How accessible are traditional financial markets?
Think about how many requirements and restrictions exist around taking out loans. To even get approved for one requires a bank account, good credit, tons of documentation, and can take weeks or even months. Banks then charge high interest rates on these loans, making it even harder to pay them off.
The financial system that exists today has often been criticized for its lack of fairness and its harsh practices. While developed countries have certain standards and regulations in place, developing countries often do not. Residents within these countries have little to no exposure to the banking system due to corrupt practices, high amounts of inflation, and a lack of government regulation in the banking sector.
What if there was a way to take out a loan with none of those obstacles in place?
What if you didn’t need a bank account, a high credit score, or even an ID?
What if you could take it out in a matter of minutes?
This is the true power of decentralized finance.
What is DeFi?
Decentralized finance, or DeFi, markets are financial mechanisms that operate on a peer-to-peer system with no middlemen. DeFi exists entirely on blockchain, making it completely trustless and open to anyone. There are no restrictions on who can access it and what they can or can’t do with their money. The entire DeFi ecosystem operates off of smart contracts directly stored on the blockchain. DeFi gives users the ability to truly make the most of their money by giving them full and independent custody over all their digital assets.
DeFi creates a fair market for all users, regardless of their background. It is accessible to anyone with an Internet connection regardless of location, which removes geographic and economic barriers for users to be able to participate. Due to its blockchain operating system, all of DeFi is completely transparent and open-source; anyone can go and audit a protocol’s code themselves to ensure it’s legitimate, creating a system that is much less susceptible to fraud.
Since DeFi operates peer-to-peer and requires no intermediaries to settle transactions, it is much more cost effective for users, where their only cost is the network fee to process a transaction. DeFi also promotes full self-custody over all your money because it doesn’t require an institution to hold it for you - to interact with a DeFi application, all you need to do is connect your wallet to it and begin making transactions.
Source: CoinDesk
The DeFi market is full of financial innovation and is rapidly improving on a daily basis. Below are some of the key offerings of DeFi and how they are far more effective than traditional financial systems.
Stablecoins
Stablecoins are tokens that are pegged to the value of existing fiat currency, which lets them match their value but with none of the actual drawbacks of fiat. Stables are generally backed by fiat currency or other real financial assets such as treasury bonds, giving them legitimate value and making them the preferred method of conducting payments on-chain because of their fixed price point unlike other cryptocurrencies that can be volatile in value. This has resulted in a massive boom of the stablecoin market, with the total market cap of stablecoins reaching over $160 billion as of June 2024.
The largest stablecoin by market share is USDT, operated by Tether. USDT is entirely backed by the US dollar as well as government bonds and treasury notes. It dominates almost 70% of the stablecoin market with its closest competitor USDC, ran by Circle, making up 20% of the stables market. Other popular stablecoins include the DAI token by Maker, the USDe token ran by Ethena, and the PYUSD token operated by PayPal. Euro versions exist as well, with Circle operating EURC as a Euro stablecoin solution.
While tokens such as USDT and USDC are backed by fiat currency, other stablecoins are backed by crypto or completely algorithmically. The USDe stablecoin operated by Ethena is completely backed by crypto assets on-chain, making it transparent and fully decentralized. Feel free to read more about Ethena in the Ethena Labs documentation. Algorithmic stablecoins work by minting or burning tokens to control the price based on demand - when the price starts to go over the $1 point new tokens are minted (created) to dilute the supply, and when the price starts to dip below the $1 point tokens are burned (removed from circulation) to decrease the supply.
Source: DefiLlama
While the technology behind these stablecoins continues to improve on a daily basis, algorithmic stablecoins are generally viewed as not being as reliable as collateralized stablecoins because they aren’t backed by legitimate assets. This became evident with the collapse of the Terra ecosystem in May of 2022.
Terra’s stablecoin UST was an algorithmic stablecoin that was controlled by the minting/burning of LUNA, Terra’s native token. A massive sell-off of UST caused the price to depeg from $1, causing a loss of investor confidence as the algorithm continued to mint more LUNA to try and bring UST back up to its $1 peg. The massive influx of LUNA into the market caused its price to plummet from almost $120 down to zero as investors sold off their holdings, causing the entire ecosystem to collapse. While new algorithmic tokens have taken precautions to avoid this scenario from ever occurring again, it’s important to know the potential downside of these assets.
Stablecoin pairs have become the dominant transaction medium for DeFi because of their price stability and security. They are available virtually on every chain, with both USDC and USDT being supported on over 70 different networks.
The goal of this stablecoin system is to create a completely digital currency that mimics the value of the fiat currencies that we are familiar with, but has none of the setbacks. It can be used by anyone, anywhere, at any time. USDC is also fully regulated and compliant and fully reserved, with the reserves for the token being transparently held and audited.
One major use case for this system is cross-border payments. Currently, this is something that creates major headaches for businesses and individuals alike. It requires going through multiple banks, long settlement times, and high fees. This is something that should not be a norm in the digital age. With stablecoins, users are able to harness the power of the blockchain to send money directly from one person to another with instant settlement time and minimal to no fees.
Because the liquidity for DeFi is provided by its users, stablecoins often offer much higher yield than savings accounts of CDs do on fiat currency. Protocols such as Ethena, Fluid, Kamino, Gearbox, and Goldfinch offer APRs of 10%+ for stablecoins because of this liquidity demand. This system benefits both sides of the ecosystem, where businesses have liquidity to operate while users get high and secure returns on their money.
Check out the current yield rankings for stablecoins on DefiLlama to see how much yield different protocols offer for their users to capitalize on.
source: Circle.com
DeFi Lending
Stablecoins provide another major use case, which is that they are able to be taken out as loans. Loans in the DeFi realm operate with much less restrictions than financial institutions do. Anyone can access liquidity at anytime with minimal restrictions. You do not need any form of identification, tax information, or financial documents, only a digital wallet and cryptocurrency as collateral.
A prominent example of DeFi lending is the Aave protocol, which is an entirely decentralized ecosystem that allows users to act as either borrowers or lenders.
How does lending work in Aave?
Lending on Aave works using Liquidity Pools, which are smart contracts that are able to store cryptocurrency. These liquidity pools allow for a system where lenders are able to deposit assets into the pool and borrowers are then able to borrow those assets. The borrowers then pay interest on their borrowed assets, which goes directly to lenders. The entire process is completely automated, with no intermediaries required, making it fast, cheap, and effective.
Lenders simply have to deposit one of the supported assets into a liquidity pool in order to get started. In return, they receive a liquidity token that represents a yield bearing version of the asset they deposited.
For example, if you were to deposit $1,000 worth of ETH, you would get an equal amount in aETH, the liquidity token that represents ETH. The interest rates that are generated vary depending on network activity and would be paid out in the form of that liquidity token, so your $1,000 worth of aETH would receive interest in the form of additional aETH.To redeem your assets, you’d burn the liquidity token and receive the corresponding value of the original asset in return.
source: Global X ETFs
What about borrowing?
To ensure that the risk of bad debt is at a minimum, Aave requires loans to be overcollateralized, where users must provide crypto as collateral that exceeds the value of the loan, with the exact amount required being dependent on what asset and how much of it they are borrowing. The interest rate on the loan is then determined by Aave’s algorithm that checks the balances in the liquidity pools and sets an appropriate rate. Because they provided collateral, borrowers have much more flexibility with loan repayments.
Another option for borrowers is an advanced technique called a flash loan, where the loan is taken out and then repaid within the same transaction. Generally, these flash loans are utilized through smart contracts that employ advanced trading strategies, such as token price arbitrage, to create leverage. Once the transaction is complete, the loan is returned to the pool it was taken from, and since this entire process occurred in only one transaction, Aave can audit it to ensure the loan was repaid in full.
Aave is completely decentralized and is operated through governance proposals where participants can vote on AIPs, or Aave Improvement Proposals, to govern the protocol. This type of protocol is called a DAO, or a Decentralized Autonomous Organization. DAOs are entirely controlled by their participants, who are all equally entitled to suggest and vote on improvements to the protocol. To become part of the Aave DAO, all you need to do is hold AAVE, the protocol’s token. This token is what allows you to create, review, and vote on proposals.
You do not need to be an Aave DAO member to use the protocol and all its features.
- A proposal, that can be created by anyone in the DAO, is introduced to the community, and a temperature check called a snapshot is taken, which provides a sentiment gage and gives members the opportunity to offer feedback
- Proposals that successfully pass the snapshot are turned into official AIPs and are submitted on-chain to be voted on by the community
- Voting power is based on the amount of tokens you hold, where you would use your AAVE token balance as a way of supporting your vote on the proposal
- Successful proposals are then directly deployed onto the Ethereum network, which is the main network that Aave operates on, as well as then passed onto other networks in the form of smart contracts
To prevent potentially malicious proposals from being passed, elected members of the community called Guardians have the power to prevent harmful proposals from being passed, as well as other failsafe features that let them act in emergency situations.
To learn more about how the Aave protocol works, check out the Aave docs and Aave governance guides.
Lending and borrowing platforms such as Aave open up tons of new avenues for both lenders, who can earn interest on their money, and to borrowers, who have an effective and easy way to take out loans. For those that are unbanked, this is a particularly powerful tool, as they now have the ability to access capital for their endeavors.
Decentralized Exchanges
Liquidity pools also play an important role within another key sector of DeFi. Decentralized exchanges, or DEXes, allow users to swap between different tokens using these pools to provide the liquidity necessary. These exchanges are completely automated through smart contracts and require no middlemen or any managing entity that can control the price of assets on it. To use the exchange, you’d simply connect your digital wallet, select the token you’d like to trade and the asset you will trade it for, and then sign the transaction. This process was discussed earlier in the 2. Digital Identity on the Blockchain section.
Instead of following the traditional order book model that stock trading uses, liquidity pools on DEXes mainly operate through the use of Automated Market Makers (AMMs). AMMs are algorithms that keep the balance of the pool equal to ensure there is a balance of both assets. For example, if a pool has ETH and USDC and someone uses that pool to swap their ETH into USDC, the AMM algorithm is responsible for ensuring that the trade gets executed without disrupting the balance of the pool. Check out this article by Chainlink for a more in-depth explanation on how AMMs work.
From a trader’s perspective, they are able to access these pools and deposit one asset in return for the other. If there are no existing pools for that pair, the AMM algorithm with utilize multiple pools to complete the trade. As a trader, you directly interact with the liquidity pools when completing your trades, where you deposit one asset into a liquidity pool in exchange for the other. The trades are automatically conducted by the smart contracts, and can be executed as long as there is enough liquidity in the pool to cover the transaction amount.
Source: Crypto Robin
Imagine you want to trade ETH for USDC. You would simply take your ETH, enter an amount, and swap it for USDC. On the backend, the DEX is actually utilizing the ETH/USDC pool to complete the transaction where it will deposit your ETH into the pool and the return the equivalent of USDC.
If no liquidity pool exists for the pair you want to trade, the DEX will exchange tokens across multiple pools. For example, you are on Sushiswap (a popular DEX) and you want to use the USDC token to buy the PENDLE token but there is no USDC/PENDLE pool. However, there is a ETH/USDC pool and a ETH/PENDLE pool. The exchange will automatically take your USDC and convert it to ETH in the first pool and then convert that ETH into PENDLE in the second pool. Here is how the transaction would appear on-chain:
The transaction action shows the direct path your transaction takes, where the USDC is first swapped for ETH and that ETH is then swapped for PENDLE.
Similar to the lending and borrowing method, a DEX lets lenders provide cryptocurrency as liquidity to execute trades.
In DEXes, lenders are called liquidity providers and the process of depositing liquidity into pools is known as yield farming, where a liquidity provider is generating (farming) yield by collecting fees. Users are able to exchange one asset for another through these pools, and the fees they pay to make the swap are then paid out to the liquidity providers as interest. This system creates a self-funding ecosystem for these exchanges to thrive in, where lenders are incentivized to provide their cryptocurrency as liquidity for traders and are then rewarded for their contribution through fees.
Imagine you are a lender and you are holding the tokens ETH and USDC. You want to earn interest on those holdings so you decide to delegate them to a liquidity pool on Uniswap, one of the largest DEXes in the crypto ecosystem. To delegate, you’d simply go to Uniswap, select the pools section, and look for the ETH/USDC pair.
You can view all the information about this pool by going to the ‘Pools’ section of Uniswap and selecting that liquidity pool. You will then be able to see all the metrics regarding that pool such as volume, liquidity amount, and all the transactions that occur within that pool.
Once you select a pool, you then have two options:
- Provide liquidity for the entire pool price range, where the liquidity you put in will be distributed evenly across all price ranges of the assets
- Provide concentrated liquidity for a marginal price range, where the liquidity you put in will only be provided when the asset is within that range - for example when ETH is between $3,000 and $3,500
Full range of liquidity:
If you choose to provide for the entire pool price range, you will deposit an equal amount of both assets, for example $500 worth of ETH and $500 worth of USDC. Since your assets are spread more thinly however, you are less likely to generate as high of a yield as you would with having a more concentrated position.
Concentrated range of liquidity:
In a concentrated position, since you are only supplying your assets for a portion of the price range, you will generate a much larger fee return - the smaller the range, the higher the fee potential. Depending on your position, you will be required to deposit more or less of one asset versus another - for example $300 of ETH and $700 of USDC.
The risk with concentrated positions is that if the price of that asset goes outside the range you are providing liquidity for, you will no longer earn interest on that position, and your position will be converted from both tokens to only one. For example, if your position in the ETH/USDC pool is for when ETH is between $3,000-$3,500 and the price of ETH drops below $3,000 then your position will be entirely converted to ETH by the AMM algorithm to maintain the balance of assets in the pool. Similarly, if the price of ETH rises above $3,500 then your entire position will be converted to USDC.
For a more in-depth tutorial on providing liquidity, check out the Uniswap documentation.
AMMs make decentralized exchanges much more efficient than other existing financial exchanges. They can operate 24/7, there are no order books like within stock exchanges where orders need to be matched, and anyone can use them to either trade or yield farm. However, it is still a developing system and comes with certain risks including vulnerability to hacks, arbitrage, and slippage.
There is also no way to directly buy crypto using fiat on these exchanges, where a user would have to use a 3rd party such as Moonshot or a centralized exchange such as Coinbase or Binance. These centralized exchanges are still important to have around today because they offer a much stronger and more pleasant user experience for new crypto users, and they make it very easy to get started by buying cryptocurrency using fiat money.
However, it is important to note that when crypto is sitting on a centralized exchange, it’s not really your crypto but rather a representation of your assets. Only once you move that crypto out of the exchange and into a digital wallet that you fully own does it become yours. DEXes, unlike centralized exchanges, have no ability or power to take away your money or kick you out of your digital wallet, making them significantly more independent than accounts on exchanges.
Liquid Staking
A big part of network liquidity and security is staking. While chains such as Ethereum utilize Proof of Stake, where node operators can stake ETH to contribute to the network, not everyone can meet the criteria required or want to take on that level of commitment. Becoming a node validator on Ethereum requires putting up 32 ETH, which is roughly $115,000 as of June 2024, as well as storage space and some computing power.
A solution that arose to this issue is the rise of liquid staking, where anyone can contribute any amount they’d like to securing the network in exchange for interest on their holdings. Liquid staking works by letting people pool their assets together to cover the cost of operating a node.
Instead of one person putting up the required stake amount and running a node themselves, liquid staking protocols let users deposit funds into a pool and then use those funds to operate nodes.
What’s even better is that users that stake their assets then receive liquid staking tokens, or LSTs, that are interest bearing tokens that represent the value of your stake plus the interest accrued. These LSTs can then be used across the DeFi ecosystem to earn additional yield or as collateral on lending protocols such as Aave. Some protocols have begun to offer Liquid Restaking Tokens, or LRTs, that are given in exchange for staking LSTs.
Lido is the most prominent liquid staking protocol in DeFi, with over 32 billion dollars (as of June 2024) staked. Lido works by letting users stake their ETH and giving them stETH in return. This is the LST of the protocol and automatically accrues interest for the user. All you have to do is deposit any amount of ETH and receive the equivalent in stETH, and you will now be helping secure the Ethereum network! You can then unstake your stETH at anytime in exchange for ETH.
Lido takes all of this staked ETH and pools it together to operate nodes. The more ETH is deposited, the more nodes they can run. Interest accrued from operating all these nodes is what generates the yield that is given to the stakers in the form of stETH. This model allows users that want the staking rewards ETH has to offer, but don’t want to go through the hassle of becoming a node validator on the network, to still contribute their ETH.
source: Lido
The rise of LSTs has led to tons of different protocols in DeFi offering the ability to stake assets on their platforms in exchange for yields. Liquid staking benefits both the project and the users: on the project side this system offers increased decentralization, where protocols can rely on users to generate liquidity, while the users have a way to continuously engage with a protocol while earning rewards.
Pendle is a fully permissionless, decentralized protocol that enables users to maximize their potential return on their digital assets. They offer fixed yield strategies for users to get fixed rate returns on their staked assets. Pendle’s token is called PENDLE and lets holders of the token participate in the protocol. However, the protocol has the option for users to stake their PENDLE tokens in exchange for vote-escrowed PENDLE, or vePENDLE. Users can lock their PENDLE to receive vePENDLE, where the amount of time its locked for is proportional to the rewards - the longer you lock your PENDLE, the more vePENDLE rewards you will receive.
vePENDLE offers a ton of additional value to users, including:
- Increased voting power
- A base APY as well as an additional Voter’s APY
- Increased liquidity pool rewards for farming yield
This system benefits both the Pendle protocol and its users. It creates liquidity for the Pendle protocol by directly incentivizing users to lock their money for a set amount of time in order to accrue rewards. It creates additional value for the PENDLE token, where a user must buy PENDLE in order to stake it and receive vePENDLE, which drives demand for the PENDLE token.
For more information on how this system works, check out the Pendle docs on vePENDLE.
Liquid staking has also created a method of tracking a protocol’s value through its TVL, or Total Value Locked. The TVL of a protocol highlights the amount of assets that a protocol has locked on it and can help define the risks and benefits of investing in a certain platform. Generally, the higher the TVL of a protocol, the more trustworthy it seems, since it shows investors that others trust this project and are willing to lock their money on it. For more information on how TVL works, check out this Investopedia article.
When staking cryptocurrency it’s important to check all of the details before locking your assets on a protocol. Ensure that:
- The protocol you are using is trusted by others in the crypto community
- There are clear guidelines for how and when you can unlock your staked assets
- The smart contracts the protocol uses are secure and audited, which decreases the likelihood of the project getting hacked
DAOs and Governance
Since the goal of DeFi is to maintain as much decentralization as possible to avoid any one person or group having control, the governance of DeFi protocols reflects that belief. Decentralized governance is meant to create a collective decision making process, where everyone that’s involved in a project can get a say about which direction it should go in. This ensures that a protocol will continue to reflect the values of its users and developers as it grows.
Decentralized Autonomous Organizations, or DAOs, are set up to be an effective system of offering decentralized governance over a protocol. They operate fully on-chain, with all actions revolving around governance being done through smart contracts that do not require any third party interaction.
The goal of a DAO is always to continuously improve the protocol by applying any improvements necessary. These improvements are proposed to and voted on by the community and include items such as bug fixes, treasury allocation, new feature implementation, and any other items that a DeFi protocol may need.
As already discussed with Aave and Pendle, most DAOs operate with a token governance system, where members hold the protocol’s token and use it as voting power to suggest and vote on improvement proposals. Different projects have different rules regarding voting power and token allocation, so it’s important to know the rules of a DAO when becoming a member. Voting is always done on-chain to ensure fair practice, since votes are calculated by a smart contract that can’t be manipulated due to its transparency - if a protocol created a rigged smart contract for counting votes, members would be able to audit the contract themselves on-chain and call out the protocol.
The main business benefit of a DAO is its fluidity; it allows for much faster decision making and actions to occur since there are far less bureaucratic delays. Traditional businesses often have multiple layers of management that need to sign off on any action, whereas a DAO can put out a proposal at anytime and have its members all vote on it.
This also gives the DAO a much more diverse input, since it’s not just a small group at the top of the business making decisions but rather the entire group itself. Anyone can suggest improvements to make the DAO more streamlined and efficient, since no one will know issues better than the developers who building the product and its users who interact with it.
Voting and quick decision making lets DAOs remain competitive in the market and pivot at any point to better respond to market demands.
Because of this fair system of governance, DAOs offer unparalleled community engagement that most businesses lack. While a traditional business may have a small percentage of truly devoted customers, a DAO will generally have a much higher percentage of devoted users because those users have a direct say in the governance of the protocol and can therefore propose and vote on improvements that will benefit them.
NFTs
When most people hear the term NFT, they immediately think of a picture of a monkey selling for millions of dollars. While that has been a major use case for NFTs thus far, it is by far underselling the potential of this technology. NFT, or Non-Fungible Token, is a token just like any other cryptocurrency, except that it can’t be replicated - hence, non-fungible. Once an NFT is created, it is a unique one-of-one and can’t be copied.
This trait lets NFTs serve as truly unique identifiers of assets on the blockchain network. They are capable of storing metadata (data associated with the token) which lets them be programmable assets that can represent a wide range of objects. For example, with something like a Bored Ape NFT, the blockchain creates a token that contains all the information related to that NFT. This includes the identifier, name, image, and a list of all transactions associated with the NFT.
NFTs have the ability to demonstrate something that other digital assets can seldom do - proof of ownership. Since they are completely on-chain, you can track the entire ownership history of an NFT. This includes:
- The smart contract that was responsible for minting, or creating, the NFT
- All the transfers of ownership
- The on-chain address currently holding the NFT
While this may seem unnecessary for something like a monkey profile picture, it has real potential in other areas of digital assets.
Let’s say, for example, that instead of a picture of a monkey, an NFT represents a VIP concert ticket. The minting transaction would be the creation of that ticket by a smart contract, which would give it its unique traits and attach them as metadata to the token. This can be the ID of the ticket, the name of the event, a description of the perks the ticket offers, and a 3D animation that acts as the image that comes up when a user opens the NFT.
In this case, this concert ticket cannot be replicated because there is proof on-chain with its own unique ID that it is one of x amount of VIP tickets available. To verify the ticket is legitimate and is yours, all you’d need to do is show that based on the transaction history of the NFT that is visible on-chain, your wallet address is the one that currently holds the ticket.
Source: Bored Ape NFT on Etherscan
This represents the use of NFTs for access, where owning the NFT acts as a membership or as a ticket to an event. Owners of the Bored Ape NFTs, for example, get exclusive access to events, sales, and more as a result of holding the NFT. To learn more about how NFTs can be used as digital tickets, check out this guide by Oveit.
The concert ticket example demonstrates another huge benefit of NFTs: the ease of ownership transfer.Since there are no middlemen in blockchain, you can directly send an NFT to another address. That address will now own the NFT, and the transaction will be reflected in the transaction history of the NFT to prove the transfer of ownership occurred. In the case of a concert ticket, if you wanted to sell the ticket to your friend, you can have them send you crypto directly to your wallet address, and once you receive payment, you simply send them the NFT ticket.
For a more trustless and professional option, you can write a simple smart contract that holds the NFT until the requested amount of money is deposited into the contract, upon which the NFT is automatically released to the buyer and the crypto payment gets transferred directly to the seller.
How can NFTs represent physical assets?
NFTs offer the option of tokenization, which is the creation of a digital representation of a real world asset (RWA). Tokenization can onboard RWAs on-chain to create better and more fair organizational systems than the ones currently used. Today, ownership is tracked through a fairly inefficient and outdated system: vehicles, buildings, and land all have titles and deeds that represent ownership, with all these documents being stored in a variety of ways.
What if there was a one-stop digital solution that can modernize the issue of storing, tracking, and transferring ownership of physical assets?
This is the appeal of tokenization.
As with normal NFTs, NFTs that represent physical assets would have the ability to prove verifiable ownership of a physical good. The tokenized asset would be represented on-chain with a unique ID and held in the owner’s digital wallet. The blockchain would act as a decentralized public database that securely tracks the ownership of physical assets in a way that is much more efficient than having a messy and underkept bureaucratic database that can be breached and manipulated. It will also drastically increase the ease of transferring ownership, where official smart contracts can be created that automatically approve the transfer without any middlemen or brokers necessary.
The California DMV recently announced a move to create a custom DMV-run blockchain network to digitize 42 million car titles. This network, built on the Avalanche blockchain, will give California residents a much smoother experience in transferring vehicle ownership. A custom wallet will allow drivers to access their car titles on-chain, giving them quick and easy access. Check out the full article by Avalanche to learn more about this initiative.
As mentioned when discussing stablecoins, NFTs can represent real-world fiat financial assets. Many stablecoins today that are backed by fiat currency or treasury bonds already apply this principle, where the value of a digital asset is tied to that of a financial one such as a treasury bond.
NFTs can also represent cryptocurrency value as well - for example, if you open a liquidity pool position on Uniswap, you receive an NFT that represents your open position and contains all the associated metadata such as the value of your investment and the assets in the pool. Once you close your position, that NFT is burned and removed from circulation.
NFTs have the capability to create a far more effective medium for ownership verification and storage of records than what we have today. While today’s use of NFTs as profile pics or artwork is already proving this concept works, the technology has far more potential that most people realize. With the tokenization movement sweeping DeFi, on-chain representation of real-world assets will create a far more effective and efficient system for keeping record of physical goods than any existing system does today.
An NFT minted by Uniswap that represents an open MKR/WETH liquidity position
Memecoins
Memecoins have become commonly associated with crypto traders today, where there are countless stories of traders making (but far more likely losing) tons of money by trading these tokens. Memecoins are primarily speculative crypto tokens that represent DeFi users taking advantage of an extremely volatile and unregulated market.
Anyone can create their own token and publicly launch it within minutes, with thousands of new tokens being created on a monthly basis. Most undergo no safety checks and are designed to be quick pump-and-dumps, where a token briefly skyrockets in value before going straight to zero as the majority shareholders sell off their tokens.
Platforms such as Pump.fun, for example, make it so that anyone can launch a token in minutes. A user can add in a name, ticker, description, and an image, pay the fee (0.02 SOL is ~$3 as of June 2024), and their token will be deployed onto the Solana blockchain. Anyone can also write their own token deployment smart contract, with templates for these contracts being readily available on most DeFi chains.
While memecoins primarily serve a a speculative market, it’s important to note the underlying social movement that has made them so popular.
For the first time in the history of the Internet, users have the ability to create a monetary asset that reflects Internet culture.
Memecoins are called this way because that is what they reflect: memes. Memes are a whole new form of culture that has originated as a result of the Internet and have had tremendous impact on society. Certain memecoins have been so successful as a result of this culture, such as Doge, Shiba, and more recently Pepe.
The form to create a new token on Pump.fun
Dogecoin is considered to be the first real memecoin. It was released in 2013 and based on the popular meme of a Shiba Inu dog that began gaining popularity in 2010. It was created as a way to tokenize an iconic symbol of the Internet and to give meme culture an additional utility route. The DOGE token gained immense popularity and Dogecoin is now the 9th largest blockchain by market cap with a value of over $16 billion as of June 2024. Shiba Inu and its token SHIB took inspiration from a similar influence, with the project also being based on the iconic dog breed. Since its launch in 2020, Shiba and its token SHIB has grown to be the 13th largest blockchain by market cap with a value of over $10 billion as of June 2024. One more iconic meme that made its way into the crypto market is Pepe, based on the Pepe frog meme, attaining a market cap of over $4 billion since its token PEPE launched in 2023.
The original Doge meme picture
The Shiba Inu breed that inspired the meme
The Pepe the frog meme
Check out the Dogecoin, Shiba, and Pepe sites to learn more about these project and understand their missions.
Memecoins are driven through their communities, with their success often being dependent on how loyal of a community the project has. Successful memecoins were able to garner enough of a momentum from their supporters to become permanent players in the DeFi space because of their cultural relevance.
Memecoins often rise and fall in price corresponding to social events and narratives. Elon Musk’s relationship with Dogecoin, for example, has led to significant pumps for the token whenever he tweets about it. Celebrity endorsement of cryptocurrencies has been a significant topic of controversy, with most celebrities doing little to no research about a project before promoting it. Some even go as far as to launch their own tokens that often quickly plummet to zero once the majority stakeholders sell off their holdings.
While there are many risky facets of memecoins, it’s still important to recognize the impact of Internet culture and how important it is to shaping decentralized crypto markets. In a decentralized marketplace that has no controlling parties to dictate the market, trends arise directly from the users. While the crypto space does need a certain level of regulation to reach its peak potential, free markets cannot be undermined and subjugated. This is the true opportunity of crypto.
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