Spencer Li

Proof of Work vs. Proof of Stake: Which One is Better?

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Did you know there is an epic battle between the two main cryptocurrency verification systems?

When it comes to crypto, the debate over what type of consensus mechanism or algorithm should be used to verify transactions continues to rage on.

Proof of work (or PoW) and proof of stake (or PoS) are two ways new transactions can be added to a blockchain without needing an intermediary.

While PoW has been around since the birth of Bitcoin (BTC) in 2009 and has been used by most cryptocurrencies since then, PoS is relatively new and has only been adopted by a few coins so far, including Cardano (ADA) and Solana (SOL).

In this blog post, I’m going to break down everything you need to know about this ongoing battle of cryptocurrency algorithms, and the pros and cons of each system.

proof of work vs proof of stake infographic

 

What is Proof of Work (PoW)?

In a proof of work system, a group of computers compete to solve complex mathematical problems to validate transactions and add new blocks to the blockchain.

The first one to solve the problem receives a reward in the form of cryptocurrency.

Because the energy and computing resources required to solve the mathematical puzzle are often considered the digital equivalent of the actual process of mining precious metals from the earth, this process is often known as mining.

The book Digital Gold by Nathaniel Popper uses an analogy to describe the PoW function in the Bitcoin system:

It is easy to get 2,903 times 3,571 by simply writing the numbers on a piece of paper and multiplying, but it is much harder to figure out which two numbers can be multiplied together to create 10,366,613.

The miner who solves the complex mathematical problem first gets to add the next block of transactions to the blockchain and broadcast it to the network of nodes, who will then audit the existing ledger and the new block individually.

If everything checks out, the new block is linked to the preceding block, forming a transactional chain. The miner is then compensated with bitcoins for contributing their resources (energy).

PoW, Mining & Security

Mining consumes a lot of power and secures the network by ensuring that only those who can verify they have invested resources are allowed to add new transactions to the blockchain.

By virtue of this feature, attacking a PoW system like Bitcoin is exceedingly difficult, time-consuming, and expensive.

Attackers would have to buy and rig up expensive mining equipment and pay for electricity to power the equipment. They would then race to solve the problem and add a transaction block with counterfeit bitcoins to the chain.

If the unscrupulous miner solves the equation first, they will broadcast a new transaction block to the rest of the network.

The nodes of the network would then conduct an audit to evaluate the authenticity of the block and the transactions recorded within it.

The counterfeit bitcoins would be detected as soon as the nodes audited the new block against the previous version of the ledger. The consensus mechanism would then render the block invalid.

PoW makes it virtually impossible to counterfeit bitcoin unless an attacker owns over 50% of the entire network — this means they must own at least 51% of both the combined computing power of miners (the hashrate) and the network’s nodes.

If they did own over 50% of the network, they could simply broadcast a bad block to it and have their nodes accept it into the chain.

Given the size of the Bitcoin network and the amount of energy miners contribute to the PoW system, however, a 51% attack would be almost impossible today.

If PoW checks all the boxes, why is the crypto world slowly transitioning to the PoS mechanism?

What is Proof of Stake (PoS)?

A member on the Bitcointalk forum who went by QuantumMechanic devised a mechanism he called “proof-of-stake” in 2011. The fundamental point was that it would be wasteful to open up mining to everyone and let them compete against one another.

Therefore, PoS relies on an electoral system in which one node is chosen randomly to validate the next block in the chain.

PoS does not have miners — instead, it has “validators.” PoS also does not allow people to “mine” blocks — instead, they “forge” or “mint” blocks. As a reward, the validator receives the fees associated with each transaction.

Bear in mind that the validators are not chosen in a completely arbitrary fashion. A certain amount of coins must be staked into the network by a node before it can be considered for the validator’s role.

The size of the stake has a bearing on the probability that a validator will be chosen to forge the next block.

Let’s assume that Walt contributes $100 to the network while Skyler contributes $1,000. Skyler’s chances of making the cut to forge the next block are ten times higher!

It is worth noting that the stake is always more than what the validator earns from the transaction fees to keep the validator financially motivated.

Advantages of Proof of Work

Mining cryptocurrency is a very competitive industry. Miners are always looking for ways to mine that are more efficient and cost-effective so that they can lower their costs.

Those that are able to find the least expensive forms of energy and develop innovative technological solutions that allow for the production of mining chips that are both quicker and more efficient would automatically benefit from this process.

Proof of Work has also been shown to be the most effective way to maintain consensus while simultaneously ensuring users’ security within a distributed ledger.

This is attributable to the fact that it requires the initial cost of hardware and the continued spending of resources to participate, in contrast to PoS, which just requires a single upfront payment.

Disadvantages of Proof of Work

The amount of energy that goes into powering Bitcoin’s Proof of Work algorithm is often criticized because it creates a large carbon footprint.

In fact, it is estimated that the Bitcoin network alone consumes as much energy as the entire countries of Ukraine and Norway.

This high level of energy consumption is due to the fact that miners need to solve complex math problems to validate transactions and add new blocks to the blockchain.

The solution to these problems requires a lot of computational power 24/7, which in turn requires a lot of electricity.

The traceability of blockchain can also be a double-edged sword. On the one hand, it adds transparency and builds trust between users.

On the other hand, it also means that every single transaction is out there for everyone to see. This could be a problem for people who value their privacy.

For example, the US Internal Revenue Service (IRS) has successfully tracked down suspected tax evaders by matching records from bitcoin exchanges with data obtained from other financial institutions such as banks and brokerages.

Traceability will likely remain an issue as long as cryptocurrencies are used as a payment system rather than just an investment vehicle.

Advantages of Proof of Stake

One major advantage of Proof of Stake (PoS) over Proof of Work (PoW) is that it is more energy efficient.

With PoW, miners need to expend a lot of energy to power their computers and solve complex mathematical problems to earn rewards. This can be expensive and damaging to the environment.

With PoS, however, miners do not need to use as much energy since they are not solving complex mathematical problems.

Instead, they can simply stake their coins and earn rewards based on how many coins they have staked.

Proof of Stake algorithms also tend to be more censorship resistant than PoW algorithms.

This is because, in a PoS system, the network is not controlled by a small group of miners who can choose to censor certain transactions.

Instead, everyone who has a stake in the network (i.e., everyone who owns coins) has a say in what happens.

This makes it much harder for anyone to censor transactions or refuse to process them.

Proof of Stake also has a lower barrier to entry. To start mining a PoS coin, you only need an Internet connection and enough money to buy a fraction of a coin.

That’s it! You can even mine from your smartphone.

Since there is no need for expensive hardware, PoS is much more accessible to the average person.

Disadvantages of Proof of Stake

There is no Proof of Stake system currently that can scale to the level of Bitcoin or Ethereum. These systems are not yet as decentralized or safe as the most advanced PoW systems.

However, these flaws could be fixed with more advanced consensus mechanisms like Casper (CSPR).

When the validator does not show up to complete their job, this might be another source of possible issues. However, this problem can be easily solved by choosing a large number of backup validators in case the primary ones fail.

And though Proof of Stake systems might use fewer resources overall, they can be less secure than PoW systems.

One reason is that the hashing power in a PoS system is spread out among all users, while in a PoW system, it is centralized among miners.

This means that a Proof of Stake system is more vulnerable to a Sybil attack, where an attacker creates multiple fake identities to gain control of the network.

Another issue with PoS is that it can be more vulnerable to 51% attacks, where one entity controls more than half of the currency.

PoW vs. PoS: Which is Better?

It is safe to say that both PoW and PoS have their pros and cons.

And while there is no clear winner, each algorithm seems to have its own strengths and weaknesses.

Ultimately, it will be up to the developers and miners to decide which algorithm is best for their needs.

But one thing is for sure; the cryptocurrency world is in for an exciting ride as these two algorithms battle it out.

Concluding Thoughts

The cryptocurrency world has been buzzing about the future of the blockchain, especially the debate between Proof of Work (PoW) and Proof of Stake (PoS).

While PoW has led to some of the most famous cryptocurrencies like Bitcoin and Ethereum, it may not be long before PoS takes over as the dominant algorithm.

For example, in the upcoming Ethereum merge, Ethereum will be transiting from a PoW system to a PoS system.

So far, PoW has also been the most proven way to maintain consensus and security within a distributed ledger.

This is because it requires the initial cost of hardware and the ongoing expenditure of resources rather than a single upfront expense to participate like PoS.

On the other hand, PoW is unsustainable due to high energy consumption, and runs into scaling problems, for example high fees and slow transactions.

Now that you know the difference between Proof of Work (PoW) and Proof of Stake (PoS), which system do you think is better in the long run?

Which consensus mechanism do you think will dominate future cryptocurrencies and tokens?

Let me know in the comments below.

 

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If you would like to learn more about crypto & DeFi, also check out: “The Ultimate Guide to Blockchain & Cryptocurrencies”

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Spencer Li

What is Cryptocurrency, and is it a Good Investment?

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Many people think that crypto is going to be the biggest innovation of our generation, while many others think it it simply a scam.

So, which is it?

Cryptocurrencies have been in the news frequently over the past few years, and more people are becoming aware of them every day.

In fact, over 30% of all U.S. adults now own crypto. However, despite their growing popularity and astronomical gains in value, many people still don’t actually understand what cryptocurrencies are.

In this blog post, I will share everything you need to know about cryptocurrencies, how they work, and whether or not you should invest in them.

 

Infographic What is Cryptocurrency and is it a good investment

What is Cryptocurrency?

A cryptocurrency (or “crypto”) is any peer-to-peer digital currency that uses cryptography to create and manage the money supply and confirm the transactions.

While Bitcoin (BTC) is the first and most well-known cryptocurrency, there are many others available, including:

  • Ethereum (ETH)
  • Ripple (XRP)
  • Cardano (ADA)
  • Solana (SOL)
  • The asset-backed cryptocurrency stablecoin Tether (USDT)

Most cryptocurrencies are decentralized systems based on blockchain technology, which enable transactions to be verified by the network without the need for central authorities, such as banks or governments — in other words, they are not subject to government or financial institution control.

The Difference Between Real Money and Cryptocurrencies

Real money, like the U.S. dollar, is fiat currency. That means it is not backed by a physical commodity like gold or silver but rather by the full faith and credit of the U.S. government.

In contrast, cryptocurrencies are decentralized digital assets not subject to government control or regulation. In fact, Bitcoin was created in 2009 as a peer-to-peer electronic cash system that could function without the need for a central authority.

Also, since cryptocurrency relies on public blockchains rather than banks, transaction fees are lower, allowing you to send funds across borders cheaply and quickly.

Blockchain: Proof of Work Vs. Proof of Stake

Most cryptocurrencies, including Bitcoin, follow a specific pattern called proof-of-work.

Proof-of-work requires miners to solve complex problems with large data sets to find blocks (a group of transactions) with rewards (typically the token).

The difficulty levels vary depending on the type of cryptocurrency, but some standard proof-of-work algorithms include SHA-256, Scrypt, X11, Ethash, Equihash, and Lyra2REv2.

Proof of work can necessitate a significant amount of computing power and electricity. After deducting the expenses of power and computing resources, miners may barely break even with the cryptocurrency they earn for validating transactions.

To limit the amount of power required to verify transactions, some have suggested the transition to the proof of stake verification method instead.

The number of transactions any user can verify with proof of stake is limited by the amount of crypto they are willing to “stake” in exchange for the opportunity to participate in the verification process.

Proof of stake is substantially more efficient than proof of work since it eliminates energy-intensive equation solving, allowing for faster transaction verification.

This is why Ethereum is moving towards the “Ethereum merge”, where it will switch from a proof-of-work to proof-of-stake system.

Is Cryptocurrency a Good Investment?

Since crypto’s arrival on the scene, many people have wondered if cryptocurrencies are viable as investments. Some experts say they will become a global phenomenon, while others say they are an investment bubble destined to pop.

The best thing about them is that once you purchase them, your online wallet gives you control over your assets without any third party being able to intervene. There are no intermediary collecting fees each time a transfer takes place between different digital wallets.

Another significant benefit of investing in crypto is the transparency it offers. All crypto transactions are stored on a public ledger. This means that anyone can view the transaction history of any given cryptocurrency. The identity of all the parties involved in each transaction is hidden, but we know who has made every purchase.

The consensus mechanism (e.g., proof-of-work) used to verify these transactions makes for an open, democratic system where no one party controls the entire blockchain.

Cryptocurrencies offer investors several other potential benefits, including the potential for tremendous growth, short processing time, fraud protection, and international acceptance.

However, there are also some risks associated with investing in cryptocurrencies.

Risks of Cryptocurrencies

Investing in any cryptocurrency comes with many risks, from outright fraud to exchange hacks. You may lose all of your investment or perhaps even more.

For example, Mt. Gox was a popular exchange for trading Bitcoin for fiat currencies like dollars or Euros until hackers stole $450 million worth of Bitcoin from users’ wallets! It shut down soon after, and today Mt. Gox has filed for bankruptcy protection.

In another case of fraud, CoinDash ICO lost out on $7 million in investor money after their site was hacked shortly before their token sale went live.

Another potential drawback is its volatility — cryptocurrencies carry a risk of big swings up or down in value, which means there is no guarantee they can be relied upon for long-term savings.

And since crypto values fluctuate so wildly — sometimes even more than once per day — they are unsuitable for most people’s needs as general spending money. They are better suited to speculative trading, much like stocks and commodities.

So even with the incredible volatility experienced so far and stories about crypto millions made or lost overnight, would a prudent investor still consider putting their money into the market?

Cryptocurrency might be a good investment for you, provided you are willing to take the chance and consider it a risky, high-reward gamble that can net you plenty of dough — but know that you can lose all of it, too.

Many people have lost thousands, or even millions, in cryptocurrency, so always ensure you are prepared to manage your investments before committing any significant amount of your wealth.

How to Start Investing in Crypto?

Many potential investors respond to crypto ads or private messages pushing “get rich quick” schemes.

Instead of making an impulsive purchase, you should use these steps to vet a cryptocurrency before buying it:

1. Research the currency.

Verify that the currency is legitimate, secure, and worth the money before providing personal or financial information.

Review the currency’s white paper.

Check the coin’s security ratings with Crypto Rating Council and CertiK, and use a third-party price tracker like CoinMarketCap to see how it has performed in the past.

2. Choose a platform

Which platform should you go with? It is dependent on how you want to use the currency.

Will you buy and hold? Will you make regular trades or cash out your cryptocurrency now and then?

Each platform charges a different fee for these activities — and some may even limit the type of transactions. Before making a decision, review the fees and limits, as well as the exchange’s security ranking.

I recommend sticking with the top few players in the market, which I have shared under the tools and resources tab.

Thing to Consider when Investing in Crypto

1. Make sure you have enough emergency savings to last at least six months.

Determine what constitutes your emergency funds — will it be six months’ worth of your expenses (for example, food, transportation, and entertainment), or will it be equivalent to six months’ allowance/salary?

Sorry for boring you, but with risk comes caution. Prioritize this and do not dive into something you do not fully comprehend.

You have heard about the one person who earned a fortune overnight with $1000, but you have never heard of the countless who saw their $1000 turn into $0.1.

2. Next, start small and manageable. Passive investing in ‘blue chip’ currencies such as BTC and ETH is safe.

Because of the volatility of cryptocurrency, this is also known as DCA (dollar-cost averaging), and you either average up or down.

A monthly budget of $50 to $100 is a great starting point.

You can also diversify your portfolio with other investments such as Exchange-traded funds (ETFs) and bonds.

Once you have more earning power, you can continue to allocate more. It can be more, depending on one’s current situation.

3. After establishing your passive investment portfolio, you can consider active investing.

Having the first two things mentioned above is critical to avoid crashing and burning. Again, start small, allocating no more than 10% of your risk tolerance to active investing.

To earn a yield on your crypto, you may look into crypto staking or other yield farming strategies. You may even consider performing leverage trading with your cryptocurrency.

These are all mid to high-risk alternatives, and you must be willing to lose them if something goes wrong.

Concluding Thoughts

Some people see cryptocurrencies as an investment opportunity, while others view them as a volatile gamble.

It all depends on what you try to get out of the market.

The cryptocurrency industry is so new that no venture has a guarantee of success or safety.

However, if you are looking for a high-risk-high-return scenario, investing in cryptocurrencies may be worth your time.

Personally, I think crypto is an exciting investment opportunity, but we should see it as a high risk, high reward type of investment.

This means that we can add it to our portfolio to boost our returns, but it should not form the bulk of your portfolio.

Now that I have shared all about cryptocurrencies as a potential investment asset, is this something you would consider adding to your portfolio?

And if you are already a crypto investor, how many percent of your portfolio have you allocated to cryptocurrency investments?

Let me know in the comments section below!

 

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If you would like to learn more about crypto & DeFi, also check out: “The Ultimate Guide to Blockchain & Cryptocurrencies”

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Spencer Li

What are Blockchains & Cryptocurrencies?

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Why are blockchains touted as the next big thing in the financial industry and potentially a major game-changer?

If you have heard of blockchain technology, chances are you know it has something to do with bitcoin, decentralised finance or cryptocurrency.

And while those two things have become inextricably linked, they are not the same.

That’s why it is crucial to understand how they work now so that you can take advantage of that potential — both as an entrepreneur and a consumer.

In this blog post, I will tell you everything you should know about how blockchain technology works and what its impact could be going forward.

 

what are blockchains and cryptocurrencies infographic

 

History of Blockchains

Blockchain technology has a long and complicated history.

It was first conceptualized in 1991 by a group of researchers trying to create a system for timestamping digital documents so they could not be tampered with.

But it was not until 2008 that blockchain really came into its own when Satoshi Nakamoto first introduced the concept of blockchains in a white paper entitled Bitcoin: A Peer-to-Peer Electronic Cash System.

In this paper, Nakamoto described how a decentralized ledger could be used to record and verify transactions instead of the unstable traditional banking system.

Since then, blockchain has been hailed as a revolutionary new way of handling data.

What is a Blockchain?

At its simplest, blockchain is a digital database or ledger of transactions.

When someone uses cryptocurrency to buy something, they broadcast their transaction to the entire network of computers running the software.

These computers then race to verify the transaction, and the first one to do so adds it to the chain of past transactions or “block.”

The new block is then broadcast to the network and verified by more computers, and so on.

Each block contains a cryptographic hash of all the previous transactions, and each new block is linked to the one before it via cryptography, creating a “chain.”

How Does Blockchain Technology Work?

It can be difficult to understand how blockchain works by looking at its front-end alone.

The best way to describe blockchain technology is via an analogy…

Imagine a collection of people (nodes) connected by a peer-to-peer network they all possess access to.

Each person has a ledger book (a permanent, public record of all the transactions that take place on the network), and every time someone wants to make a transaction or record one in their ledger, they must first present it to everyone else so everyone can read and mathematically verify it.

Once everything checks out, each person updates their own ledgers with what has been written down.

As soon as this happens, each node checks to see if anyone has rejected the entry — if no one did, it is complete!

If someone did, this entire process starts over again until there is consensus across all nodes.

How is a Blockchain Different from a Typical Database?

A typical database is more vulnerable to data breaches and hacking because it is centralized, meaning all the data is stored in one place.

On the other hand, a blockchain is decentralized, meaning the data is spread across multiple computers across the decentralized network.

This makes it much more difficult for hackers to access and tamper with the data.

Why is Blockchain Technology Popular?

Blockchain technology is popular because it is seen as a more secure and transparent way to store and share data.

In theory, blockchain technology is highly secure as it is impossible to hack into multiple nodes at once without significant resources.

It also provides transparency by ensuring all records are shared with everyone on the network while preventing any tampering through encryption keys that change with every block of information added to the chain.

This makes it ideal for storing sensitive information like financial transactions.

Plus, since blockchain is decentralized, there is no need for third-party regulatory authorities like a government or bank to verify or approve transactions.

This makes the process faster and more efficient.

As we make our way to ‘Web 3.0’, one of the most popular applications of blockchain technology today is in the form of non-fungible tokens (NFTs).

NFTs are digital assets that are unique and cannot be replicated. They can be used to represent anything from art and collectibles to digital experiences and gaming items.

Because of their unique nature, NFTs have become extremely popular in recent years. In 2021 alone, the market for NFTs surpassed USD 40 Billion.

How to Process Transactions on a Blockchain?

Blockchain-based systems use what is called a hash function to encrypt transaction data. A hash function is a mathematical algorithm that takes input data of any size and converts it into output data of a fixed size.

The output of a hash function is commonly referred to as a hash or hash value.

In a blockchain, every transaction is stored in a block.

Each block has its own cryptographic hash and timestamp, as well as other data that may be specific to that block.

The blocks are stacked on top of each other, creating a digital ledger or chain of blocks.

This process is done through cryptography, which provides security and tamper-proofing for every block in the chain.

The hash from each block is used to create another cryptographic hash for each subsequent block, forming an unbroken chain and linking it all together.

For a new block to be added to the chain, miners must solve a complex mathematical problem.

This problem is known as the proof of work. Once a miner solves the proof of work, they can add the new block to the chain and they are rewarded in cryptocurrency for doing so.

The pieces of data stored in one block cannot be changed without changing all subsequent blocks; doing so would invalidate all following hashes and require massive amounts of computing power just to make a single change.

Types of Blockchains

Blockchain networks can be either public or private.

A public blockchain network is a decentralized network that anyone can join.

Bitcoin and Ethereum are examples of public blockchain networks.

A private blockchain network is a permissioned network where only approved participants can join.

Private blockchain networks are often used by businesses to create shared databases.

There is also a federated or consortium blockchain. In this type of blockchain, there is no one central authority.

Instead, a group of companies or organizations (known as a consortium) come together to form the network.

Each member of the consortium operates a node and has a vote in decision-making.

This type of blockchain is often used in industries where multiple parties must securely share data or conduct transactions, such as banking or supply chain management.

How to Invest in Blockchains?

There are several ways to make your first blockchain investment.

The most common way is to buy Bitcoin or Ethereum on a cryptocurrency exchange such as Coinbase or Binance.

Alternatively, you can purchase blockchain-based security on a traditional stock exchange, such as the Nasdaq.

Finally, you can invest in a blockchain startup through an initial coin offering (ICO) or a token sale.

When it comes to investing in blockchain technology, there are a few things you should keep in mind:

  • The cryptocurrency market is highly volatile. This means that prices can fluctuate wildly from day to day, and you could lose a significant amount of money if you are not careful.
  • You should only invest as much money as you are comfortable losing. Remember, there is always a risk of losing your entire investment when dealing with cryptocurrencies.
  • Finally, make sure you do your research before investing in any blockchain-based project. There are a lot of scams out there, and it is important to know what you are getting yourself into before putting any money down.

 

What are the Implications of Blockchain Technology?

As the technology behind Bitcoin and other cryptocurrencies, blockchain has the potential to revolutionize the way we interact with the digital world.

With its distributed ledger system, blockchain offers a new way of storing and verifying data that is more secure and transparent than traditional methods.

In addition, blockchain could help reduce fraudulent activities, such as identity theft and money laundering.

Ultimately, this could lead to a more efficient and trustworthy online ecosystem.

Concluding Thoughts on Blockchain

Overall, blockchain technology is a way to store and transmit information in a secure, decentralized manner.

Blockchain technology can provide greater transparency and security for online transactions by using a distributed database.

Additionally, blockchain technology has the potential to streamline many business processes and reduce costs.

However, the full potential of blockchain technology has yet to be realized.

As the technology continues to evolve, we can expect to see even more innovative applications of blockchain technology in the future.

Now that you know a little more about how blockchain technology works, what do you think of it?

Do you think it has the potential to revolutionize our financial ecosystem?

And besides the finance world, what other real-world applications do you foresee it being used for?

Let me know in the comments below!

 

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If you would like to learn more about crypto & DeFi, also check out: “The Ultimate Guide to Blockchain & Cryptocurrencies”

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Spencer Li

Short Interview with Business Insider: My Insights on the TerraUSD & Luna Crash

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terrausd luna crash

Last week, I had a short interview with Business Insider to share some of my insights on the TerraUSD and Luna crash.

For those who are not in the loop, it was one of the biggest crashes in the crypto market, causing many investors to lose all their life savings.

So, how did it all happen, and what are the lessons we can learn from it?

 

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business insider article 130622 2

 

The article is mainly about the experiences of retail investors coping with the big crash, so I thought I’ll share some of the other points not included in the article, for education purposes.

Here goes:

What does a stablecoin mean? How do they differ from other cryptocurrencies?

One way is to think of it in terms of real world currencies. The price of a currency fluctuates according to demand and supply, unless it is a pegged currency, for example the HKD is pegged to the USD, so its price movements follow the USD. If we think of cryptocurrencies as a currency, then a stablecoin is a cryptocurrency which is pegged to another asset or currency (usually the USD).

Reference: https://synapsetrading.com/best-stablecoin-crypto/

What about TerraUSD and luna? How do they differ from other stablecoins?

There are several types of stablecoins, depending on what they are pegged to and the pegging mechanism. For example, there are metal-backed stablecoins, currency-backed stabelcoins, or algorithmic stablecoins.

For stablecoins like Tether (USDT) and USD Coin (USDC), they are purportedly backed by fully reserved assets, similar to how a nation holds reserves to back its currency.

TerraUSD (UST) is an example of an algorithmic stablecoin, where instead of being backed by collateral, the price is managed by an algorithm which maintains its peg to the US dollar through an arbitrage mechanism with LUNA.

Are stablecoins a good form of savings/preserving value, why or why not?

If you are talking about stablecoins purely as a store of value, then holding fiat USD would be a better option because you can avoid unnecessary risks such as depegging risk, or the risk of getting your hot wallets/accounts compromised. 

Of course, this is assuming you can get access to fiat USD, if not stablecoins would be the next best option to preserve your wealth if you live in a country which has a fast depreciating currency.

Are stablecoins a good form of investment, why or why not?

I assume that by investment, you are not referring to the appreciation of the USD (and hence the pegged stablecoin), but rather the 20% APY by staking on Anchor Protocol.

I would say it is a good investment if you know what you are doing, for example understanding the product and the associated risks, and taking steps to minimise the risk.

For example, in DeFi (decentralised finance), there are common risks such as software risk, counterparty risk, token risk, regulatory risk, impermanent loss, gas fees, etc.

Just a few weeks prior to the crash, I highlighted that the funding rate to short UST was about -10%, meaning people were willing to pay 10% APR just to have a short position on TerraUSD. This was an early warning signal of sorts.

I suggested to hedge any open UST positions, because you can still get a net 10% APY (20% from Anchor minus 10% for short position funding rates), and you would be fully protected if UST depegs and crashes (your gains from the short positions would offset any losses).

In your view, what were the different factors that resulted in the crash?

I think firstly the market was already on edge, because prices have been on the decline for most cryptocurrencies, so people became more risk averse. This also lowered the value of their reserves, which were held in mostly cryptocurrencies.

The actual catalyst was several large accounts withdrawing large quantities of UST (either for risk management or some yield farming strategies), causing a slight depegging.

Normally, the algorithm would be able to restore the peg via its arbitrage mechanism, but more UST holders got spooked and started withdrawing their UST as well.

Thus, as more people withdrew their UST, the lower the demand for UST, which caused the price of UST to drop, which in turn caused more people to withdraw… 

This caused a positive feedback loop, straining the system, and resulted in something akin to a traditional bank run, thus leading to a depegging of the stablecoin and its price crashing.

The investors I spoke to seemed to come from places where USD was not easily convertible. They also seemed to be in tighter economic conditions and were attracted by Anchor’s 20% APY. Do you think what TerraUSD and luna were marketed as appealed to them? Do you think the marketing was a big part of why they were attracted to TerraUSD/Luna?

I’m not sure what kind of marketing they were exposed to that convinced them to invest, but based on the retail investors that I came across, a lot of them found out about it via word of mouth, or from bloggers or influencers who parroted it without really understanding the product or associated risks. Thus they might get the idea that this is a “risk-free” 20% investment, and when greed takes over they decide to go all-in on it.

There are some who actually know about the Terra network yet still lost money. What about financial savviness/education as a factor in finding out why these investors lost money?

Knowing about how the system works might not mean they are fully aware of all the potential risks, or even if they are aware of it, they might not be aware of the magnitude or probability of the risk, or even worse, decide not to take steps to mitigate it due to faith in the system.

Hence when we approach this from a financial perspective, I feel that technical knowledge alone is not enough, because one has to consider other factors like financial savviness, behavioral psychology, portfolio risk management, etc.

Do you think there should be more oversight or regulation on education and marketing?

Normally, for financial products, there are pretty strict guidelines on marketing, including checks like KYC to assess the risk appetite and savviness of the investor, as well as full disclosure on the risks and returns.

However, in the crypto space, it ist somewhat less regulated, so the onus falls on investors to do their own due diligence.

However, every new product is going to be pretty technical and hard for the average retail investor to understand and assess the risk, so there is a limitation on product education as the solution.

A better solution would be to impart the basic universal skills that allow a retail investor to manage the risk of any investment product in general, such as those mentioned above (financial savviness, behavioral psychology, portfolio risk management).

What is the biggest takeaway for the crypto community from this incident? What about for investors?

For professional and seasoned investors, this will likely not be their first rodeo, as 80-90% of crypto projects historically have crashed and burned. They most likely did not put all their eggs into one basket, as they are aware of the risks of any individual crypto investment. So I would say some seasoned investors might have suffered some losses, but not to the point where they go totally bust. 

For retail investors, especially for those getting burnt the first time, this will be a good lesson not to be too greedy, and to diversify your portfolio. Another important lesson is that there is no truly risk-free investment, so before investing in a product, you need to know all the risks associated with it, and decide how much risk you want to take on (and mitigate the risks you don’t want).

 

Read the full article here:
https://www.businessinsider.com/terrausd-luna-60-billion-crash-sparks-fears-suicide-self-harm-2022-6

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Spencer Li

Easiest Way to Invest in the Metaverse (Stocks & Crypto)

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Easiest Way to Invest in the Metaverse Stocks Crypto

metaverse ready player one

Seems like nowadays, everyone is talking about the Metaverse, and every company is following Facebook’s (now called Meta) lead in pivoting to a Metaverse company.

So what exactly is the Metaverse?

 

What is the Metaverse?

If you have watched movies/shows like “Ready Player One” or “Sword Art Online”, you will have a pretty good idea.

The origin of the term comes from science-fiction writer, Neal Stephenson, who coined the term “metaverse” in his 1992 novel “Snow Crash,” which envisions a virtual reality-based successor to the internet. In the novel, people use digital avatars of themselves to explore the online world, often as a way of escaping a dystopian reality.

In short, it is like creating a virtual world which mimics the actual world, so activities like socialising, learning, gaming, working which you normally do in the real world, can also be done in the virtual world.

metaverse wikipedia

By now, you probably get the idea that this is something big, judging by how every major company is looking to get a slice of the pie.

But the big question is, what is the best way to invest in the Metaverse?

If you are not an expert in the industry, it will be hard to pick the correct stocks that give the best exposure, and have the most potential.

So here are some easy ways to do it:

Metaverse Index for Stocks (META)

The first way to get exposure is to invest in stocks that are related to developing the Metaverse, and an easy way to do it is via an ETF (exchange-traded fund) which allows you get diversified exposure without needing to do much research.

Here is the current most popular ETF:

The Ball Metaverse Index is the first index globally designed to track the performance of the Metaverse. The Index consists of a tiered weight portfolio of globally-listed companies who are actively involved in the Metaverse.

roundhill metaverse index META

roundhill metaverse index META holdings

Source: https://www.roundhillinvestments.com/etf/meta/

Metaverse Index for Crypto (MVI)

Besides stocks, there is another possibility that the Metaverse might develop independently in the crypto space, via DAOs or decentralised projects.

The metaverse is a broad term to define the ever-expanding virtual reality worlds where players can create an avatar, buy land, build experiences, import NFTs, and trade with other users. Here are some projects and tokens:

CUBE is the ERC-20 token native to Somnium Space, a virtual world that offers both community-led events and an in-game economy. CUBE can be used to purchase virtual assets and pay for goods and services in the metaverse. Participants can join via virtual reality (VR) headsets or mobile and web browsers.

MANA is the ERC-20 token used to pay for goods and services in Decentraland. In Decentraland, users connect and interact with each other, create content, and play games. It even has a virtual economy where users can monetize the content and applications they build.

SAND is the ERC-20 token used in The Sandbox virtual world. The Sandbox virtual world is made up of LAND – digital pieces of real estate – that players can buy, and on which they can build games and other virtual experiences.

So it makes sense to get some exposure to this as well.

The easiest way to do it is also via an “ETF”, which is not really an ETF but it is a token which mimics the performance of a variety of Metaverse-related projects.

Here is one such index:

The Metaverse Index (MVI) is designed to capture the trend of entertainment, sports and business shifting to take place in virtual environments.

metaverse index MVI overview

metaverse index MVI components

Source: https://www.indexcoop.com/mvi

 

In conclusion, these are the 2 easiest ways to get exposure to both stocks and crypto in the Metaverse space, for people who do not want to spend too much time or effort doing rsearch.

If you interested to take it to the next level, then you can do more precise targeting by buying specific stocks and projects, but that will involve more research.

 

thumbnail the ultimate guide to blockchain and crypto assets

If you would like to learn more about crypto & DeFi, also check out: “The Ultimate Guide to Blockchain & Cryptocurrencies”

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