challenges and risks.

The elements involved in DeFi

Looking at DeFi as a whole, much like building a house, you have various layers that come together to form a new digital service offering.

Using the house as our example, the first layer, the underlying blockchain technology which could be Ethereum or Solana (layer-1 protocols), is like our basement or cellar. Depending on which blockchain is used, you will need to make certain trade-offs. This is known as the blockchain trilemma, a phrase coined by Ethereum co-founder Vitalik Buterin.

Think of a triangle with security, scalability and decentralization at each of the corners. You can only optimize two corners while making a compromise on the third corner. Putting this into a practical context, Marius Ciubotariu, founder of the Hubble Protocol, states:

“Both Solana and Ethereum do not compromise on security, but as opposed to Ethereum, where almost everybody with a laptop can run a node, Solana nodes are much more demanding. However, in a world governed by Moore’s law, this doesn’t seem to be much of a trade-off anymore.”

He continues: “Solana, as a blockchain, was designed for high frequency (financial) activity. Everything in Solana’s design is geared towards performance, choosing to prioritize speed over cost.” This gives you more color for the nuanced views developers and investors must take when deciding for an ecosystem. To tackle these challenges, developers are working on either creating new “base layer” blockchains to solve these constraints, which you see with Polkadot and their layer-0 approach or by introducing layer-2 scaling solutions on top of layer-1 blockchains like with Ethereum using zk-Rollups smart contracts for cost reduction.

Related: From DeFi year to decade: Is mass adoption here? Experts answer, Part 1

Then, on top of our basement, we have our walls, which are the respective protocols, also known as decentralized applications, or DApps, that offer their service as decentralized exchanges (DEXs) such as Curve or Uniswap, lending protocols like Aave or Maker, derivatives liquidity protocols like Synthetix and more. A space that is constantly growing and developing.

You have to put a roof on your walls, and for that, we have the “pools.” When using one of the DApp services like a lending protocol, you can choose which token you want to provide. For example, when using the service of Aave, you can decide to only provide a loan for USD Coin (USDC) stablecoins. Or, on UniSwap, you can act only as a liquidity provider for Ether (ETH) and USDC trading pools. Think of when going to a bank and saying you want to borrow money or trade stocks, you also have to say in which currency you wish to borrow or which stock you want to buy in which reference currency. We’ll cover these activities in more detail in the next section.

Finally, to plant a flag at the top of your roof, you also have the aggregators such as wallets like MetaMask, Trezor and Ledger, DEXs like Thorchain and 1inch, or Centralized Exchanges such as Kraken and Binance. They combine the services of the various platforms into one single entry point/user interface creating ease of access. Die-hard crypto fans will reject using centralized exchanges, as this goes against the entire point of decentralization and self-custody of your private keys, the password to your crypto wealth.

Related: From DeFi year to decade: Is mass adoption here? Experts answer, Part 2

In comparing DeFi to the structure of a house, we aren’t doing so only for simplification, while, of course, omitting some nuances and details, but showing that if the foundation, or the layer-1 blockchain, has cracks, the entire house is at risk. Therefore, when doing your risk assessment, consider the stability of the entire house and not just the floor you are standing on.

How can you make money with DeFi?

Simply speaking, you can either invest in the DeFi projects/protocols by buying the respective tokens like SushiSwap (SUSHI), Aave (AAVE) or Maker (MKR) while expecting capital gains through price increase based on a superior platform offering, user and asset growth. Or, you can actually use these platforms as an “operator” and generate income from the various activities available.

You can also have your cake and eat it, too, by buying into high conviction projects and get some additional income through some of the following activities:

Staking. With staking, you are rewarded for participating in the consensus mechanism process, or how decisions are made, of a blockchain using your staked tokens like Tezos (XTZ), Polkadot (DOT) or ETH, de facto becoming a validator of the network. This is referred to as a proof-of-stake mechanism used by blockchains such as Tezos, Polkadot and soon, Ethereum 2.0 to secure transactions and the network. Notice how I use the “ticker” symbols when talking about the tokens and the platform names when referencing them as a protocol. With an increase of staked and, thereby, “locked” tokens, new concepts such as “liquid staking” have emerged, basically creating a derivative of the staked token, which then again becomes “liquid” and can be re-deployed while earning staking rewards.

Lending. Instead of receiving a loan from the bank, you can get it from a DeFi protocol, having fellow investors put up the funds or, in essence, peer-to-peer lending. In return, the investors receive part of the interest paid on the loan as their yield. Note that when you, for example, hold stocks with your bank, they are most probably lending those stocks, for which you are paying a deposit fee, to some financial institution like a hedge fund, again for a fee, which then can be used for short selling and other leveraged trades. Obviously, you don’t see any of that money.

Liquidity provision. When you buy and sell stocks on a traditional exchange, financial institutions act as intermediaries in coordinating trades, as well as providing liquidity through shares or cash. In the digital asset world, these activities have been disrupted by automated market makers (AMM) running and operating as decentralized exchanges on automated code. The missing liquidity is yet again provided by fellow investors who will receive income in the form of the fees generated by these liquidity pools. These pools consist of a variety of trading pairs such as crypto vs. crypto like BTC/ETH, crypto vs. stablecoins like DOT/Tether (USDT), or stablecoins vs. stablecoins like USDC/Terra (UST).

Yield farming. Imagine you lent money to a liquidity pool, such as SushiSwap, and started to receive your first rewards in SUSHI. You don’t want them sitting around. You could put them to work yet again through one of various opportunities and pile up more rewards. In short, yield farming is the activity of constantly putting your tokens to work — money doesn’t sleep — chasing higher and compounding yields across protocols, pools and others.

Related: From DeFi year to decade: Is mass adoption here? Experts answer, Part 3

All these activities offer a respective annual percentage yield (APY) or fee share split which will vary depending on the platform like Curve or Compound, services such as staking or liquidity provision and underlying tokens like BTC or USDC used. These gains can come in the form of deposited tokens, referenced as “Supply APY,” as well as the platform’s native token, referenced as “Rewards APY.” For example, the SushiSwap protocol would give you SUSHI tokens and the Aave protocol AAVE tokens. Some of these platforms distribute governance tokens, giving owners the right to vote on the direction of the platform, such as receiving the optionality of becoming an activist investor.

What to watch out for

This could be an entire article in itself, so we’ll stick to some key highlights. First, use the house analogy to have a conscious awareness for your risk assessment across the layers and interdependency. With a focus on the protocols, or your counterparty risk, there are some specific levels you will want to review and ask critical questions on:

  • Team. Is the team known or an anonymous group? What is their technical and practical background? Are there any large/well-known backers of the crypto community involved?
  • Technical. Have there been any hacks, are there third-party smart contract audits available and do they have security bounty prizes posted?
  • Tokenomics. Are governance tokens awarded? What is the current total value locked and how are growth numbers regarding assets and active users? Is the project run through a decentralized autonomous organization (DAO) with a community-supported model?
  • Insurance. Is there a treasury to make investors “whole” again in the event of a hack? Are any insurance policies in place?
  • Pools. What are the APYs — are they insanely high? — has the APY been stable, how much trading liquidity is within the pool, risk of impermanent loss, lockup periods or transaction fees?

When you actively “use” your tokens to generate income, you generally are “hot” on these protocols/exchanges and, therefore, much more vulnerable to hacks or counterparty risk. There are institutional providers, such as Copper, offering secure custody not only for buy-and-hold investors, but also for staking of tokens at a cost. These security and custody concerns are a key difference between investing in DeFi through buying tokens, which can then get tucked away into cold storage vs. operating a strategy which is constantly and actively generating income.

In conclusion, this is an incredible space: We have been in and will continue to witness a new trillion-dollar industry being built right in front of our eyes. However, some final words of caution: Watch out for the too good to be true deals/APYs, as there’s usually a catch, for the fees that can suddenly explode, diminishing returns on an active strategy making smaller investments unattractive and be careful with the general safekeeping of your assets as loss of principle is possible.

If you are new to the field, start off with some play money, testing and learning along the way. Alternatively, if you want to participate but not deal with the hassle, you can also invest in professional managers designing, execute and monitoring these strategies in an institutional setting. But, one should use the same nuanced assessment approach provided earlier in your due diligence process of selecting a manager.

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

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

Marc D. Seidel started exploring blockchain and crypto back in 2016. Besides starting the crypto hedge fund AltAlpha Digital, he heads up the Alternative Investment practice of the BFI Capital Group. He previously worked at Google and Facebook, where he led the go-to-market ads strategy for the Alpine region. He founded three companies, one each in the health care, law digitalization and sustainability ecommerce sector.
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Crypto is going mainstream: Here’s how the future founders will build on it

Crypto is going mainstream: Here’s how the future founders will build on it

Crypto is going mainstream, and crypto adoption will likely continue to increase in the years to come. But, in which specific areas?

Using cryptocurrencies for employee compensation

Several companies have already started paying employees in crypto. 

There are several advantages to using cryptocurrencies for employee compensation, especially for companies with a global workforce. First, cryptocurrencies are borderless, which means that crypto can be used to pay employees anywhere in the world.

Second, they are secure and irreversible, reducing the risk of fraud. Finally, cryptocurrency can be easily converted into local currencies, making them convenient for employees wanting to use them for everyday transactions. As more companies adopt this payment method, the use of cryptocurrencies as employee compensation will likely increase.

Access banking services with cryptocurrency

Over two billion people worldwide are currently unbanked, making access to banking services a luxury. 

For people in areas that may have less stable economies, using cryptocurrency can be a way to bypass traditional banking systems.

Several startups are already working on banking the unbanked via cryptocurrency, especially in countries with unstable economies. Kotani Pay and Leaf are examples of platforms that allow the underbanked in Africa access to essential financial services.

Cryptocurrencies can be used to send and receive money, pay for goods and services and more. They also offer security and privacy that traditional banking systems cannot provide. In the future, more platforms will hopefully be able to provide essential financial services in developing countries and war-torn areas through cryptocurrency.

Creating communities around NFTs and cryptocurrencies

One of the most exciting aspects of crypto is the ability to create and trade digital assets, or nonfungible tokens (NFTs). 

These tokens can be used to represent anything from physical assets to digital artwork, as well as collectibles like trading cards and sports merchandise.

NFTs have the potential to create thriving communities around them. For example, there are already a few games that allow players to trade and collect NFTs. These games include CryptoKitties, Gods Unchained and Axie Infinity.

The success of these games shows the increasing demand for NFTs and that people are willing to invest time and money into them. As more games and platforms that allow for the creation and trading of NFTs continue to be created, this trend will likely continue.

New use cases for NFTs are continually being developed and they have the potential to keep revolutionizing the way we interact with digital content. On Decentraland, for example, people can purchase real estate NFTs to own a patch of land in the Metaverse.

NFT communities will likely evolve into tribes within the Metaverse as people learn to navigate identities via avatars and virtual spaces.

Raising debt via DeFi platforms

The advent of decentralized finance (DeFi) platforms that facilitate loans with more manageable terms for both lenders and borrowers has opened up new opportunities for people and businesses to raise debt.

In times of crisis, debt is often seen as a necessary evil. Debt can provide short-term relief and help businesses stay afloat in difficult times. Currently, a few platforms allow businesses to raise debt via decentralized finance. These platforms include Dharma, dYdX and Compound.

Debt raised on these platforms is often used for working capital or covering operational costs. Since the interest rates on these loans are much lower than those offered by traditional lenders, businesses can benefit from the significant savings.

DeFi lending is likely to become even more popular in the coming years as businesses look for ways to get back on their feet post-pandemic. The ease of use and competitive interest rates make DeFi lending an attractive option for businesses looking to borrow money.

Structuring as a decentralized autonomous organization (DAO)

The concept of a decentralized autonomous organization, or DAO, is also something that will likely factor into the future of organizations. 

From governments to corporations, structuring as a DAO gives benefits that traditional organizational structures cannot provide.

DAOs, for one, can streamline complex workflows with the help of blockchain technology. Smart contracts can be used to facilitate tedious processes that require long paper trails, like filing permits, granting approval and so on.

DAOs can also dramatically cut red tape in companies and corruption in governments. Because every transaction will be encoded into the blockchain, records will be available to the public for their scrutiny at any time.

The way we work has already shifted, and it’s not far-fetched to imagine a future where companies are structured differently. A DAO is a fascinating concept that has the potential to change how we do business and should be watched closely in the years to come.

Crypto as a viable form of payment

Crypto has long been criticized for its lack of inherent value. However, the shift toward contactless transactions amid the pandemic has emphasized the value of digital currencies and blockchain technology in the modern world.

For this reason, merchants have been slow to adopt cryptocurrencies as a form of payment. As it gains widespread usage, however, we can expect to see more businesses accepting crypto in the future.

The global pandemic has changed the way a lot of us do business. The shift away from cash and face-to-face transactions toward digital cashless ones has introduced many people to the convenience of paying digitally. So, it’s no surprise that crypto is starting to gain traction as a viable payment option — one that will only continue to evolve.

While still in the early stages, large platforms such as PayPal, Visa and Mastercard have already started allowing clients to purchase and transact crypto through their platforms. PayPal can now be used to buy and transact crypto like Bitcoin (BTC), Ether (ETH), Bitcoin Cash (BCH) and Litecoin (LTC). 

Meanwhile, Visa allows users to conduct transactions with stablecoins on the Ethereum Network. Mastercard also announced the launch of its crypto card in late 2021 and is set to support most digital currencies in the years to come.

Merchants who are still on the fence about accepting crypto can rest knowing that it is here to stay. The cases for and against crypto as a form of payment are slowly evening out, and more businesses will likely start accepting it in the near future. In addition, businesses can save on transaction fees when using crypto as a form of payment.

Crowdfunding with a dedicated blockchain wallet

Online platforms are already being used widely to raise money for different causes and projects. 

Early hesitancy in the practice of investing money in new ideas has lowered, thanks to the increased availability of secure platforms.

We can expect this to continue well into the future, especially since crypto allows people to make smaller lower-risk investments without the fear of losing money. Small businesses and crypto projects looking to raise capital can continue to do so via methods that allow traders to invest in new blockchain projects.

Crowdfunding using a dedicated blockchain wallet allows the process to remain transparent, increasing the accountability of both traders and crypto companies to conduct their business securely. Fundraisers can also avoid paying third-party platforms’ fees without sacrificing donor confidence.

Using cryptocurrency for business equity

A lot of modern businesses nowadays give employees early shares of the company’s profits as equity. 

In the future, equity shares will likely come in the form of company cryptocurrency. This way, each business can form its own ecosystem that employees can participate in.

The use of company cryptocurrency will also enable businesses to bypass the fees such as floatation costs associated with more traditional equity-sharing models, so that’s another plus. 

It’s still the early days for company cryptocurrency. But, as crypto adoption continues to increase, we can expect to see more and more businesses adopting it.

What does the future hold for cryptocurrencies?

Cryptocurrency is going mainstream, as analysts project that the crypto market will grow exponentially over the next few years. 

There’s a lot to unpack about the reality of crypto going mainstream as the global adoption of cryptocurrency continues to increase. For one, the nature of crypto has always been at odds with many of the institutions we associate with “mainstream” big players such as governments, central banks and venture capitalists.

At the heart of crypto is decentralization, which also means transparency, immutability and security. Crypto was built on the heels of an economic crisis, meant to give back financial power to the people and avoid total economic reliance on fiat money and centralized banking.

Today, the push-and-pull between regulatory bodies and crypto organizations proves that crypto is indeed going mainstream. Regulation isn’t bad, but it’s intriguing to see how centralized institutions are trying to inject a bit of centralized order into the seemingly unruly and rebellious world of crypto.

With more and more countries legalizing cryptocurrency, and even some looking to follow El Salvador’s footsteps in making crypto legal tender, it’s clear that crypto will never fade into the background anytime soon.

Needless to say, the future of crypto is inextricably woven into the future of business, technology, and society in general. At the rate things are going, analysts project that the cryptocurrency market will have tripled in size by 2030 at a valuation of around $5 billion.

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