Lending secured by cryptocurrency. How it works and what is the benefit from it

With the advent of DeFi, a new way of making money has appeared in the blockchain industry — lending secured by cryptocurrency. In this article we will tell you about this type of lending and the way it works. We will give you examples of earning money on cryptocurrency secured loans.

What is lending secured by cryptocurrency

This is a type of lending that is used in the decentralized finance ecosystem. DeFi is made up of many applications that work autonomously and provide tools similar to traditional financial instruments. One such tool is lending, which is available in the MakerDAO app on the Ethereum blockchain and Just Lend app on the TRON blockchain.

How lending secured by cryptocurrency works

The peculiarity of lending in DeFi comes from the autonomy of such applications. Unlike a bank, the application cannot check a potential borrower for solvency. Everything works automatically via smart contracts. Therefore, in order to obtain a loan, the user must secure it with a collateral. The collateral must exceed the loan amount by a certain percentage, which depends on the specific app. Upon reaching this condition, the smart contract will automatically issue a loan.

Take the MakerDAO project as an example. In MakerDAO, you can take out a loan in DAI stablecoins pegged to the US dollar in a 1:1 ratio. You need to leave a deposit, which is at least 150% of the loan amount, in order to receive a loan. For example, you want to take out a loan for 1,000 DAI secured by Ethereum cryptocurrency (ETH). This means that you must leave a deposit of at least $1,500 in ETH. If the ETH rate is $10,000, then you must leave at least 0.15 ETH as collateral. You also need to pay interest for a loan secured by collateral in cryptocurrency. In the case of MakerDAO, it’s 8.5% of the loan amount.

Keep in mind that 150% is only the minimum collateral percentage. If the rate falls and the collateral percentage is less than 150%, then your collateral will be sold, and you will have to pay not only an 8.5% stability fee, but also a 10% liquidation fee. Therefore, it is recommended to leave the collateral above 150% to protect your loan from the collateralized cryptocurrency’s volatility.

What are the benefits of such loans

There are two reasons for using loans secured by cryptocurrency. The first reason: such a loan allows you to fix a part of the investment portfolio. Let’s say you are not sure that the ETH rate will rise and you want to protect a part of your assets from a fall. You take out a loan in DAI stablecoins against the collateral in ETH cryptocurrency. If the ETH rate rises, then the value of your collateral will rise too and you will make a profit. It will be less than without using a loan, since you need to pay an 8.5% stability fee. But if the rate falls and your collateral is sold, then you will still have DAI stablecoins you have borrowed. Their value will not change as they are stablecoins pegged to the US dollar.

The second reason: get leverage. Let’s say you expect the ETH rate to rise. You borrow 1,000 DAI against a collateral of 0.15 ETH at a rate of $10,000. For a 1,000 DAI loan, you immediately buy another 0.1 ETH. If the rate rises to $15,000, then the price of your 0.25 ETH will increase to $3,750. If we subtract from this amount a loan of $1,000 and an 8.5% stability fee, then you get $1,165 profit. If you didn’t use MakerDAO to get leverage and just kept your cryptocurrency in your wallet, then your 0.15 ETH would only increase in value by $750.

It should be borne in mind that leverage increases not only profits, but also risks. If the rate falls, then you will lose more money than without a loan. Let’s continue the example with a loan of 1,000 DAI and a collateral of 0.15 ETH at a rate of $10,000. Let’s say the rate fell to $5,000. The liquidation occurs when the collateral percentage falls below 150%, that is, at a rate of $9,999.99. At this point, you are charged a 10% liquidation fee and an 8.5% stability fee. The remainder of your collateral is auctioned off. Only 0.02 ETH of your 0.15 ETH collateral is returned to you. Along with the leverage purchased for 1,000 DAI, you still have 0.12 ETH. Let’s compare the losses in case of a fall in the rate from $10,000 to $5,000 under the following scenarios:

  • if you used leverage, then at a rate of $5,000, your 0.12 ETH will cost $600. Your losses on the fall of the exchange rate will be $900;
  • if you left the entire loan amount in DAI stablecoins, then your losses will be $400;
  • if you did not take out a loan, but simply kept the cryptocurrency in your wallet, then your losses will be $750.

In the examples given, the rate increased and decreased by 50%. Therefore, it is necessary to take into account that with small fluctuations in the exchange rate, the profit from leverage may be less than without it due to the need to pay an 8.5% stability fee.

Summary

Lending secured by cryptocurrency is one of the areas of the decentralized finance ecosystem. It works on the basis of stand-alone apps that automatically issue a loan if the user leaves a collateral that exceeds the loan amount by a certain percentage. This percentage depends on the specific loan app.

If the percentage of cryptocurrency collateral becomes less than necessary due to fluctuations in the collateral cryptocurrency’s rate, 2 types of fees are immediately charged from the user — stability and liquidation fee. If the user returns the loan before this moment, then he only pays the stability fee —  an analogue of interest on the loan.

There are 2 benefits from such loans:

  1. Fixing a part of the investment portfolio. If you take out a loan in stablecoins, then you will lose less money if the rate falls.
  2. Getting leverage. If you are confident that the collateralized cryptocurrency’s rate will increase, then you can buy even more cryptocurrency with stablecoins. If the cryptocurrency’s rate increases, your profit will be greater than without a loan.

The real possibility of cryptocurrency regulation

It is virtually impossible to regulate blockchain technology. But governments continue to look for new technical and legal opportunities to do so. Let’s find out why countries interfere in the crypto industry and what problems arise along the way. 

Why would one want to regulate cryptocurrencies?

Blockchain technology allowed the first cryptocurrency to be launched in 2009. Its main feature is distributed storage of information between all users. None of them can intentionally or accidentally make a change, since only the option that is fixed by the majority is recognized as correct.

Such authentication not only provides reliability but also virtually eliminates the possibility of any outside interference. For example, government agencies will not be able to confiscate bitcoins obtained fraudulently or block a criminal’s account of a criminal.

In addition to countering crime, the need to regulate cryptocurrencies is caused by the role of the state in the modern economy. The state is responsible for such functions as protecting property rights and collecting taxes.

The problem arises when it is necessary to determine the legal status of cryptocurrencies — to treat them as currencies, goods, securities or property. The system of taxation, supervision, and reporting will depend on the classification. Thus, commodity markets operate under relatively weak regulation. Securities, by contrast, are usually subject to more onerous rules regarding price transparency, trade reporting, and market abuse.

Thus, the regulation of cryptocurrencies themselves is almost impossible. Instead, regulators are targeting cryptocurrency infrastructure.

Cryptocurrency infrastructure

The cryptocurrency industry includes different infrastructure objects, each of which requires a different approach to regulation. 

Exchanges. Possible changes in legislation create a potential risk for the crypto exchanges founders. Companies prefer to set up their servers and offices in countries where their work will be strictly regulated. Digital legislation is most developed, for example, in Switzerland, Canada, Japan, and Australia.

These governments are looking for technical opportunities to introduce the cryptocurrency industry into the legal field. Major exchanges such as Binance and Bittrex have already committed to implementing Chainalysis tools for blockchain monitoring. This enables tracking suspicious transactions in real time.

Exchangers. Regulation of the exchangers activities is most often reduced to checking who  purchases digital coins initially. Exchangers require their users to confirm their personal data.

Law enforcement agencies identify both criminals who accumulate bitcoins from drug sales, and those who use the currency to hide wealth. For example, the US internal revenue service tracks the actions of Bitcoin holders and monitors the payment of taxes.

Companies that produce stablecoins. Digital coins pegged to the dollar exchange rate are issued for users who need integration with traditional financial instruments. This determines the need for clear compliance with the law and obtaining approval from regulators. To do this, Tether has implemented the «Know Your Transaction» tool from Chainalysis in the USDT network.

«Know Your Transaction (KYT) for Token Issuers is a unique real-time anti-money laundering (AML) compliance solution for monitoring a token’s full lifecycle, from issuance to redemption» — Chainalysis commented.

Legal status of cryptocurrencies in 2020

Here are examples of countries with different levels of regulation of the cryptocurrency industry.

The map of Bitcoin Legality
Countries by the level of cryptocurrency legalization. Source: coin.dance

Full legalization. In Switzerland, cryptocurrencies and exchanges are legal. The tax administration is considering crypto-currencies as assets: they are subject to Swiss wealth tax and must be listed on annual tax returns. To start operating, crypto exchanges must obtain a license from the financial market supervisory authority. Similar rules apply for ICOs.

The Canadian tax agency also defines cryptocurrencies as commodities. Trade in them is regulated as barter transactions, and the income received is considered as business income. Therefore, taxation is applied to profit. 

Legal status is not defined. In France, there is still no direct legislative regulation of cryptocurrencies. Cryptocurrencies are not prohibited, but they are not protected either, so citizens assume all the risks of owning them. 

In Russia, courts consider cryptocurrencies to be «other property». For the first time, such a decision was made by the arbitration court of appeal in May 2018. The court ordered the debtor to transfer access to the crypto wallet to the bankruptcy trustee. The latest version of the law «On digital financial assets» defines cryptocurrency as property and prohibits using it as a means of payment. The law is due to come into force on January 1, 2021.

Completely forbidden. There are countries where the turnover of cryptocurrencies and the operation of crypto exchanges are legally prohibited. These include Afghanistan, Algeria, Bangladesh, Bolivia, Pakistan, Qatar and Saudi Arabia. 

Summary

The decentralized principle of the blockchain and the complex legal nature of cryptocurrencies complicate the task of state regulation. However, countries come up with solutions to fight crime and regulate economic relations.

The main mistakes of an investor in cryptocurrency

Consider 5 common mistakes that are most often made when investing in cryptocurrency.  We will explain how to avoid them with examples.

Investments influenced by FOMO

Even seasoned investors can suffer from «fear of missing out» — FOMO.  This is an obsessive fear of missing a good opportunity. This emotion affects 56% of social media users, according to a survey by MyLife.com.  After reading another «success story», the desire to buy cryptocurrencies at the maximum price seizes.

Example. In 2017, Bitcoin grew from $1,000 to $20,000. This information evokes a strong emotional response and makes you regret that you missed out on such an opportunity. 

How to avoid. You need to get rid of the idea that someone else is lucky, but you are not. Those who became millionaires in 2017 have endured and believed in bitcoin for a long time. You need to understand the issue, and not act on the basis of emotions and rumors.

Selling the «Bottom»

The opposite situation also happens when investors get rid of coins at a loss to themselves. Looking back, one can come to the conclusion that «the bottom was not worth selling then».  In such a sale, complex and intricate human emotions are triggered — more frequently, panic.

Example. Cryptocurrency lost 80% of its value within a few months.  Such a picture will make any investor nervous.

How to avoid. It should be understood that the cryptocurrency market is extremely volatile.  The rates of digital coins are unstable — their value often rises and falls.  Investing in cryptocurrency requires a different approach from traditional investing in stocks.

Sale of long-term investments

The cryptocurrency market is heavily influenced by the media hype.  After some negative news, even long-term investors can start selling their assets.  Panic is common. On Twitter, information was spread that on October 15, 2020 there will be a massive sale of 140,000 bitcoins.

Example. The contribution is initially planned for a year.  A month later, bitcoin grew by 10% and then the thought comes to mind that it’s time to sell it.

How to avoid. Giving into the desire of quick profit is a bad quality for an investor.  An important skill to learn is patience. Therefore, if you were planning on making your investment a long-term one, it is better to leave them as such.

Unfortunate choice of wallet

A superficial approach to choosing a wallet can result in not only inconveniences, but also security problems.  The easiest way is to register an account on an exchange. This is convenient, but unreliable — 75 cryptocurrency exchanges have closed since the beginning of 2020.

Example. A person bought a token, which is released at the exchange rate a year later. During this time, the wallet manufacturer could go bankrupt or become victim to a hacker attack.

How to avoid. Different wallets are suitable for different purposes. Learn the differences between different types of wallets, for example, in the article «How to choose a wallet for Ethereum».  Read reviews of cryptocurrency wallets and test them with small amounts.

Lack of backup

A backup is a copy/backup of information. Unlike other types of investments, in cryptocurrencies, the loss of private keys means that the coins are lost forever.  A fire or hard drive failure can destroy a cryptocurrency portfolio 100%.

Example. The investor used a software wallet installed on the computer.  After reinstalling Windows, it turns out that «Drive (C :)» was formatted and access to the wallet is no longer available .

How to avoid.  Create recovery files. More specifically, you need to copy the private key, with which you can restore the wallet with investments. Alternatively, print it on paper in QR code format or somewhere other than a computer.

Summary

The main mistake an investor can make is not taking this matter seriously enough.  Before you start investing in cryptocurrency, you should study the common mistakes of investors in order to know how to avoid them:

  • Investments under the influence of FOMO;
  • Sale of «Bottom»;
  • Sale of long-term investments;
  • Unfortunate choice of a wallet;
  • Lack of a backup.

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What you need to know about stablecoins’ privacy

Cryptocurrencies are often associated with anonymity. But stablecoins are a different kettle of fish. Today we will talk about why they can’t be as confidential as cryptocurrencies. We will tell you in what ways centralized stablecoins differ from decentralized ones, what are the problems with privacy and how these problems are solved if at all.

Stablecoins and privacy

State regulation of cryptocurrencies is a complex task that developed countries are trying to solve. To develop and implement bills, they often turn to analytical companies working with the blockchain. One of such companies is Chainalysis, which monitors cryptocurrency transactions.

Chainalysis works with internal agencies in the United States and Europe, such as the Federal Bureau of investigations (FBI) and Europol. Tracking of up to 90% of all transactions in cryptocurrency helps in the fight against corruption, fraud and terrorist financing. According to the Chainalysis’ report, more than $1 trillion worth of cryptocurrency transactions were made in 2019, and 1.1% of them were illegal.

In fact, the work of blockchain analysis services is to identify the connection of specific individuals with specific transactions in the network. Thanks to the Chainalysis services, the Internal revenue service of the United States tracks the actions of bitcoin holders and monitors the payment of taxes. Therefore, even Bitcoin transactions cannot be considered completely anonymous.

For stablecoins, the cost of which is pegged to the exchange rate of a fiat currency, the issue of confidentiality is even more complicated. Problems arise from the goals that users follow:

  1. To minimize the risks associated with the volatility of cryptocurrency.

The problem in this case is to simplify the algorithms of stablecoins. This makes it easier for monitoring networks such as Chainalysis to work. Reducing privacy may have negative consequences in countries where the cryptocurrency market is not yet regulated.

  1. To protect themselves from inflation in the real economy.

In this case, the holder of a stablecoin is at risk, as it acts in opposition to the economic policy of the state. There may be clash of interests not only on the ideological level, but also on the regulatory level. With the devaluation of the national currency, the anti-crisis measures include control over the movement of capital. Such a case occurred in Argentina in 2019, when the government forced citizens to keep a currency that was rapidly losing its value.

  1. To use in Decentralized Finance (DeFi). 

Due to the lack of transparency of cryptocurrencies, the traditional financial market cannot fully integrate them. Stablecoins allow you to create an alternative to existing financial systems based on the blockchain.

All these problems are solved in different ways, since the privacy parameters of any cryptocurrency depend on the principle of its operation. Stablecoins can be divided into two groups — centralized and decentralized.

Centralized stablecoins

Centralized stablecoins are backed up in a 1:1 ratio by currencies that are stored in bank accounts. They are created and managed by a single organization and store data only on their own servers. At the same time, the stablecoin of a single company can exist in several different blockchains. For example, UDST runs on the Omni, Ethereum, EOS, Tron, and Liquid platforms.

Examples: USD Tether (UDST), Paxos Standard (PAX), Binance USD (BUSD). 

The non-profit organization Human Rights Foundation in 2019 presented a report that provides an analysis of the privacy of stablecoins. HRF identified five main evaluation parameters:

  1. The ability to monitor transactions using Chainanalysis;
  2. Open source contracts;
  3. Basic privacy tools;
  4. The ability to freeze accounts;
  5. Monthly certifications.
The result of HRF's report about atablecoins
Table of different stablecoins characteristics. Source: Human Rights Foundation

Of the above, only USDT on the Liquid blockchain supports any privacy tool. That is Confidential Transactions, which hides the asset type and amount of each transaction.

It is important to consider not only the technical capabilities of organizations, but also how they use these leverage. According to HRF, Tether has only frozen USDT at 16 different addresses.

Decentralized stablecoins

Decentralized stablecoins do not have a central regulator. They are backed by cryptocurrency collaterals and are managed by the users themselves.

Examples: DAI, EOSDT, USDJ. 

The DAI decentralized stablecoin, like USDT, is pegged to the US dollar. The difference is that to get it, users block a certain amount of their ETH.

The main problem with privacy is that it is easy for monitoring networks like Chainalysis to identify users. This is because the Ethereum blockchain encourages the reuse of addresses. By default, most users make all their transactions using the same address. This allows monitoring companies to identify the relationship of specific individuals with specific transfers. However, it is still technically impossible to block funds in DAI by the decision of the regulatory body.

On October 12, 2020, the Aztec 2.0 platform for the Ethereum blockchain was announced. The startup provides tools for sending tokens with a high level of anonymity. The zkSNARK Protocol hides the sender’s and recipient’s data, as well as the volume of transactions, which makes them private.

Summary

The very purpose of using stablecoins causes a number of privacy issues. Centralized and decentralized projects try to approach the solution from different angles. However, HRF analysts conclude that the privacy of stablecoins still «leaves much to be desired».

What is DeFi and how to make money on it

Что такое DeFi и как на нем заработать

People who follow the blockchain industry have probably heard about a new trend called DeFi. In this article we will tell you about DeFi and methods of making money on it.

What is DeFi

DeFi stands for Decentralized Finance. This is the name for applications that use blockchain and provide financial services. DeFi projects perform almost the same functions as traditional financial institutions, but they do it automatically using protocols and smart contracts. 

What is included in DeFi ecosystem
The DeFi ecosystem consists of apps that duplicate the functionality of financial institutions and instruments.

For example, there are DeFi applications for lending, insurance, creating stablecoins, and managing cryptocurrency assets. DeFi has its own decentralized exchanges and payment systems.

How to make money on DeFi

There are ways to make money on DeFi which are similar to the traditional financial system. The classic methods include trading on decentralized exchanges and investing in DeFi tokens. And there are ways that are not possible anywhere else. 

DeFi-specific earning strategy is the so-called «Yield Farming». The point of this strategy is in earning DeFi tokens. In order to receive these tokens, you must support the DeFi protocols. These projects need liquidity — user’s funds locked inside a smart contract in order to work successfully. DeFi protocols have a reward mechanism to those who provide this liquidity. We will take a closer look at this and other ways to make money on DeFi below.

Liquidity providing at interest

Let’s say a user wants to take out a loan on a DeFi platform or buy ERC20 tokens on a decentralized exchange. The platform must have assets already in order to issue a loan or sell tokens. Liquidity is the asset that DeFi needs to function properly. These assets can be placed in so-called liquidity pools. Protocols pay a return percentage on blocking funds in such pools. For example, you have provided liquidity to the pool at 3% and the protocol blocked it. This pool contains the assets of all users who have put liquidity into this specific pool. When other users would want to take a loan in the protocol, they will take it from this pool. But they will pay more than 3% for it. This percentage difference is necessary in order to protect the protocol from fluctuations in the cryptocurrency rate.

How do liquidity pools work
A liquidity pool consists of assets that liquidity providers have placed in it. They get an interest for it. Other users can borrow assets from this pool and will pay interest on it.

For example, the Compound app allows you to make money on loans. The interest rate depends on supply and demand and is adjusted with each new Ethereum block, that is, every 12-15 seconds. Interest is paid in ERC20 COMP tokens. In the Compound’s case, you can return the loan you have provided at any time.

In decentralized exchanges, liquidity pools are a pair of two coins. You can either create your own liquidity pool or join an existing one. For example, you can block the ETH/DAI pair on Uniswap, the largest decentralized exchange by trading volume. To do this, you need to block the ETH cryptocurrency and DAI stablecoins in the protocol’s smart contract.

You can provide liquidity not only to exchanges and lending projects, but also to decentralized insurance, payment systems, betting and gambling platforms. There are DeFi projects that track the percentage of other projects’ liquidity pools and automatically move the user’s assets to the pool where this percentage is higher at the moment. For example, Yearn Finance tracks the percentage on the Compound, Aave, and dYdx liquidity pools.

If you want to become a liquidity provider, you need the cryptocurrency of DeFi project’s blockchain. DeFi projects mostly run on the Ethereum blockchain and therefore require ETH as liquidity. You can buy ETH with fiat currency on Bitzlato P2P-exchanger.

Cryptocurrency secured loan in stablecoins

Decentralized finance lending is different from traditional lending. You need to provide a collateral that will exceed the loan amount by a certain percentage in order to get a loan. The exact percentage depends on the specific DeFi platform. For example, the minimum loan collateral percentage in MakerDAO is 150%, in MonolithosDAO it is 125%. Excess collateral is necessary to protect the loan from fluctuations in the cryptocurrency rate. If the rate falls below the collateral percentage, the system will sell your collateral.

These loans are useful for two reasons. First, you can block a part of the investment portfolio from fluctuations in the exchange rate. Loans are issued in stablecoins that are pegged to fiat currency at a one-to-one rate. For example, MakerDAO’s DAIs are pegged to the US dollar, while MonolithosDAO’s MCRs are pegged to the Russian ruble. When you have taken out a loan in stablecoins, you can be sure that their price will not change. If the cryptocurrency rate falls and you lose your collateral, you would still have stablecoins that will not fall in price along with the cryptocurrency. If the cryptocurrency rate rises, then the value of cryptocurrency assets left as collateral also rises.

DeFi lending
When fixing a portfolio, the user fixes the loan funds, since they are stored in stablecoins.
When using leverage, he buys more ETH to trade.

Second, traders use these loans to gain leverage. For example, you expect the ETH rate to rise. You take out a loan in MCR and collateralize them in ETH. Then you buy more ETH for MCR. If the rate increases, then when you return the deposit, you will receive even more ETH. The profit increases because the rate of the collateralized cryptocurrency has also increased. You can buy ETH to get a loan on DeFi platforms at Bitzlato P2P exchange.

DeFi tokens as an investment asset

In addition to investing in cryptocurrency, you can also invest in DeFi tokens. Most DeFi projects have so-called governance tokens. These projects work automatically, so you need to vote to make changes to them — for example, to fix an error in the code or to change fees. Governance tokens give owners an opportunity to vote for protocol changes. In some projects, owners can use them to pay commissions or interest on a loan. Such tokens can be obtained in exchange for a certain action, like liquidity providing. They can also be bought on centralized and decentralized exchanges.

The DeFi tokens’ feature is their high volatility — many of them change in price more than regular coins. The most exponential example is the YFI token of the Yearn.Finance app, which increased more than 130,000% in the first 2.5 months. In this example, you can see that governance tokens often show growth in the first few months, after which their price fluctuates within certain limits, but no longer shows growth by thousands of percent. This is due to the fact that in the first few months it becomes clear whether the DeFi project can be trusted, and the tokens themselves are listed on large centralized exchanges.

Soon you will be able to buy MDT, the governance token of the MonolithosDAO DeFi project, on Bitzlato.

Trading on decentralized exchanges

One of the DeFi segments is decentralized exchanges or DEXes. Compared to conventional centralized exchanges like the Bitzlato exchange, they have two distinct features.

First, there is an automatic listing procedure. In centralized exchanges, the token verification and the listing decision is made by a person, while in DEX it is made by a smart contract. Because of this, fake tokens can be found on decentralized exchanges. They have the same name and logo as the original ones, but do not have the functionality of the original tokens. For example, you won’t be able to use them to pay in-app commissions or sell them on a centralized exchange. In order to buy an original token, you need to enter into the search bar not the name of the token, but the address of the smart contract, which can be taken from the project website or from a large cryptocurrency aggregator like CoinMarketCap.

Secondly, the DEXes’ trading process doesn’t require the use of the order book, but goes down directly between users’ wallets. Decentralized exchanges use liquidity pools provided by users to have volumes of assets at the asking price. Therefore, it is more difficult to find assets on DEX at the right price and in sufficient volume than on a centralised exchange.  The speed of order execution and transaction fees on DEXes are higher than on centralized exchanges due to the fact that such exchanges work automatically and use the blockchain. But to trade on DEX, you don’t need to register and go through a verification process.

In 2020, there are more than 100 decentralized exchanges that differ in functionality and the amount of available liquidity. The largest DEX by trading volume is Uniswap on the Ethereum blockchain. It has an analogue on the TRON blockchain called JustSwap. Among decentralized exchanges, there are platforms with the ability to trade with leverage — for example, dYdX. The Synthetix exchange makes it possible to trade derivatives — tokens that are tied to the value of real assets, such as gold or an exchange index.

Summary

DeFI is an infrastructure of decentralized applications that provide services similar to the classic financial system. Such applications work automatically via smart contracts and protocols.

The main ways to make money on DeFi:

  • liquidity providing to the liquidity pools as an analogue of a bank deposit;
  • lending gives you the ability to block a part of an investment portfolio or to get a leverage;
  • investing in DeFi tokens as an alternative to investing in cryptocurrencies;
  • trading on decentralized exchanges, including the ability to trade with leverage and derivatives.

You can buy ETH for fiat currency on Bitzlato and try to make money on DeFi projects on your own. Soon, you will be able to buy MDT — the governance token of the MonolithosDAO project.

The best wallets for storing Ethereum

If you plan to buy or send Ethereum, you will need a wallet to store this cryptocurrency. In this article, we will tell you what types of wallets exist, what their differences are, and what tasks they are best suited for. 

Software wallets

A cryptocurrency wallet has little in common with a cash wallet. It stores only private keys and tools for tracking the balance and making transactions. Therefore, a crypto wallet is more like a door to the respective blockchain. Software wallets are applications for browsers, computers, or mobile devices.

Functions. Software wallets have constant access to the Internet. In addition to the interface for interaction with the blockchain, they can be embedded with various tools or third-party services, for example, for interacting with DApps.

Usage. It is safer to access the software wallet from the computer where it is installed. This method is suitable for those who are going to work with cryptocurrency in a permanent place with a trusted network. This can be a home computer with personal Wi-Fi.

Differences from other types. Vulnerability of software wallets may be related to network connectivity. If your computer is hacked, you may lose all your funds.

Examples. MyEtherWallet is one of the first Ethereum wallets. The user receives a private key, a public wallet address, access to the smartphone app and browser extension. All these tools allow you to manage not only ETH tokens, but also ERC20 or ERC-721 tokens.

MetaMask is a wallet that works as extensions for browsers and mobile apps on iOS and Android. MetaMask is a «bridge» for managing multiple accounts in other wallets, such as MyEtherWallet. In addition, the wallet is integrated with major cryptocurrency exchanges and DeFi services.

Hardware wallets

Hardware wallets are physical media in the form of a USB key. The gadget looks like a flash drive and works without Internet connection. This is one of the safest ways to make transactions with cryptocurrencies. Getting access to coins on a hardware wallet is not easy. To do this, you will not only need to enter the password, but also connect the device itself to the computer.

Functions.  Hardware wallets are connected via the USB connector. On some models, there is a screen that visualizes the data that the user needs. It is often possible to set a PIN code on hardware wallets. So the gadget can not be used by intruders if it is stolen.

Usage. This storage option is suitable if you do not make transactions often and consider Ethereum as means of saving.

Differences from other types. Unlike software wallets, offline devices cannot be accessed over the Internet. The disadvantage of this method is the need to independently check for updates and test the device for failures.

Examples. Trezor was one of the first offline solutions for cryptocurrencies. The developers claim that you can safely use the gadget even when connected to a computer infected with malware. The device offers thermal and water resistance.

Ledger offers two main products: the more budget-friendly Ledger Nano S and the more expensive Ledger Nano X. With both wallets, you can store almost all existing digital coins (more than 1500 overall). The main difference between these products is that Ledger Nano X has Bluetooth, a battery, and more memory.

Internal wallets of trading platforms

A crypto exchange account can also be considered a wallet. The only difference is that the user sees only the public address of the wallet, and does not have the private key. As long as the funds are on the platform, they are under the control and responsibility of the administration. Therefore, you should only choose reliable sites to work with.

Functions. In addition to storing Ethereum, you can immediately change it, buy, sell and withdraw it.

Usage. Most traders use this solution, as they need to get access to funds frequently and quickly. It is also suitable for novice users who find it difficult to independently ensure proper security of their wallet.

Differences from other types. For such an online wallet, you do not need to install any software on your computer. If you have access to the Internet, you can access it from any device anywhere in the world. It should be understood that this makes them more risky for storing cryptocurrencies compared to any offline option.

Examples. Binance is the largest cryptocurrency exchange by turnover. In addition to Ethereum, you can work with hundreds of other cryptocurrencies.

Bitzlato is not an ordinary exchange, but also a P2P exchange where you can exchange cryptocurrency directly with other users. Among others, the platform uses its own RUBM stablecoin.

Conclusion

Now you know what to pay attention to when choosing an Ethereum wallet. We looked at the differences between the main storage methods using MyEtherWallet, MetaMask, Trezor, Ledger, Binance, and Bitzlato as examples.

What is the ERC20 token standard?

Anyone with an interest in cryptocurrencies has probably heard of ERC20 tokens. In this article, we will explain what ERC20 is, where such tokens are used and why they are so widespread.

What is ERC20

ERC20 is the standard for the Ethereum blockchain tokens. ERC stands for Ethereum Request for Comments. The number 20 denotes the serial number of the standard, with which you can distinguish it from others. There are other token standards, such as ERC721. Often the abbreviation ERC20 is not called the standard itself, but the tokens created in accordance with it.

The token standard was created by Ethereum’s founder Vitalik Buterin in 2015. He developed ERC20 standard to address the compatibility issues of tokens with cryptocurrency services. The lack of compatibility led to the following problems:

  • the need to write new code for a new token type;
  • in order for the cryptocurrency service to have the technical ability to work with the token, it was necessary to coordinate the technical details with the service support. This process took a long time.

Functions of the ERC20 standard

The ERC20 source code is written in Solidity, the same programming language as Ethereum. The standard consists of functions that are used at the time of writing the token code. 6 of these functions are mandatory:

  • totalSupply — the maximum number of tokens that a smart contract can issue;
  • balanceOf — the current balance of tokens and the assignment of this amount to the wallet address;
  • transfer — transfer of tokens from the primary address to the first token buyers;
  • transferFrom — the address from which tokens are transferred;
  • approve — approval of the funds transfer and their availability’s verification in the smart contract;
  • allowance — checking the account balance, which ensures that the user is sending the number of tokens that he has.

The ERC20 standard also includes 3 functions that are only recommended for execution:

  • name — token name;
  • decimal — number of digits after the decimal point, up to 18;
  • symbol — symbol for exchanges and other cryptocurrency platforms.

Together, these 9 functions form a set of rules according to which all ERC20 tokens work.

ERC20 tokens

ERC20 was the first token standard, which is why it has become popular in the cryptocurrency industry. The standard was actively used during the ICO hype in 2017-2018. It allows you to easily prescribe the order for transferring tokens to investors and the principle according to which some of the tokens will be assigned to primary addresses, as a rule, owned by the ICO initiators. For example, ERC20 tokens were used during the ICO of The DAO project, during which the initiators called in more than $100 million in investments.

In 2020, ERC20 tokens are actively used in decentralized applications — DApps. The peculiarity of DApps is that they don’t have a centralized development team that can change the app. After launching an app, any changes can be made only by voting among the community members. All app processes are automated through protocols that support a token standard by default. ERC20 is the most common standard therefore it is usually used in DApps. For example, these tokens are used in MakerDAO, Uniswap, Synthetix and many other apps running on the Ethereum blockchain.

The ERC20 standard is also used by normal centralized companies. For example, USDT stablecoins issued by Tether and BNB tokens of the Binance exchange are based on this standard.

Most of the wallets supporting the Ethereum cryptocurrency also support ERC20 tokens. For example, MetaMask and MyEtherWallet software wallets, Trezor and Ledger hardware wallets can work with this standard.

Disadvantages of the ERC20 standard

ERC20 is the first standard created for Ethereum blockchain tokens, so the creators couldn’t foresee all possible problems:

  • BatchOverFlow vulnerability. It was discovered in 2018. Due to a code error, hackers could cause an overflow of tokens in a smart contract and create large quantities of new tokens. Ethereum developers fixed this vulnerability shortly after it was discovered.
  • Automatic contract execution. This happened when ERC20 tokens interacted with smart contracts that don’t support the standard. The transaction could not be executed, and the user’s funds were frozen and irretrievably lost. The problem was discovered by a developer nicknamed Dexaran in 2018.
  • Simplicity of creation. The ERC20 token deployment process doesn’t require a lot of time or deep programming knowledge. This simplicity was used by scammers who conducted the ICO not for the development of the project, but for making money on investors.

Summary

ERC20 is the standard for the Ethereum blockchain tokens. It contains 9 functions that form a set of rules according to which the token operates. ERC20 solved the problem of token compatibility with other cryptocurrency services.

ERC20 tokens were actively used during the ICO hype, and now they are actively used in decentralized applications. These tokens are supported by almost all wallets that work with the Ethereum cryptocurrency.

The ERC20 standard has its own problems such as the BatchOverFlow vulnerability and automatic contract execution. The simplicity of creating tokens according to this standard has led to the fact that they are often created by scammers.

The most promising cryptocurrencies in 2020

In 2020, many cryptocurrencies have shown large value increases. People who invested in them at the beginning of the year made large profits. Do you want the same profit next year? We have prepared a list of promising altcoins. These coins showed great growth in 2020 and have prospects for further value increase. Read on to find out which cryptocurrency is better to invest your money in.

Ethereum (ETH)

After Bitcoin, Ethereum (ETH) is the second largest cryptocurrency by market capitalization. It appeared in 2013 along with the eponymous blockchain platform.

Ethereum is a platform for many other cryptocurrencies (tokens) and for the smart contracts execution. Ethereum’s goal is to become a global platform for decentralized applications (DApps). It allows users from all over the world to write and run censorship, downtime and hack-resistant software.

Throughout its existence, Ethereum has demonstrated relative stability and constant value increase. Therefore, it is considered a promising coin for investment. Since the beginning of 2020, the coin has almost tripled its value. On January 1st, the cost of ETH was $130, on October 14th — $382.8.

Ethereum also benefits from:

  • DeFi progress;
  • state recognition of the coin as an exchange commodity. New York State Department of Financial Services issued ErisX a license to trade Ethereum futures contracts;
  • the prospect of introducing an Ethereum based benchmark by the Federal Reserve System.

DeFi — decentralized finance. Its peculiarity is that the creators of exchanges, wallets and applications don’t have access to users’ funds. DeFi has become the main trend of 2020. The main reason is a large value increase of tokens related to the system. For example, the YFI token has increased its value by 100,000% since the summer of 2020.

Yearn Finance (YFI)

The native token of Yearn Finance, an app for investing in DeFi. The token was launched in July 2020 and showed a record high price of $41,000 in September. Therefore, the YFI token became the first cryptocurrency to beat the value of Bitcoin.

In August 2020, YFI was added to the Binance exchange and is currently trading in pairs with /BNB, /BTC, /BUSD и /USDT. The token has gone beyond the Yearn Finance platform in which it is used for governance. 

At launch on July 18, 2020, the coin price was $32. In mid-October, the token price is $15,723, which is still more than the cost of one BTC — $11,414. In less than 3 months, the coin value has increased by 49,134%.

Andre Cronje, the developer of the platform, admitted that he himself does not understand the reason behind the rapid growth of the YFI token value. He didn’t count on such success and didn’t plan to issue the coin beyond the Yearn Finance app. Cronje suggested that the hype around the token stems from the fact that it gives users the right to participate in the platform governance. The token gives the right to vote on protocol improvements and a share of the profit from the commission charged by Yearn Finance. Andre Cronje predicts that the token rate will begin to fall when the final distribution of YFI tokens occurs.

Aave (LEND)

LEND is the token of Aave DeFi app that gives users the ability to:

  • take part in platform governance by voting for the proposals of community and developers;
  • reduce commissions;
  • improve interest rates and profits.

One LEND token doesn’t cost much, but with large investments it will give you a tangible income. For example, on January 1, 2020, the coin price was $0.015, in mid-October —  $0.529. If an investor had bought $10,000 worth of LEND at the beginning of the year, he would have earned $342,666 in profit by October.

There are expectations that the token rate will continue to grow due to users’ interest in the Aave platform. Aave is one of the most advanced DeFi platforms for the following reasons:

  • it supports a large number of cryptocurrencies;
  • it supports a large number of wallets;
  • it has a flexible interest rate system.

Chainlink (LINK)

LINK is a token of the Chainlink cryptocurrency platform. It was created to bridge the gap between smart contracts powered by blockchain technology and traditional financial and payment instruments.

Since the blockchain cannot access data outside of its network, Chainlink uses an oracle system. Oracles are organizations and individuals that have the technical ability to provide the necessary data: banks, exchanges, etc. They work as special information channels and transmit the necessary information (for example, temperature, weather), which trigger the execution of smart contracts.

Since January 1, 2020, the price of the LINK token has grown by 605%: at the beginning of the year, the coin was trading at $1.8, and in mid-October its rate was $10.9. Analysts believe that the coin rate will slowly but steadily rise. This belief is due to the trust of the cryptocommunity in the project and its developers:

  • Chainlink partners with Forbes, Binance, China’s state blockchain platform BSN and is constantly expanding its partner’s list;
  • Chainlink is constantly working to expand its network and show users improved system performance and other improvements;
  • Chainlink often appears in media headlines and is the subject of many discussions on social media.

Also, the LINK’s price is positively affected by the ETH price due to the fact that the Chainlink platform is created on the Ethereum blockchain.

Summary

So, we looked at 4 promising cryptocurrencies of 2020:

1. Ethereum (ETH) — the time-tested altcoin, the rate of which is growing constantly.

2. Yearn Finance (YFI) — the token that gained maximum popularity in September 2020 and broke the Bitcoin price record.

3. Aave (LEND) — the token that doesn’t cost much but is growing in price and promising due to the popularity of the Aave platform.

4. Chainlink (LINK) — the token that has increased its price by almost 10 times in 2020, due to the Chainlink platform developers efforts.

The Difference When Buying Bitcoin: How to Choose between Security & Anonymity

Buy Bitzlato

There are different ways to buy Bitcoin. Convenient services for a trader, may not be suitable for beginners. In our material, we will help you to choose a method that meets the needs of the buyer. Let’s consider what’s important and whether to trade off anonymity for safety. At the end, we’ll show the process of buying Bitcoin as an example.

Centralized Exchangers

Given that the principle of operation is like the currency exchange rates at banks. The account on the site is replenished by any supported currency, such as ruble, dollars, pounds or euros. Then the user buys Bitcoin at a price set by the exchanger. 

Operations in centralized exchangers are performed instantly; as they do not directly rely on the current demand for crypto currencies. At the same time, high volatility, i.e. instability of the Bitcoin exchange rate, is compensated by an overvaluation of the real market value. In the end, the process of buying a Bitcoin will be simple, but not necessarily profitable.

bestchange com
Marketplace Bestchange

These types of purchases are the most common. According to BestChange data for October 2020, there are 432 centralized exchangers (marketplaces).

Possible Prospect. A possible scenario of using centralized exchangers is to acquire long-term investments. Buying Bitcoin in this case can be considered as a tool to store your funds. In this case, the holder relies on security, anonymity and future profits. That’s why it’s important to be sure of its reliability and reputation when choosing a site

How to Choose the Right Option.  Reliability lies not only in the security of funds, but also in the safety of personal data of the users. The main danger in this process can be the verification process – some services require proof of identity through official document scans and photos. 

According to ShapeShift CEO Eric Voorhees, verification systems make centralized platforms vulnerable to personal data theft and hacker attacks, especially if the exchanger keeps confidential information such as; passport data, financial statements and social security numbers.

After confirming your identity, the user is no longer anonymous. To protect yourself from hackers, you must selectively choose a service with a good reputation. To do this, it is highly recommended that you research online:

  • Feedback from those who have already used the exchanger. You can find them on Reddit forums, Bitcointalk or BestChange
  • The number of authentication methods and the possibility to form private keys
  • Political situation and legislation of the state where the service is located

Cryptocurrency Exchanges

The work algorithm functions like the stock exchange. Prices are determined by the market, depending on the level of supply and demand.

After opening an account at the crypt exchange, the user works with one of the available currency pairs, such as “BTC/USD”. You can open an order for exchange at the current price or set the quote value at which the transaction will be started.

In some exchanges, you can exchange cryptocurrencies only for other cryptocurrencies. In this case, you can buy Bitcoin with a card. Also, in addition to the commission for withdrawal of funds, usually for each transaction on the exchange the trader pays a commission of 0.2 – 0.5%.  This is due to the number of professional tools for market analysis and asset management, such as charts and pending orders.

coinmarketcap com
Service Coinmarketcap

According to CoinMarketCap as of October 2020, there are 334 cryptocurrency exchanges.

Possible Prospect. The function of a cryptocurrency exchange is designed to facilitate the work of traders. Buying Bitcoin is considered a short-term investment. According to CoinMarketCap, the daily trading volume of Bitcoin at Binance Stock Exchange alone is 2,000,000,000 USD on average.

Prices for cryptocurrencies are extremely volatile. Even Bitcoin during the day may fluctuate by 1-2%. Exchanges will help to analyze prices, choose the right time and react quickly to market changes. 

How to Choose the Right Option. Before registering for a certain service, it will be useful to research a bit about it. Aggregators of exchanges and service of statistics, for example already mentioned in CoinMarketCap and BestChange, will help. You should note the following indicators:

  • Liquidity — the more users on the platform, the easier it will be to find a suitable offer
  • Trading volume — the more an operation is executed on the platform, the faster the transaction will be executed
  • Time zone — so that most counterparties were active at the same time as you
  • Number of markets — the more currency pairs are traded at the exchange, the more opportunities for the trader to work

P2P exchangers

Such services provide direct Bitcoin transfers between users. The exchanger only helps to bring together buyers and sellers, acting as an arbitrator in the transaction.

The user creates or finds an ad he needs. The system shall block the Bitcoins on the seller’s account until the transaction is completed. When the payment is confirmed, the P2P exchanger will send the Bitcoins to the buyer’s wallet.

Unlike cryptocurrency exchanges, the functionality of P2P exchangers is aimed at solving only two specific tasks — buying and selling. This makes the services convenient for users who have never had to deal with buying cryptocurrencies.

P2P exchangers are more likely to set low commissions because they have no exchange functionality and no third parties, as opposed to centralized exchangers.

Possible Prospect. P2P may be useful for a person who is entering the cryptocurrency world for the first time. For example, to make a money transfer. The fact is that international transfers, with the help of intermediary banks, take up to 3 business days. However, with Bitcoin, there is no difference in which point in the world the funds will be sent – a transaction usually takes 10 minutes. Furthermore, there are no limits on the amount of transactions.

Picking the Best Option. The common difference between services is the size of commissions. Since the transactions are free, you should compare the commissions: 

  • For creating an advertisement
  • For the output on a third-party wallet

It is possible to minimize possible risks when buying Bitcoin by making transactions with reliable sellers. P2P exchangers offer different options so that users can evaluate the security of each other’s trades. For this purpose, the following tools are implemented on the service:

  • Verification process — Users can confirm their identity by scanning documents, photography or exclusively by phone
  • Statistics — Ideally know about the seller, i.e., the number of successful and canceled deals, losses in disputes, activity for the month, etc. 
  • Reviews — Is it possible to see the ratio of good to bad reviews from other users on the service?

How to Buy Bitcoin with P2P Exchanger, Bitzlato, as an example:

Finally, when we found out what may be the difference between different services and have chosen the best one, we will start the process of purchasing Bitcoin. Let’s do it on the P2P exchanger Bitzlato, as an example. 

Step 1. Registration: Click “Register” and enter your email address and password. 

Step 2: Searching for a Trader: Use the filter to select a purchased cryptocurrency. In our example it is Bitcoin. Find a trader with the right payment method and start a trade.

ad board bitzlato

Step 3: Starting the Transaction. When the deal starts, Bitzlato will block the cryptographic currency in the seller’s account. The system guarantees transparency of the transaction and arbitrator’s assistance to all parties of the transaction in case of a dispute. At this point in the transaction, the buyer must transfer the fiat money according to the chosen payment method.

start dealing with trader

Step 4: Getting Cryptocurrency. The seller then checks and confirms receipt of money. The buyer then receives the previously blocked cryptovalue on the trader’s account for his wallet.

get cryptocurrency bitzlato

The deal is now closed. You can evaluate the trader and even leave him a tip, if you’d like.

Conclusion

In our material, we discussed the 3 ways to buy Bitcoin – using centralized exchangers, crypto ATM and P2P exchangers. We considered the algorithms of working with them and the main differences.

Each of them is suitable for certain tasks, such as trading in cryptocurrencies, private transfers or long-term investments. On page 3, we have described what to consider when choosing a suitable service.

Then we described a step-by-step instruction on how to buy a Bitcoin using the P2P exchanger Bitzlato as an example.