We are hearing about cryptocurrencies more and more often. They are a popular source of investment by individuals and businesses users around the world. For many of us, it is still a mysterious concept that creates uncertainty. It is usually gives with a wide berth. We have created a guide that will bring each of you closer to the topic of cryptocurrencies. It will explain what exactly they are and what types they are divided into.
But let's start by explaining the concept of cryptocurrency.
The shortest definition of cryptocurrency: It is a digital currency, secured by cryptography. This makes it completely immune to fraud and forgery. It is typically used as an exchange value in a peer-to-peer (P2P) host system. The first cryptocurrency was Bitcoin, introduced by Satoshi Nakamoto in 2009. It was aimed at creating an electronic payment system that would be universal all over the world and would enable financial transactions between users without the participation of intermediaries - a bank or any governmental institution. Every device that joins the decentralized structure of the system is referred to as a node. It is a physical device connected to a network that can send, receive and transmit information. Cryptocurrency systems are considered decentralized because they do not rely on a centralized point of power. Management and the issuance of cryptocurrency units are based on pre-programmed algorithms and mathematical evidence. Cryptocurrencies are characterized by varying degrees of decentralization. It depends on the structure of the network and the way the nodes are arranged. Most systems are based on a public distributed ledger, the so-called Blockchain. It is a constantly growing list of records and they are resistant to modification. Blockchain consists of a “linear chain” and in the crypto world, it is responsible for keeping a permanent record of all confirmed transactions and related data. They are secured by cryptography. Each cryptocurrency follows a predefined set of rules - the underlying protocol that governs the operation of the blockchain and the system.
At first sight it seems very complicated. There are many terms that need to be carefully analyzed. So that the world of virtual currencies does not deter us with its mystery and unpredictability. Because that's what most of us have. Cryptocurrencies are not a stable currency and it is easy to lose your money invested. However, there is one more possibility that can open us up about cryptocurrencies and arouse our curiosity. At the same time, it is characterized by greater stability. We are talking about stablecoin.
Stablecoin - new investment opportunities.
So what are stablecoins? These are cryptocurrencies that have been around for several years. However, they have gained popularity and importance over the last year. They are backed by other assets or benchmarks such as the US dollar or gold. As the name suggests, they are stable in nature. Stablecoins gained popularity by USDT Tethera, which contributed to the flooding of the cryptocurrency market around the world. They change the belief that Bitcoin contributed to that they are not only a good way to store value, but also a convenient and simple form of payment. As a result, more and more retail and institutional investors are choosing to enter the stablecoin market. Their main goal is to maintain a stable market price.
What influences the stability of stablecoin?
Everyone expects profit, security and certainty from the investment. Therefore, trading cryptocurrencies is not a business for faint of heart. It is a market steeped in volatility that puts pressure on traders. More than once we have seen a situation where the value of bitcoin has increased several times at a record pace, and then it has drastically dropped to one fifth or sixth of the previously achieved value. The entire year 2017 was characterized by such jumps, which raised many doubts among investors. Then they started looking for a safe place to locate their investments. They were found in stablecoins price. This was due to their combination with real assets. An encouraging option is the fact that you can exchange other cryptocurrencies for stablecoins.
Stablecoins can be divided into the categories:
- Assets secured / Fiat- backed
They are secured with fiduciary currencies or commodities. Let's explain what fiat currencies are - Fiat Collateralization. Stable coins hold a currency reserve through assets such as the US dollar, precious metals or oil. However, dollars are the most common and most popular reserve. They are the security for the issuance of cryptographic coins. Reserves are held by independent trustees and are regularly audited for the necessary compliance.
There are also some problems with Fiat Collateralization. The money required to put in will not be a form of investment for us, which will bring us earnings in the form of interest. It is also difficult to prove that we have the total amount of security. In addition, if the company invests, there is a risk of fraud or security breach by people working in the institution.
The most famous stablecoins in this category: DAI, Tether, USD Coin (USDC), Gemini and Digix.
- Secured with cryptocurrencies:
They are stablecoins secured with other cryptocurrencies or many other assets. They can also be supported by both of them at the same time. These are the same options mentioned in the point above.
Examples of such cryptocurrencies are MakerDAO and Steem.
- Unsecured / Algorithmic:
They use intelligent contact with the coin share system to algorithmically regulate the coin supply. This contributes to the stabilization of their prices.
Examples of interesting stablecoins in this category are Terra, Ampleforth and Element Zero.
What are the advantages of stablecoins?
We already know that stablecoins are a stable cryptocurrency - this may encourage their purchase. At this stage, the question is: why should I invest my currency or assets in a not very popular, and in addition, a virtual currency?
First: stability. Stablecoins are designed to be stable for a long time. This made them a safe way of investing for both companies and individuals.
Second: easy and safe cryptocurrency trading. Many companies create on-ramps and off-ramps to buy cryptocurrencies. Using them requires a fee. Stablecoins are a good way to reduce your cryptocurrency exposure without making a full withdrawal. Investors don’t want to leave the market fully. They are looking for the right moment to enter the market. Stablecoins make it possible for them.
Third: the possibility of paying in stablecoins. This is the greatest opportunity for cryptocurrencies. More and more companies decide to accept payments and pay wages in cryptocurrencies. This is quite a controversial way as it is still largely speculative trading. Stablecoins have a chance to change that because they don't have this problematic volatility.
Fourth: stablecoins are the future of settlements and money transfers, especially abroad. People send or wait for money abroad know how long the waiting time can be. The downside is also quite high fees that we have to pay in connection with such a transfer. In the case of stablecoins, we are not dealing with intermediaries. The time of such a transaction is also much shorter. Binance, one of the largest cryptocurrency exchanges in the world, is available any hour, seven days a week. In addition, cryptocurrency market participants can make transactions without having to provide their personal data for verification or being subject to a number of other procedures.
What is distributed cryptocurrency exchanges - DEX?
A decentralized exchange, or DEX (Decentralized Exchange) in short, is a platform for the exchange of digital assets. It works on the principle of decentralization - without the participation of a central authority. DEX allows you to trade peer-to-peer digital assets directly between investors. So it means that users do not have to transfer their assets to the stock exchange. This reduces the risk of possible theft or hacking of servers. The decentralization of trading prevents price manipulation or fraudulent trading. It is characterized by security, independence and speed, just like stablecoins.
Is DEX the only crypto exchange platform? Well, no - the Synthetix project was created.
What is the Synthetix project?
Synthetix is a decentralized platform based on Ethereum (It is the entire development platform, the structure of which gives the possibility of creating decentralized, distributed applications). It is used to trade synthetic assets and create assets that can be found in the real world. We mean company stocks, precious metals or other assets. The platform itself is a place for active asset trading users as it connects the traditional market with the cryptocurrency market. Asset prices are delivered to the platform in a decentralized manner, which affects security and stability. If you are interested in trading on this platform, go to the website and simply connect your Ethereum wallet. It is not necessary to provide your personal details or scans of evidence, which often discourages us from using multiple platforms. Please note that the platform is still in an early stage of development. We must, of course, be careful with the decision to invest.
DeFi - what is it and why is it so important in the cryptocurrency market?
The term DeFi stands for Decentralized Finance. They are financial applications based on the Ethereum blockchain. It is a computer program in the form of a smart contract. It transfers banking operations to the blockchain. This phenomenon is becoming more and more popular among cryptocurrency market participants. It is a response to the need to maintain the anonymity and security of the parties to the transaction. DeFi became popular during the COVID-19 pandemic. It contributes to the abovementioned possibilities of stablecoins, such as e.g. the lack of intermediaries in the transaction. It also has a downside. Low system performance and low scalability. The developers are still working on improving DeFi, it is still in the development phase. The system becomes the object of fraudulent attacks, and in the extreme situation of loss of funds, we have no one to address our claims to.
Smart Contracts - how can we understand it?
In the world of cryptocurrencies, the role of ensuring is created by smart contracts. They are smart contracts in the Ethereum network (thanks to this they have been introduced into common circulation) and are based on Blockchain technology, in the form of an application. Their creation is possible thanks to decentralized DApps applications. They are an interface that allows interaction with smart contracts. Ethereum also allows you to create advanced smart contracts. Smarts contracts operate on the basis of a traditional contract for the owner. They are a computer protocol designed to digitally facilitate, verify, enforce the negotiation or contract performance. Smart contracts allow you to make reliable transactions without a third party. After certain conditions are met, they allow the EVM (Ethereum Virtual Machine) code to be executed and, as a result, start fulfilling the role of a traditional legal contract. As in the case of the aforementioned international transactions, these agreements are verified much faster. We save time and skip the tedious bureaucracy process.
So, as you can see, smart contracts are applications that can have the same governing power as traditional legal contracts. However, they have the great advantage that they are verified much faster, thanks to which we save a lot of time, effort and formalities, and above all - we skip the entire bureaucracy process, which has led many people to the brink of patience. Such contracts may be the future in many dynamically developing industries, such as the real estate, finance or e-commerce sectors.
In the above article, we tried to introduce you to the topic of cryptocurrencies, and above all, algorithmic stablecoins. This is a relatively new category, especially for people who are not interested in investments and modern technologies. As you can see, in this quite short article we tried to list and explain as many concepts related to cryptocurrencies as possible. Please note that this is a real investment and it is not worth going into it without first researching the topic. We hope you will find this text a good guide in a nutshell.