Table of Contents:
What is DeFi?
What is a Blockchain Wallet/Account?
What Crypto Wallet Should I Use?
What is a Decentralized Crypto Exchange? Which Can I Use?
What is Ethereum Gas?
What is a Stablecoin?
What is an Altcoin?
What is DeFi? Decentralized finance (DeFi) refers to financial projects/products that leverage blockchain technology to provide decentralized, typically permissionless methods of interacting with them. This allows for the removal of middlemen such as banks and brokerages. Instead, transactions happen in a peer to peer manner. Also, unlike a bank or brokerage account, an SSN, government I.D., proof of address, etc are not needed - you just need a wallet on the blockchain that the project/product supports. Multiple technologies and protocols are used to achieve decentralization, and this is where smart contracts come in and play a crucial role.
Smart contracts (discussed in a previous education post) transparently automate the terms between buyers and sellers or lenders and borrowers to make these financial tools possible. Regardless of the tech used, one of DeFi’s largest value props is the removal of intermediaries in financial transactions.
DeFi is a young industry with infrastructure that is still being built out. Currently, regulation and oversight is extremely minimal, which imposes potential risk on the investor, especially one that does not yet know how to evaluate the types of risk present. However, the speed of innovation has been astounding (even despite the scams and copycats that have appeared frequently) and points towards a bright future for DeFi. Some broad categories of DeFi products include DEXs, borrow/lend protocols, yield earning protocols, and futures trading protocols.
Video:Article: https://www.coindesk.com/tech/2020/09/18/what-is-defi/
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-What is a Blockchain Wallet/Account? A crypto wallet (same thing as an account) is a digital or physical wallet that allows you to send, receive, and store digital assets. Some wallets are built for a single cryptocurrency or blockchain, while others support multiple.
Creating a wallet gives you an address. This address acts as a publicly identifiable account number, and it is called your public key. The public key is used to identify the wallet and, if a friend wanted to send you crypto, would be used to specify which wallet to send it to. Just as the name implies, the public key can be told to anyone else without worry of losing funds. Your public key is a series of letters and numbers that usually starts with ‘0x’, like 0xe21bmcBeeBC18509e304B939907d50a91D7084dF.
The private key (also sometimes referred to as a “seed phrase”), on the other hand, should be kept secret. It is given to you when you first create the account. It is used to digitally sign transactions and could therefore be used by an adversary to access the wallet and withdraw all funds - hence the need to keep it secret and safe. NEVER give your private key out to anyone else, no matter what they say! Not even the creator of Ethereum would ever need or ask for your private key. However, in the event that you lost your wallet (misplaced your hardware wallet or replaced the computer that your software wallet was on), the private key could be used to recover the wallet on another device or software. For instance, if you were accessing your Bitcoin wallet using some software and your laptop broke, you could always continue right where you left off, using a different computer and even software, so long as you have your private key.
For those of you who have only accessed crypto through centralized crypto exchanges, you have never had to worry about a private key because the exchange does it for you. This difference between institutional-custody and self-custody wallets lies in who holds the private key: when using an institutional wallet, a trusted 3rd party (like a centralized exchange) holds the private key, while you hold the key when using a self-custody wallet. This means that, for self-custody wallets, you are responsible for maintaining the private keys in a safe, private manner. If you lose your private key, there is no way to get back into the wallet!
Centralized exchanges like Coinbase act as an institutional-custody wallet, while hardware wallets like Ledger or software wallets like MetaMask act as self-custody wallets. At the end of the day, choosing a wallet depends on your needs. For instance, hardware wallets are great for long term, secure storage, and centralized exchange wallets are good for frequent trading.
Also, be sure to watch out for software wallet scams - many fake websites will target less experienced users by asking for access to MetaMask or other software wallets. Always make sure the website you are on is the correct one, and, again, never give out your private key unless you are recovering an old wallet and fully trust it.
One more note: as mentioned above, private keys are also referred to as seed phrases in some cases. This “phrase”, (actually just a list of words) can be used to represent your private key in a more readable manner.
Video:Article: https://www.coinbase.com/learn/crypto-basics/what-is-a-crypto-wallet
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-What Crypto Wallet Should I Use? If you're on a centralized exchange, there's obviously no need to worry about which wallet to use. They'll take care of all wallet-related stuff for you. However, if you plan on interacting with DeFi and other on-chain applications or you want to simply store some crypto in a hardware wallet, you'll need to choose the right wallet. Here's a few options:
MetaMask - The most popular software wallet. MetaMask supports Ethereum (mainnet and testnets), Avalanche, Binance Smart Chain, Polygon Matic, and some other blockchains.
Phantom - A great software wallet for Solana.
Ledger - A hardware wallet that supports a wide variety of tokens and NFTs
Exodus - Another software wallet that supports a wide variety of tokens
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-What is a Decentralized Crypto Exchange? Which Can I Use? As we learned in “Blockchain Basics”, centralized crypto exchanges like Coinbase or Binance are easy to sign up for, deposit money from your bank account, and use. Decentralized exchanges, on the other hand, require you to have your own crypto wallet. Also, we go deeper into how these work in “DeFi Basics: Part 2”.
Decentralized Crypto Exchange - A decentralized exchange (DEX), lacks third-party oversight, is usually open source, and depends on liquidity providers (discussed in future education) to offer good spreads. DEXs are typically less beginner friendly, as they often require more technological skills and/or intimate knowledge of cryptocurrencies and related tools such as web-based wallets for a specific blockchain. These follow the decentralized ideals of crypto by removing a central party involved in the exchange, though they do charge some sort of fees to compensate liquidity providers and, depending on the exchange, project teams or token holders. Popular DEXs include Uniswap and Raydium.
Now, what are some good decentralized exchanges to use?
Note - If you're new to DeFi, it's smart to have a friend walk you through withdrawing from an exchange to a self-custody wallet, using a DEX, etc, as it can be easy to make mistakes at first. If you don't have a friend to walk you through it, you can look up a tutorial, or shoot us an email at upnowcrypto@gmail.com and we’ll try to help out. You can also check out our Tutorials section - we provide a few tutorials to help out with this process!
Uniswap/Sushiswap - Historically the two most popular decentralized exchanges. Mainly for swaps on Ethereum, but each offer some other blockchains as well. Raydium is another similar DEX but built on the Solana blockchain.
Opensea - For buying and selling NFTs, mostly using Ethereum.
Digital Eyes - For buying and selling NFTs on Solana.
dYdX - For trading perpetual futures (this is a more advanced option). They offer leverage, and you must deposit funds from the Ethereum blockchain in order to trade on here (and withdraw to the Ethereum base layer once you're done) since dYdX uses a zk-rollup (discussed in another educational piece) to minimize gas fees, which are discussed next.
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-What is Ethereum Gas? You may have noticed high fees when interacting with Ethereum, especially in the last few months. What are these fees and why do they exist?
The concept of “gas” fees applies to all blockchains, so it’s very important to understand.
Gas refers to the fee, usually paid in the native token of the blockchain (ETH for Ethereum) required to successfully conduct a transaction. On Ethereum, it is priced in small fractions of ETH called gwei. The gas fee, or gwei, is used to secure the network by offering incentives for miners (and eventually, stakers) to bundle transactions into blocks.
So gas fees exist, in a way, as a security measure, but how are they calculated? Supply and demand plays a part in this; the amount of transactions that can go into a block is limited. So, as network congestion/demand increases, it costs more gwei to get your transaction included in a block.
The EVM (Ethereum Virtual Machine), which helps allow smart contract execution, also plays a role in gas prices because some types of transactions are inherently more expensive than others. For instance, a simple smart contract interaction that updates a small piece of a smart contract will be less expensive than a more complex transaction, such as deploying an entire large smart contract or buying an NFT through a marketplace. Without getting too deep into the technical details, certain Ethereum opcodes (think of these as the actual low-level steps that a smart contract must run through in order to run each piece of code) cost more gwei than others, and the more opcodes a transaction must step through, the more gwei the transaction will cost.
You can also set a gas limit, which tells miners the maximum amount of gas you want to use on a particular transaction. However, if you set this too low, your transaction will simply sit in the mempool (think of this as a waiting room for transactions) until you cancel it or the typical gas fee drops low enough that a miner decides to include your transaction.
Video:What is a Stablecoin? One of the biggest hurdles to overcome in crypto is how to provide stable (relative to fiat) pricing of tokens over a longer-term horizon. A stablecoin is a type of cryptocurrency that aims to avoid volatility. Its value is usually pegged to an outside asset, like gold or a fiat currency. This removes volatility compared to its peg (say, the dollar) and allows users to trade against that asset outside of centralized exchanges.
Usually, the entity behind a stable coin will set up a reserve where it will securely store the assets backing the coin. This is the simplest way that stablecoins are set up. There are also more complex stablecoins that are collateralized by other cryptocurrencies (or NFTs, in-game items, etc) or use algorithms to keep a stable price. We will dive into these more in our research on the different stablecoins in the market. Popular stablecoins include USDT, USDC, and UST.
Video:Article: https://www.investopedia.com/terms/s/stablecoin.asp
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-What is an Altcoin? The exact definition of an altcoin may differ depending on who you talk to, but an altcoin essentially refers to any non-Bitcoin token. "Alt" refers to a shorthand spelling of "alternative", hence “altcoin” meaning a coin that is viewed as an alternative to Bitcoin. Most of our research will be on altcoins.
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