“Crypto” – or “cryptocurrencies” – is a type of software system that provides users with transactional capabilities over the Internet. The most important feature of the system is its decentralized nature – typically provided by the blockchain database system.

Blockchain and “cryptocurrencies” have recently become important elements of the global zeitgeist; typically as a result of bitcoin’s skyrocketing “price”. This has prompted millions of people to participate in the market, with many of the “Bitcoin exchanges” facing sell ethereum in Nigeria massive infrastructure stresses as demand surges.

The most important point to know about “crypto” is that while it actually serves a purpose (cross-border transactions over the internet), it offers no other financial benefit. In other words, its “intrinsic value” is strictly limited to its ability to do business with other people; NOT in storing/distributing value (as most people see it).

The most important thing you need to realize is that “Bitcoin” and the like are payment networks – NOT “currencies”. This will be covered in more detail in a second; The most important thing is to realize that “getting rich” with BTC isn’t about getting people into better economic positions – it’s simply the process of being able to buy the “coins” at a low price and be able to sell them higher.

To that end, when looking at “crypto”, you must first understand how it actually works and where its “value” really lies…

Decentralized payment networks…

As mentioned earlier, the most important thing to remember about “Crypto” is that it is predominantly a decentralized payment network . Imagine Visa/Mastercard without the central processing system.

This is important because it highlights the real reason why people have really started to dig deeper into the “Bitcoin” proposal; It gives you the ability to send/receive money from anyone anywhere in the world as long as they have your bitcoin wallet address.

The reason this attributes a “price” to different “coins” is due to the misconception that because “Bitcoin” is a “crypto” asset, it somehow gives you an opportunity to make money. It doesn’t.

The ONLY way people have made money using Bitcoin has been by “rising” its price – buying the “coins” at a low price and selling them at a MUCH higher price. While it worked well for many people, it was actually based on the “bigger fool theory” – which essentially states that if you manage to “sell” the coins, it goes to a “bigger fool” than you.

This means that if you want to get involved in the “crypto” space today, basically think about buying any of the “coins” (even “alt” coins) that are cheap (or inexpensive), and riding on them will increase in price until you later sell them. Since none of the “coins” are backed by real assets, there is no way of predicting when/if/how this will work.

Future growth

By any measure, “Bitcoin” is a spent force.

The epic rally of December 2017 indicated mass adoption, and while its price is likely to continue to surge into the $20,000+ area, basically buying any of the coins today will be a huge risk of that happening.

Smart money is already looking at the majority of “alternative” coins (Ethereum/Ripple etc.) which are relatively low in price but are steadily increasing in price and adoption. The most important thing in the modern “crypto” space is how the various “platform” systems are actually used.

Such is the fast-paced “technology” space; Ethereum & Ripple look like the next “Bitcoin” – with a focus on how they can enable users to leverage “decentralized applications” (DApps) on top of their underlying networks to get functionality work .

Decentralized Finance (DeFi) on Ethereum: The Future of Finance?

Decentralized finance, or “DeFi” for short, has taken the crypto and blockchain world by storm. However, the recent resurgence obscures its roots in the bubble era of 2017. While everyone and their dog did an initial coin offering, or ICO, few companies saw the potential of blockchain far beyond a quick price win. These pioneers envisioned a world where financial applications from commerce to savings to banking to insurance were all easily possible on the blockchain with no intermediaries.

To understand the potential of this revolution, imagine having access to a savings account that yields 10% a year in USD, but with no bank and virtually no capital risk. Imagine being able to trade crop insurance with a farmer in Ghana sitting in your Tokyo office. Imagine if you could be a market maker and earn percentage fees that any citadel would wish for. Sounds too good to be true? It is not. That future is already here.

Building blocks of DeFi

There are some basic building blocks of DeFi that you should know before we continue:

• Automated market making, or trustless exchange of one asset for another without an intermediary or clearing house.
• Over-collateralised lending, or the ability to “lease” your wealth for traders, speculators, and long-term holders.
• Stablecoins, or algorithmic assets that track the price of an underlying asset without being centralized or backed by physical assets.

Understand how DeFi is done

Stablecoins are commonly used in DeFi because they mimic traditional fiat currencies like USD. This is an important development as crypto’s history shows how volatile things are. Stablecoins like DAI are designed to track the value of USD with minor deviations even during strong bear markets, i.e. even when the crypto price crashes like the 2018-2020 bear market.

Credit protocols are an interesting development that usually builds on top of stablecoins. Imagine being able to lock up your $1 million worth of wealth and then loan it out in stablecoins. The protocol automatically sells your assets if you fail to repay the loan when your collateral runs out.

Automated market makers form the basis of the entire DeFi ecosystem. Without this you are stuck in the old financial system buy or sell ethereum where you have to trust your broker, clearinghouse or an exchange. Automated Market Makers, or AMMs for short, allow you to trade one asset against another based on a reserve of both assets in their pools. The price is determined by external arbitrageurs. Liquidity is pooled based on other people’s wealth and they get access to trading fees.

You can now gain access to a variety of assets in the Ethereum ecosystem without ever having to interact with the traditional world of finance. You can make money by lending assets or by being a market maker.

For the developing world, this is an amazing innovation as they now have access to the full range of financial systems in the developed world with no barriers to entry.