Debunking blockchain myths part 2 by MineBest

The past few years have seen the rapid advancement and further implementation of blockchain technology. But the confusion and misunderstandings surrounding this concept still need to be cleared before the public fully embraces it. Following the first article of the series, we continue to debunk myths and clarify misconceptions surrounding blockchain.

Myth: Blockchain technology is not ready for everyday use

Due to its close association with digital currencies and the recent hype surrounding the highly volatile cryptocurrency market, there is a belief that blockchain is just a new fad among speculators and has no use in the real world.

Fact:

Blockchain technology is being implemented and used daily worldwide. Multiple businesses and industries have adopted it to streamline their operations. Each day, more people interact with platforms and structures that employ blockchain technology.

Blockchain provides solutions for many industries, in applications previously thought to be impossible. A study from the Stanford University shows that this technology has been growing exponentially and has been transforming the infrastructure of various organizations since 2013.

Funding for blockchain startup

Data source: https://www.statista.com/statistics/621207/worldwide-blockchain-startup-financing-history/

The rise in popularity of cryptocurrency services shows the potential for everyday use of blockchain technology. Digital currencies are the original use case for blockchain and although they are not the same, a certain similarity can be observed between them. The world’s most used cryptos, Bitcoin and Ethereum, touched all-time highs in transaction volume in 2020.

Services such as crypto-only online marketplaces and crypto credit cards have taken significant steps in enabling the everyday use of digital currencies. People around the world can now purchase virtually anything they want, at any time, using their digital assets.

Myth: Blockchains require large amounts of energy to run

Blockchain technology, initially implemented for cryptocurrencies, uses a consensus mechanism called Proof of Work. Its use requires expensive and energy-intensive crypto mining equipment.

The Bitcoin network currently consumes the same amount of energy as a small country. This has given birth to the myth that all blockchains require excessive and costly amounts of electricity to run.

Steaming powerplant MineBest

Fact:

It is true that large-scale blockchains like the one used for Bitcoin require huge amounts of energy. This is mainly because they are public, open-source and permissionless blockchains used to mine crypto. But companies looking to adopt blockchain technology do not have to rely on mining.

Unlike permissionless networks, only people with appropriate credentials can access permissioned and private blockchains. These blockchains can operate on the basis of principles set out by a governing body, using a mechanism to validate information called Proof of Authority. This procedure consumes very little energy, often less than the non-blockchain-based system.

Myth: Blockchain is unregulated

The association with cryptocurrencies has led to the belief that blockchain technology is hard to regulate and is risky from a legal standpoint. The majority of cryptocurrencies use public and decentralized blockchain systems, which, until recently, had no clear regulatory guidelines.

Fact:

Cryptocurrency and blockchain technologies are now heavily regulated. Authorities such as FINMA and FATF are leading the way on international blockchain regulation. They have developed government guidelines worldwide, focusing on tax regulations, banking services, transaction monitoring and anti-money laundering policies.

Additionally, blockchains don’t need to be public. Organizations seeking to incorporate this technology into their systems can use a private network set up to comply with laws and regulations, thus minimizing legal risks.

Debunking blockchain myths

Myth: Blockchain is immutable

Immutability is advertised as one of the main assets of blockchain. The feature of distributed ledger means that all transactions, once added to the blockchain, are indisputable and can never be changed.

Fact:

Large networks, such as Bitcoin and Ethereum blockchains, are considered immutable due to their enormous size. But the extent of immutability depends on the size and decentralization of a network.

Having a large user base is essential when establishing an immutable blockchain network. Simply creating a blockchain out of nothing will not automatically make it immutable. Such a feature must be developed through proper planning and infrastructure.

Myth: Blockchain only applies to finance

The financial sector is one of the main industries that can benefit from blockchain technology implementation. FinTech operations are at the forefront of blockchain adoption, with many discussions about its impact on the future of finance.

The recent surge of decentralized finance (DeFi) and the announced interest in blockchain technologies from financial giants such as PayPal and JP Morgan are the hottest topics at the moment. But this enthusiasm for new solutions has also led to the misconception that blockchain can only be used in the finance industry.

Fact:

There are many applications for blockchain technology outside of this sector. New use cases are being proposed and implemented daily. Some notable examples include:

Unfortunately, blockchain technology is still surrounded by myths. Debunking these misconceptions and discovering the facts is a continuing duty that we pledge to fulfil, paving the way for blockchain to revolutionize the way we interact with the digital world.

Debunking blockchain myths: part 2

Debunking blockchain myths part 2 by MineBest

The past few years have seen the rapid advancement and further implementation of blockchain technology. But the confusion and misunderstandings surrounding this concept still need to be cleared before the public fully embraces it. Following the first article of the series, we continue to debunk myths and clarify misconceptions surrounding blockchain.

Myth: Blockchain technology is not ready for everyday use

Due to its close association with digital currencies and the recent hype surrounding the highly volatile cryptocurrency market, there is a belief that blockchain is just a new fad among speculators and has no use in the real world.

Fact:

Blockchain technology is being implemented and used daily worldwide. Multiple businesses and industries have adopted it to streamline their operations. Each day, more people interact with platforms and structures that employ blockchain technology.

Blockchain provides solutions for many industries, in applications previously thought to be impossible. A study from the Stanford University shows that this technology has been growing exponentially and has been transforming the infrastructure of various organizations since 2013.

Funding for blockchain startup

Data source: https://www.statista.com/statistics/621207/worldwide-blockchain-startup-financing-history/

The rise in popularity of cryptocurrency services shows the potential for everyday use of blockchain technology. Digital currencies are the original use case for blockchain and although they are not the same, a certain similarity can be observed between them. The world’s most used cryptos, Bitcoin and Ethereum, touched all-time highs in transaction volume in 2020.

Services such as crypto-only online marketplaces and crypto credit cards have taken significant steps in enabling the everyday use of digital currencies. People around the world can now purchase virtually anything they want, at any time, using their digital assets.

Myth: Blockchains require large amounts of energy to run

Blockchain technology, initially implemented for cryptocurrencies, uses a consensus mechanism called Proof of Work. Its use requires expensive and energy-intensive crypto mining equipment.

The Bitcoin network currently consumes the same amount of energy as a small country. This has given birth to the myth that all blockchains require excessive and costly amounts of electricity to run.

Steaming powerplant MineBest

Fact:

It is true that large-scale blockchains like the one used for Bitcoin require huge amounts of energy. This is mainly because they are public, open-source and permissionless blockchains used to mine crypto. But companies looking to adopt blockchain technology do not have to rely on mining.

Unlike permissionless networks, only people with appropriate credentials can access permissioned and private blockchains. These blockchains can operate on the basis of principles set out by a governing body, using a mechanism to validate information called Proof of Authority. This procedure consumes very little energy, often less than the non-blockchain-based system.

Myth: Blockchain is unregulated

The association with cryptocurrencies has led to the belief that blockchain technology is hard to regulate and is risky from a legal standpoint. The majority of cryptocurrencies use public and decentralized blockchain systems, which, until recently, had no clear regulatory guidelines.

Fact:

Cryptocurrency and blockchain technologies are now heavily regulated. Authorities such as FINMA and FATF are leading the way on international blockchain regulation. They have developed government guidelines worldwide, focusing on tax regulations, banking services, transaction monitoring and anti-money laundering policies.

Additionally, blockchains don’t need to be public. Organizations seeking to incorporate this technology into their systems can use a private network set up to comply with laws and regulations, thus minimizing legal risks.

Debunking blockchain myths

Myth: Blockchain is immutable

Immutability is advertised as one of the main assets of blockchain. The feature of distributed ledger means that all transactions, once added to the blockchain, are indisputable and can never be changed.

Fact:

Large networks, such as Bitcoin and Ethereum blockchains, are considered immutable due to their enormous size. But the extent of immutability depends on the size and decentralization of a network.

Having a large user base is essential when establishing an immutable blockchain network. Simply creating a blockchain out of nothing will not automatically make it immutable. Such a feature must be developed through proper planning and infrastructure.

Myth: Blockchain only applies to finance

The financial sector is one of the main industries that can benefit from blockchain technology implementation. FinTech operations are at the forefront of blockchain adoption, with many discussions about its impact on the future of finance.

The recent surge of decentralized finance (DeFi) and the announced interest in blockchain technologies from financial giants such as PayPal and JP Morgan are the hottest topics at the moment. But this enthusiasm for new solutions has also led to the misconception that blockchain can only be used in the finance industry.

Fact:

There are many applications for blockchain technology outside of this sector. New use cases are being proposed and implemented daily. Some notable examples include:

  • Supply chain management: Organizations use this technology to prevent counterfeiting and create a transparent source of information in their supply chains. It allows all parties to identify the chain of custody, ownership transfer and trace their products’ origin in a reliable and efficient way.
  • Maintaining health records: Healthcare providers in countries like the US, Canada and Russia have started using private blockchains to store medical records, monitor disease outbreaks and track medication shipments. Additionally, distributed ledger technology allows healthcare workers to securely and efficiently access their patients’ verified medical history.

Unfortunately, blockchain technology is still surrounded by myths. Debunking these misconceptions and discovering the facts is a continuing duty that we pledge to fulfil, paving the way for blockchain to revolutionize the way we interact with the digital world.

Debunking blockchain myths: part 1

Debunking blockchain myths

The world of cryptocurrencies is ever-expanding, but there is still a lot of confusion about what digital currencies are. With so many tall tales floating around the internet, it is not easy to distinguish between facts and fiction, especially in such a dynamic environment in which new concepts are constantly appearing.

This is the first in a series of articles dedicated to debunking some of the top myths surrounding the new tech-driven buzzword: blockchain. Today, we dive into five of the most common misconceptions regarding blockchain’s origin, uses and potential.

Myth: Blockchain and Bitcoin are the same

Since the launch of Bitcoin in 2009, there has been a widespread belief that the first cryptocurrency and blockchain technology are synonymous. Even today, many people still use these words interchangeably. Nothing could be further from the truth!

Fact: Blockchain technology was invented for Bitcoin. It did not exist before. But it is not a type of digital currency. It is an open-source system that stores information kept on different computers and is interlinked through a peer-to-peer network. In simple words, blockchain is a distributed digital ledger that records transactions that were carried out.

Blockchain stores transaction details, like the amount of cryptocurrency, date and time, type of transfer, in the so-called blocks. Each block is cryptographically connected to the previous one, creating a chronological chain of data. This structure is the reason behind the name blockchain.

It is also important to mention that blockchain used for cryptocurrencies is typically meant to be decentralized. It means that there is no central authority maintaining it. Information stored on the blockchain is distributed across a network of computers. So, it is not legitimately possible to change or remove a transaction once it is recorded on the blockchain.

Last but not least, blockchain technology aims to increase transparency. When it comes to open networks, most of the recorded information is accessible by everyone through platforms called blockchain explorers. Also, there are many analytic tools developed to have several types of in-depth macro and micro-level insights into the blockchain network. So, it is not so difficult to track all the transactions performed on any given wallet.

Myth: There is only one type of blockchain

The concept of a distributed ledger was first developed in 1991. However, most people heard about blockchain technology only after Bitcoin was born. And because it was the first cryptocurrency, many assumed that the public blockchain developed specifically for Bitcoin was the only one that existed. But that is not true!

Fact: There are hundreds of thousands of individual blockchains on the market. Most cryptocurrencies operate on a public blockchain, but there are other types out there. Soon after Bitcoin was released, banks and other private institutions developed a controlled system that required permission to join. This was the beginning of private and federated blockchains.

Over the years, blockchain technology evolved and was adapted to suit an array of sectors and industries. The first-generation public blockchain had several deficiencies like scalability, efficiency, so other blockchains came into existence to overcome these drawbacks. There are currently four types of blockchain networks: public, private, hybrid and federate.

Myth: Blockchain technology can only be used for cryptocurrencies

Blockchain was indeed introduced because of Bitcoin. Since then, it has been widely used in the cryptocurrency industry. But this innovative technology has other applications beyond the cash and payments system.

Fact: Blockchain is a system of recording information and digital assets in a distributed way. It has been developed to solve the problem of double-spending in a decentralized system. But there are other FinTech applications and services developed based on blockchain technology.

Blockchain-based applications, commonly referred to as DeFi, which stands for decentralized finances, provide services similar to conventional financial operations, but without the involvement of third parties or centralized financial institutions. The developments in this space have come a long way. There are DEXs, stable coins, money markets, insurance solutions, financial contracts, and many others that operate exclusively on the fundamentals of blockchain technology.

The beginning of 2021 saw the total value of assets locked within DeFi applications reach a staggering USD 40+ billion.

Myth: Blockchains are cloud-based ledgers

One of the most common blockchain myths implies that they are just cloud-based databases. But even though all network participants have access to the blockchain, the information it contains is not stored in the cloud.

Fact: Blockchains need to be downloaded and run on computers connected to the internet in a peer-to-peer network. Each computer is called a node, and the better the connection of each node, the stronger the whole network. Another difference between blockchain and a cloud database is that it doesn’t store files in a specific format. Blockchain keeps records with a Proof of Existence service that shows evidence that a file exists without actually showing it.

Now, it is important to point out that some cloud service providers have come up with a solution called BaaS (Blockchain-as-a-Service). The idea behind it was to support the development and management of cloud-based networks for companies that develop blockchain applications.

BaaS is very similar to SaaS (Software-as-a-Service) and allows its users to develop, build, host, and operate blockchain apps on the cloud. This technology helps to boost the future blockchain adoption.

Myth: Blockchain can power up the global economy

It is less a myth and more a widespread perception. Many people believe that blockchain is a massive global network, but in fact it is about the size of NASDAQ’s network. It is not equipped to handle as many transactions as most small global financial institutions deal with.

Fact: According to Gartner’s study conducted in 2019, blockchain technology is still about a decade away from the transformational impact. The report states that this technology is not advanced enough to enable a digital revolution across the business ecosystems. There is still time for it to become fully scalable both technically and operationally.

Currently, the most popular blockchain networks like Bitcoin’s are not designed to handle a huge number of transactions made by financial institutions, so it will not take over any time soon.

Busting the myths helps to understand what blockchain is, how it works and see its limitations. Getting familiar with the technology can increase confidence of its users and support the mass adoption of both blockchain and cryptocurrencies.

What’s hidden in Bitcoin block transactions?

One of the fundamental concepts behind cryptocurrencies is that transactions are recorded in blocks stored on the blockchain digital ledger. But what else is hidden inside those registers? Let’s find out.

Thanks to the public nature of blockchain technology, every user can check all transactions ever made with cryptocurrencies like Bitcoin. But when you go to the blockchain explorer, open a random block and scroll down to the block transactions section, you may get a bit lost with all the confusing names and terms. Concepts such as coinbase transaction, hash, transaction fee, public address and multiple confirmations will be covered in this article.

bitcoin block transactions

The meaning behind the data

A blockchain explorer might not be the most obvious thing for newcomers. So, what is the meaning of the information presented in a transaction block?

Starting from the top, the first thing you see when entering a block is a coinbase transaction, which is the first transaction of every block. It is a special type of transaction generated when that block is created. It contains the block reward in the form of newly created coins and transaction fees distributed as compensation to the miner that has successfully established the block.

bitcoin block transactions

Example of a coinbase transaction, Source: click

The interesting fact about coinbase transactions is that they contain no other inputs commonly found with regular transactions.

There is only one coinbase transaction in every block.

Below the coinbase transaction, there are many other regular transactions that were included in a block. And each transaction has its unique transaction hash (TxHash). Also known as transaction ID (TXID), it is a unique identifier that serves as a reference for localizing specific transactions in the blockchain ledger.

TxHash is an alphanumeric code, and every single on-chain transaction has its unique transaction hash. This allows it to be distinguished from other blockchain transactions.

Below is the hash from the first-ever transfer, where BTC was sent from one user to another – from Satoshi Nakamoto, the anonymous creator of Bitcoin, to Hall Finley, an early developer of Bitcoin:

f4184fc596403b9d638783cf57adfe4c75c605f6356fbc91338530e9831e9e16

Pasting it into the Bitcoin explorer will redirect you to that specific transaction with all its details.

bitcoin block transactions

Source: click

As you may notice, the component next to the amount of BTC being sent is the public address.

The public address is a long string of letters and numbers used to receive crypto assets. It is a unique identifier that serves as a Bitcoin bank account number and can be freely shared with anyone.

This is an example of a Bitcoin public address:

1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa

That specific public address belongs to Satoshi Nakamoto. Its first received transaction was 50 BTC as a coinbase transaction from Bitcoin’s first block, also known as the genesis block. The term is used for the block number zero of a particular blockchain.

Keep in mind that while sharing your public address, the whole transaction history can be navigated. For this reason, those who want their identity to remain confidential must avoid linking public addresses with their real-world identity.

bitcoin block transactions

All about transaction fees

The next component that may stand out in a blockchain transaction is the transaction fee. It refers to a small payment to the miner that processed it.

Bitcoin has no intermediaries and transactions are added into the blockchain through the mining process. So, to perform any transaction, a small fee needs to be paid to the miner that will include the data in the block. It is a reward for the miner’s contribution and resources.

Think of transaction fees as a small tip to the miner. And as in the case of tipping, the customer is the one who decides how much it will be. The greater the incentive, the higher the chances that the said transaction will be included in the next block. In simple terms, if you want your transaction to be processed faster, it is going to cost you more.

Transaction costs may depend on network usage. When the demand for transaction processing is high, the fee may increase significantly. As a result, offering a low transaction fee may not be the best solution as it could take a lot of time to get it confirmed and included in the block.

bitcoin block transactions

Tracking a transaction

The last component is the transaction status. It tracks the current status of a transaction, determining whether it has been included in the block.

In every completed block visible on the blockchain explorer, the status is followed by a number of confirmations. The exact amount depends on how many other blocks were created afterwards.

bitcoin block transactions

The example above means that three additional blocks were created after the one in which the specific transaction was finalized.

Platforms such as exchanges or wallets may have different requirements regarding the number of confirmations before the crypto assets are visible.

It is possible to navigate the blockchain explorer using the TxID and check its status. If it says “pending”, it means that the transaction has not been included in the block. This may be caused by the transaction fee being too low.

Terminology related to Bitcoin transactions may be confusing, but hopefully it’s easier to understand now. Be sure to follow our series where we will explain the meaning of other terms related to mining and crypto block terms.

How blockchain technology is changing finance

A shift towards blockchain technology has begun in the financial industry. Major companies are seeing it as a way to modernize their operations. And to provide a new approach to the way people interact with their services. But this revolution didn’t just happen overnight. Let’s take a look at how and why blockchain is transforming the financial landscape.

Image source (https://www.theblockcrypto.com/linked/83135/2020-fintech-crypto-involvement-timeline)

The image above shows the blockchain developments that major financial institutions have undertaken over the past year. You can find a comprehensive list of financial companies currently pursuing blockchain solutions here.

Evolution of FinTech

To appreciate the impact blockchain can have on financial services, we first need to understand the evolution of financial technology. The term financial technology refers to the solutions that businesses use to deliver smartphone apps, websites and other services. Though you may have heard it called by another name. A shortened form – FinTech. It has gained popularity over the past decade as a trendy way to describe modern finance companies. However, the concept of FinTech has been around for over a century spanning three eras.

Blockchain_Finance

The first era of FinTech (FinTech 1.0) lasted from 1866 to 1967. It began when the first transatlantic cable was laid between New York and London. This provided the necessary infrastructure (or tech) needed for the globalization of financial services. Although the financial world was strongly connected during this period, the technology remained mostly analog.

The era of FinTech 2.0 began with the development of digital technologies for communication and transactions. It was marked by the introduction of the first ATM by Barclays bank in 1967. This era spanned over 40 years and saw the rise of digital stock exchanges, SWIFT transactions and online banking.

The current era of FinTech 3.0 started with the 2008 financial crisis, Which coincided with the introduction of smartphones. This era of FinTech bloomed thanks to an innovative method of delivering financial services to people through mobile applications, no matter where they were. It was also influenced by the growing distrust of traditional financial institutions. Soon, new financial start-ups emerged. And large tech companies began offering financial services through their platforms, like Google Wallet and Apple Pay.

Blockchain_in_Finance

The beginning of each FinTech era was marked by a technological breakthrough. The revolution of blockchain technology is set to boost the world into the next era!

FinTech (r)evolution

FinTech 3.0 emerged as a response to the inherent issues of FinTech 2.0. But it still faces its own inefficiencies. So, what are the challenges here? And what solutions can blockchain technology provide so we can see the dawn of FinTech 4.0?


Challenge: Exceptionally high power is entrusted to central authorities. The ultimate control over your finances lies with the service provider. If it chooses to freeze or confiscate your assets, there isn’t much than can be done about it. The Cyprus banking crisis serves as an example of this.

Blockchain solution: Blockchains are inherently decentralized and immutable. Meaning the data stored on the blockchain is visible to everyone and cannot be tampered with or changed by anyone.


Challenge: It is difficult for financial institutions to keep up with regulations and policies. Companies offering financial services are subject to time-consuming audits and require continuous monitoring and supervision to ensure regulatory compliance.

Blockchain solution: Blockchain can generate a full overview of all assets and transactions and constitutes a single source of truth. It makes the auditing process more manageable and cheaper.


Challenge: Long transaction periods. With increased globalization, the demand for cross-border and far-distance payments is growing. There is also the issue of transfers between variously regulated institutions and governments. This means transactions can take multiple days or even weeks to be processed.

Blockchain solution: Cryptocurrency payments on the blockchain are far less time-consuming. Even the slowest blockchains need no more than one hour to process a transaction to anywhere in the world.


Challenge: Lengthy and tedious client onboarding procedures and threat of identity theft. Financial institutions must verify the identity of each new user. It causes delays and allows potential identity thieves to slip through the cracks.

Blockchain solution: Users can store and manage their personal data on the blockchain. This will allow them to provide authenticated information at the very start of the onboarding process.


Challenge: Procedures involving multiple intermediaries. Many people are involved in updating and maintaining internal and external ledgers.

Blockchain solution: The use of an automated blockchain-based digital ledger will keep track of all operations with no human input needed. It will also provide an undisputable account available to everyone at any time.


These solutions will lay the foundation for efficiency, transparency and security previously unattainable by the financial services sector. But it will take time before they can be fully adopted. Financial institutions will have to undergo a profound transformation before everything blockchain has to offer can be implemented.

Blockchain is beginning to change the scope of financial services. It is evolving and mainstream users become more familiar with it. Over time, we may see a progressive shift, pushing us into a new era of blockchain-based financial technology.

Decentralized Finance (DeFi) – a financial revolution

Decentralized Finance (DeFi) is the fastest growing trend in crypto. Considered a revolutionary movement rather than a single service, DeFi is beginning to establish itself as a legitimate global financial tool.

The term Decentralized Finance refers to financial applications that exist on the blockchain. Traditional financial services, such as banking and commerce, all rely on a centralized body acting as an intermediary for all operations. DeFi aims to become a completely decentralized alternative to these services.

Just a few years ago, blockchain technology was used only for asset transfers and exchanges. It had no significant impact on the greater financial world. Now, thanks to DeFi, blockchain technology is beginning to transform almost all aspects of finance. Lending, trading, asset management, and more is now possible on the blockchain and the popularity of DeFi applications is on the rise.

Between mid-2019 and the end of 2020 the total value locked in DeFi applications rose by 3,000 percent from USD 500 mln to USD 15 bln! It is possible to see real-time valuations and track the growth of all DeFi applications through sites such as Defipulse.

Decentralized Finance (DeFi) – how it started

The journey began in 2014 with the advent of Ethereum. Its proposition was to create a smart contract platform allowing people to build any type of application on the blockchain. This gave rise to a multitude of new possibilities and DeFi was one of them.

As soon as the Ethereum blockchain went live in 2015, people began building applications on top of it, known as Decentralized Apps (DApps). The advantage of creating a DApp is that once it is implemented onto the blockchain, it inherits all its features – for example, being open source, difficult to manipulate and having no central control.

DApps can be implemented for everyday use in the same way as any digital app. Initially, popular use-cases for DApps were games, art, music and voting platforms. But after some time, people began looking at other financial applications and started creating DApps for lending, trading, brokerage, insurance and asset management. These applications were dawn of what we now call DeFi.

Ethereum remains the blockchain of choice for most DeFi apps. Competing chains, like EOS and Solana, have also developed DeFi projects within their ecosystems and may provide viable alternatives in the future. Some of the most popular use-cases for DeFi applications currently operating within the Ethereum ecosystem are decentralized exchanges, money markets, yield farming and price oracles. Let’s go over them in more detail.

Decentralized exchanges

Commonly known as a DEX, a decentralized exchange facilitates the decentralized swapping or trading of one cryptocurrency to another. Traditional crypto exchanges rely on a centralized model, which requires buyers and sellers to provisionally give up control of their digital assets in order to make a trade. This is to guarantee liquidity. DEXes faced the same need of liquidity, but platforms like Uniswap and Curve managed to resolve this issue through the use of liquidity pools.

Liquidity pools are just large volumes of assets stored in a smart contract. These assets are provided by users and anyone can contribute to the pool.

Why would users want to do that? DEXes charge a small fee for each trade. Fees get distributed to the users who have funds within the liquidity pool, meaning they earn interest on their assets. This concept has given birth to another major application within DeFi – yield farming.

Yield farming

So, crypto assets sit in a liquidity pool and earn a nice little bit of interest. But maybe another liquidity pool will earn more interest? This “grass is always greener” mentality led to the emergence of what is now called yield farming.

Yield farming is about moving assets around from one DeFi platform to another in an attempt to get the best yield. Yield optimization platforms, such as Yearn Finance and Idle, streamline this process so that assets deposited by users are automatically allocated to the DeFi protocol with the highest returns.

Money markets

Decentralized Finance DeFi

In DeFi, money markets are decentralized lending platforms that allow users to earn interest on their cryptocurrency. Lenders simply need to deposit assets into their desired money market to begin earning.

The assets deposited by the lender are sent to a smart contract and can be borrowed by other users. In return, the smart contract issues tokens to the lender which represent their deposited assets plus interest. These tokens can be traded and used like any other crypto token.

Users who wish to become borrowers must first put forth collateral in the form of the asset they plan to borrow. Since it is impossible to carry out a credit check on a decentralized lending platform, the collateral required usually exceeds the amount that can be borrowed.

Overall, it seems like a complex process, but so do all financial lending operations. Companies such as Aave and Compound are helping to simplifying it through their user-friendly platforms. Now, almost anyone who is capable of using the internet, can lend and borrow using DeFi.

Oracles

Oracles connect smart contracts to the outside world. Blockchains are unable to retrieve information from sources outside their own network. Without oracles communicating this information to the blockchain, DeFi would not be possible.

The majority of oracles operating in the DeFi space are price oracles, like Chainlink. They retrieve the current price of assets from multiple trusted sources, such as major exchanges, and feed that information to the smart contracts central to the operations of DeFi platforms.

Oracles don’t only function as price validators. They can retrieve almost any information required by a smart contract, like sports results, weather forecasts or flight delays.

Concerns associated with DeFi

Many of the concerns with DeFi stem from some of the core features of blockchain and Distributed Ledger Technology. Blockchain transactions are irreversible, meaning that any faulty transaction associated with a DApp cannot easily be changed.

This even applies to coding errors in smart contracts, giving hackers a way to find and exploit any loopholes in the code. Such a loophole was exploited in a DApp during the 2016 DAO attack, where hackers managed to move over 3.6 million ETH into their personal account.

Further concerns arise from the fact that the smart contract codes are open source. Anyone can copy the code and create a new competing platform. While this is generally considered beneficial, it also led to many scams and unregulated websites popping up, raising concerns for the safety of customers.

As there are no custodians or central entities managing the users’ funds, there is no need to provide any personal information while using DeFi applications. Therefore, implementing any KYC (Know your Client) or AML (Anti-money Laundering) measures is currently not possible. A major issue from the perspective of regulatory authorities.

DeFi still has a few hurdles to overcome, but big steps are being taken. Auditing platforms have been developed to check, verify and double-check smart contract codes and release their findings to the public. Platforms like DeFiAudits and DeFiSafety are currently leading the way in the DeFi auditing space.

Why use DeFi?

DeFi lending allows users to make money/crypto just like banks, but in a completely decentralized environment. When a user deposits crypto into a DeFi lending platform, the interest earned on that deposit goes directly to them, with no central entity in place that can change that.

Borrowing funds through a DeFi lending platform also has its benefits. For example, it can be very useful for those who need money urgently, but don’t want to sell their assets.

DEXes give users the opportunity to trade crypto peer-to-peer, without the need for a centralized middleman. When using a DEX to trade, there is no need to provide any personal details, and there is no central point of failure that could be exploited by hackers – users remain in control of their assets during the entire process.

DeFi growth

The DeFi movement has recently seen significant growth in the Ethereum ecosystem. By the end of 2020, there were around 130 million ETH addresses registered in the network, with a daily average increase of 100,000 new addresses only in the last quarter of the year!

The number of unique Ethereum addresses linked with DeFi applications has followed the same trend throughout 2020. According to a Consensys report, over 1,195,000 unique Ethereum addresses have interacted with decentralized finance platforms, with over 607,000 new addresses added in Q4 2020 alone. This indicates a significant increase in the number of new participants while confirming the popularity gained by DeFi and its greater adoption in the crypto space.

In September 2020, Uniswap, the biggest decentralized trading platform, surpassed the daily volume of Coinbase, the leading centralized trading platform, for the first time.

At the beginning of January, the total value locked in DeFi applications exceeded the USD 20 bn mark. It continues to grow, recently reaching a new all-time high and breaking the level of USD 40 bn in assets locked in the DeFi ecosystem.

These statistics underline the power and significance of the current DeFi movement and its increasing potential use cases.

As time goes by, DeFi will only continue to thrive and expand further into the mainstream. With multiple use-cases and major DeFi platforms already established, we are beginning to see a new revolution in the world of finance.

MineBest | CryptoFest2019

MineBest was a proud Platinum Sponsor of Crypto Fest 2019, a global crypto festival on September 7th 2019 at Shimmy Beach Club in Cape Town, South Africa!

Catch Senior VP Global Business Development at MineBest, Piotr Tylczynski, on stage in the ‘Gold VS Crypto’ panel discussion, the MineBest team speaking to guests and fellow industry experts at the official exhibit, and even more in this video summary of the event!

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