The digital landscape is evolving constantly, as once “exotic” technologies are becoming mainstream and their impact is obvious in nearly all aspects of our lives, ranging from how we shop to dating. However, as expected, businesses and especially banking and finance have been the most affected by so-called “disruptive” technologies.
Disruptive is a good word in this context, and “digital disruption” impacted the highly regulated banking and financial sectors in a big way. Until recently, banking and finance were one of the most “orthodox” industries, with change coming slowly if at all.
However, in the current “internet of things” environment, that once full proof business model was literally forced to evolve or become extinct, hence banking and the financial sector had to adapt to the digital disruption in order to stay ahead of the competition.
The huge impact of the “digital revolution” is observable everywhere in the financial sector, ranging from credit settlements, lending, payment solutions and so on. To mitigate this, financial institutions and banks are literally forced to develop their own solutions, or even to partner with “new-age” FinTech companies, if they want to stay afloat and/or ahead of the curve.
With all these in mind, let’s take a closer look at how the latest developments and tech trends are shaping the financial sector as well as the banking industry.
1. FinTech – Driving the New Business Model
FinTech is a fancy word that can be heard a lot in corporate pep talk, but what it actually means is the merger of technology with finance.
The digital revolution created a Frankenstein monster in the shape and form of innovative tech startups that offer better solutions compared to regular banking, hence they exert a disproportionate influence on the industry.
The new tech startups are basically forcing financial institutions to transform radically in order to create better customer experiences.
For example, FinTech offers the huge advantage of real time transactions to the average Joe, as affordable mobile internet made mobile banking the new norm, so people are not required anymore to visit their local branch to receive/send money or to open an account.
Another factor that leads to better consumer experiences is the ability of FinTech to provide meaningful financial advice to customers via innovative solutions.
But the main advantage of FinTech over “old-school” banking is that it allows companies to unilaterally focus on the most profitable business segments by employing state of the art technology.
2. Digital Banking
Digital banking is one of the most important tools in modern banking paraphernalia, and by that we mostly mean mobile banking, as well as payment apps and wallets, which are used by billions of people every day.
The modern financial industry could not exist without these instruments, and whether we’re talking about sales, marketing, communication or customer service, internet-powered social networks are now fully integrated into the banking ecosystem, helping facilitate global operations of financial institutions and banks via cutting-edge software solutions and automation systems.
Since technology is moving fast and the world has become smaller, digital banking has become a crucial component of the financial industry, without which banks couldn’t survive when confronted with disruptive technologies.
3. Blockchain
Speaking of disruptive technology, enter blockchain. There are now many new blockchain startup companies. In case you did not know it, blockchain is not the same thing as crypto, i.e. there are crypto currencies that use blockchain technology, but not everything that uses blockchain is crypto.
Cryptocurrencies were introduced as an alternative to the current SWIFT –based banking system, and became a threat to the banking industry due to their fast and affordable way of doing “peer to peer” financial transactions between regular people.
According to various experts, blockchain’s distributed ledger system will allow financial institutions to impose draconic controls, thus enabling smart contracts and auditable data, hence blockchain is expected to have a major impact on the banking/financial services industry in the near future.
Some even speculate that the appearance of blockchain is an extinction level event for the antiquated SWIFT system, even if bankers have been sceptical about the technology so far, ironically due to “security” concerns, and the fact that the crypto-blockchain space is literally free market in action, i.e. completely unregulated by state actors.
Things are changing fast in the industry, especially in the past 2 years, with banks moving to implement blockchain technology in their commercial transactions, due to blockchain’s obvious advantages, like cost effectiveness, security and efficiency.
According to various studies, banks adopting blockchain into their business process would end up with $27 billion saved in in settlement transactions by the year 2030, and that’s basically the reason for which the banking industry is now exploring the endless possibilities of embracing blockchain technology for inter-bank transfers, fraud protection, loan processing, money laundering prevention etc.
4. AI and Machine Learning
Artificial intelligence and machine learning are among the hottest trends in the banking industry. Banks all over the world are implementing chatbots with AI to supplement their customer service crews, and this is maybe the most popular (as in most adopted) form of AI in financial services.
Basically, AI-powered chatbots, also known as automated service assistants, are designed to replace human interaction, i.e. virtually any inquiry from a bank’s customer is going to be addressed by a chatbot via live-chat.
In the future, this automation of sorts will probably eliminate problems like having to personally visit your local branch to solve a specific banking issue. Banks are taking interest in AI technology due to a variety of reasons, including huge advances in machine learning, the exponential growth of data, as well as increased regulatory requirements, and, why not, cost-cutting.
Regardless of the reason, AI is expanding its presence in the financial sector, due to its inherent advantages, such as fast product delivery, improved customer experience, heightened regulatory compliance, and excellent risk management. All these advantages are incumbent to AI; more precisely, so-called artificial intelligence is based on numbers and algorithms, hence human error is out of the equation, and the chances of errors in investment decisions and financial transactions are reduced to zero.
5. Digital Disruptors
When talking about digital disruptors for the financial industry, names like PayPal, ApplePay, and Venmo come to mind, i.e. modern payment technologies that are way more easy to use and faster compared to traditional bank transfers. There are also state-of-the-art lending solutions for the general public, courtesy of the digital age, such as OnDeck, Fundera, and Avant, to name just a few.
All these highly innovative digital solutions for international payments and/or lending are dramatically changing the landscape in the financial world, and that’s why they are called digital disruptors.
Due to the apparition of digital disruptors, the general public started demanding customized and secure banking experiences, and that coupled with the convenience of mobile banking, led to the wide adoption of FinTEch by the financial sector.
Modern FinTech technology presents the banking sector with an interesting challenge: just like any other technology, FinTech can be a benefit or a hazard. Widespread adoption of financial technology is literally forcing the banking industry to reinvent itself.
Even if short to medium term, it’s unlikely for the traditional banks to be wiped out, decentralized blockchain-crypto may play a big part in banks going the way of the dodo long-term. When it comes to digital banking, there’s always the danger of cyber-attacks, hacking and internet fraud, yet the banking sector is pretty much forced to adopt these new technologies to satisfy customer demand, and to stay on top.
6. Internet & Smartphones
As soon as mobile internet became available (and affordable) world-wide, the evolution of smartphones took a giant leap forward. Together with affordable mobile internet and advanced smartphone technology, mobile apps became the corner stone of basically every sector of the market, including stocks, banking and financial industries.
Mobile banking was adopted early and rapidly by large swaths of the population, due to its ease of use and convenience, i.e. everything that involves payments or transferring money can be done anytime, anywhere, from your smartphone, almost instantly and without requiring “social interaction” with other people.
Moreover, there are financial apps for literally anything, ranging from trading stocks to transferring money abroad, cashless transactions/crypto, and so on and so forth. Obviously, mobile banking was made possible in the context of smartphone technology and mobile internet becoming affordable for the masses, and we can expect new FinTech/mobile banking features to appear as technology makes leaps forward by the day.
In order to comprehend the impact of mobile apps in the financial ecosystem, it’s important to understand what current-day mobile banking apps are already achieving for the common user.
- The growing number of cashless transactions
Arguably, the best thing about mobile banking is making cashless transactions easy as pie. You no longer have to find and ATM to withdraw money, nor carry cash on your person for daily errands. Not even credit cards are necessary in the age of smartphone and NFC, as all you have to do is a simple scan/swipe job and you’re good to go.
Not to mention the fact that smartphone apps are at least as secure as credit cards, as they require user authorization from within the app to avoid fraudulent transactions, and with the advances of IoT, mobile apps will be soon capable of withdrawing cash cardless, which may render physical CCs obsolete.
- Convenient banking services
Needless to say, if you have a bank account, a smartphone and an internet connection, you no longer need a physical branch to get the work done. Now you have your own bank inside your smartphone, i.e. mobile banking apps made banking services convenient for users, as well as payment processing, which is now almost instant.
- Control over expenses
With mobile banking, you’re in full control of your transactions, as you can track your money via real-time details of credited/debited amounts, and understand spending patterns via smart banking apps, which show you where the majority of your income is spent and so on.
- Better security
Compared to old-school transactions and especially ATMs, mobile banking is very secure, as apps are designed to ask for user authentication each time you want to make a transaction. Hence, there are almost zero chances for something to go wrong in terms of compromising security.
There are also disadvantages with mobile banking to do the inherent nature of the internet, and especially mobile internet. The good news is that companies that are developing apps for mobile banking /financial transactions have to abide to the industry standards in terms of encryption, things like TLS or SSL, and FinTech technology adds an extra layer of security by implementing blockchain technology, which is impossible to hack with current hardware.
InstaAccount services
As per its name, InstaAccount services allow you to open a bank account from your smartphone or computer instantly, and you can also submit the necessary documents online, i.e. the account opening/verification process is completely “socially distanced”.
- Investments and trading
Needless to say, investment and trading were revolutionized by FinTech via mobile trading apps. Nowadays, anybody anywhere in the world can (and does) invest money in “stonks” via various (free) trading apps, without requiring the services of a stock broker, and many apps are commission free.
FinTech literally democratized trading and investment in the financial markets, and the future will tell us if that was a good idea or not.
7.Microfinance
With widespread and affordable mobile internet becoming the norm, developing countries are now interconnected with the international financial system in what can be described as financial inclusion, courtesy of the digital revolution.
The past decade has been promising for people living in Sub-Saharan Africa. Just to give you a taste, according to Global Findex, the number of people that have a bank account in Sub-Saharan Africa almost doubled in 6 years, between 2011 and 2017 (23.2 percent in 2011 vs 42.6 percent in 2017), with 21 percent of adults using mobile banking services.
This is a huge and virtually untapped market for FSPs (financial service providers) looking to grow their customer base and make an honest buck.
FinTech makes for a great opportunity for traditional microfinance institutions to optimize their business in developing countries via reducing operating costs and operational risks, as microfinance institutions in developing countries are no longer forced to do business in high density urban centres only; moreover, due to AI and digitalization, MFIs are renouncing manual/paper based transactions in favour of automation, which further reduces risks and human error.
With all these in mind, it becomes clear that digitalisation is not a choice but a necessity in the modern financial market, especially in developing countries, and FinTech’s impact on the banking/financial industry is a truly transformative event in the good sense of the word.
It’s also true that microfinance institutions encountered a number of issues with adopting digitalization, especially in the early phases of the process, due to inherent difficulties, such as the work-force requiring training in order to get accustomed to new technologies.
The training of human capital in order to get accustomed and utilize new technologies was arguably the most difficult aspect of digitalization in microfinance institutions.
Here are the main steps required by the microfinance industry towards the adaptation of digitalization:
DIGITAL RECORD KEEPING: as expected, digital record keeping is arguably the number one step towards digitization in the microfinance industry. The MFI uses internet and digitalization to build a data base with all customer data, accessible anytime/anywhere, that includes virtually anything, ranging from clients and customers names to outstanding dues, analysis reports of loans and anything in between.
It has been proven empirically that digital records are superior to physical data collection, and being able to link ID proofs to customers’ accounts works great for the MFI companies, especially when it comes to customer satisfaction and operation security.
DIGITIZE PAYMENTS AND LOANS INTERNALLY: on top of migrating from physical to digital records, the MFI institutions and companies are working hard at digitalizing the internal system, as digital internal processing has been proven to save both time and manpower.
Even if the groundwork is still manual and relatively unorganized, especially in rural areas, where few customers have access to modern day technology (internet, smartphones and know-how), with most proceedings being time consuming and manual, things are slowly improving.
DIGITIZING CUSTOMER MANAGEMENT SYSTEM: customer management is another process that profits big from digitalization. Due to modern technology and internet, the process of digitalization in microfinance services helps staff publicize new products and schemes instantly and easily via digital platforms.
This is a huge leap forward in terms of responding to customer demands, as well as conducting research in regard to customer behaviour. As with other industries, the process of digitalization in the microfinance industry has been transformational in a good way, especially in terms of keeping a human centred approach on the behalf of customers.
Another important thing in digitalizing the management system is that institutions took proactive measures to educate their customers in order to get them acquainted to new technologies, and that’s crucial considering the fact that as technology advances almost on a daily basis, the microfinance industry is literally forced to keep up with the changes, in order to stay relevant in a highly competitive environment.
Digital Currencies
Responsible governments always work together with private companies to make their economies more productive and more efficient, and the rise of cryptocurrencies definitely drew their attention. The cryptocurrency market is booming and crypto-adoption by traditional companies like Visa or PayPal is one of the main trends of 2021. Even central banks seem interested in state-backed digital currencies, and by that we mean CBDCs, as in central bank digital currencies
The logical question to ask is how CBDCs can help grow economy and progress society. Are there any benefits for the general public with large scale adoption of CBDCs? Here’s the deal: unlike blockchain/decentralized crypto currencies, a CBDCs is basically digital fiat, or, to make it real easy, the paper dollar made digital.
In certain ways, a CBDC is pretty similar to crypto currencies, in such they offer cheaper and faster transactions compared to regular money, as well as higher security and transparency. The problem is that the CBDC are state-issued, which means they are controlled by state actors, and that doesn’t hold well with the crypto crowd.
Governments are very interested in CBDCs as a fully digital currency gives them the capability of monitoring/analysing the macroeconomic situation of a given country in real time, thus helping central banks and governments to implement monetary policies in a more comprehensive manner.
The downside of CBDCs is that there’s no more privacy for citizens, and as we move towards a cashless society, the state or state sponsored actors will have total control over people’s personal finances.
However, governments claim that wide-adoption of CBDCs will help them eradicate various illegal activities such as fraud and money laundering, thus allowing citizens to keep their money safe and so on.
On top of that, CBDCs may become a viable financial solution for people who don’t have a bank account, and help with improving international money transfers via DLT technology, which removes third parties/intermediaries, thus making financial transactions less costly and much faster.
All these advantages and disadvantages are theoretical, as central bank digital currencies are not here yet, and it would take a government decision to implement CBDC and distribute it among its population. The problem is that there are many other viable options (crypto currencies like BTC) and ideas in circulation around the world, which means CBDC is not a done deal.
The point being, CBDC have the potential to create a brand new worldwide financial infrastructure, but for now, we’ll just have to wait and see what happens.
2 Common ways of making profits with cryptocurrencies (~6p)
If you were paying attention to what’s going on in the world, you probably noticed that cryptocurrencies had a wild year, being one of the fastest growing digital assets.
Most cryptocurrencies rely on blockchain and are enabled for trading, and despite their original intent, i.e. to make for an alternative to the SWIFT system, they have become a so-called store of value, being sold and bought as an investment of sorts by people from all over the world.
If you are looking to make money with cryptocurrencies, keep reading.
Best Ways to Make Money with Cryptocurrencies
Since we live in a global economy, emerging financial markets are arguably the best places to look at if you want to make money from crypto. Here are a few examples.
1. Mining
Unlike fiat money, which is literally printed out of thin air by central banks (or commercial banks via fractional banking, a little known fact), cryptocurrencies are limited in number (as in they are non-inflationary), and new ones are created via mining, i.e. computers solving cryptographic equations. That’s an oversimplification, obviously, but you got the point.
The process of crypto mining involves blockchain, i.e. validating data blocks by all the computers in the network, as well as adding transaction records to a ledger (a public record also known as blockchain).
So, to make a long story short, crypto mining is a transactional process involving computers or mining rigs and problem solving/cryptographic processes to solve complex equations, with the end result being data recorded to a public ledger (blockchain).
A crypto currency is literally a network of computers involved in crypto mining that keep shared records using blockchain. Initially, crypto currencies were created as an alternative to the antiquated SWIFT system, in order to circumvent banks and allow peer to peer financial transactions between regular people, thus taking out the intermediaries.
In order to be crystal clear on how crypto mining works, you must first understand what the difference between centralized and decentralized systems is.
Traditional Banks Are Centralized Systems
Centralized banking means that there’s a central authority (the central bank) that processes every transaction, which is recorded and verified. The central bank controls, maintains and updates a ledger or a centralized record. Needless to say, this is a highly restricted system, as only banks are allowed to connect to the system directly and perform financial transactions.
Cryptocurrencies Use Decentralized, Distributed Systems
Cryptocurrencies are the opposite of traditional banking, as there’s no centralized ledger or a central authority. Cryptocurrencies use a distributed ledger, the blockchain thing I told you previously, and they operate in a completely decentralized system, where any user can connect directly and participate in the system, much like in P2P torrenting, provided you’re old enough to remember.
Basically, using crypto, you can send/receive payments directly to/from anyone in the network, without requiring a third party arbitrage (central bank). That’s what a decentralized digital currency is.
On top of being decentralized, cryptocurrency makes for a distributed system. Distributed means that the ledger (blockchain) is not secret, i.e. all the transactions are a matter of public record and anybody in the network has access to the ledger, as it is stored on all of the different computers/devices. This is the exact opposite of central banking, where only the bank has access to the ledger (centralized record).
Since there is no central authority to verify the transactions before being added to the ledger/blockchain, cryptocurrency relies on cryptographic algorithms.
And here’s where crypto miners come into play: they use their computers/devices to add new transactions to the ledger/blockchain by solving very complex cryptographic problems, and as a reward for doing so, they receive a small amount of the respective crypto.
2. PoS Blockchain Staking
Staking is very similar to getting interest from a bank account, as in you invest or lock up money in a particular cryptocurrency, let’s say BTC for the sake of argument, and you earn interest on it in the form of new crypto.
As a bonus, you can also benefit from the respective crypto’s appreciation if its value rises over time, provided you hold on to your coins long enough.
Besides mining to add new blocks to the blockchain, in a process called Proof of Work, you can add/validate new blocks via Proof of Stake or staking. Staking basically means that there are people called validators who hold on to their coins, or lock up their coins, in order to participate in a game of sorts, i.e. they are randomly selected by the network protocol at specific intervals to create a block (interest).
The more coins are locked up, or staked, the higher the chances are to be selected by the system as the next block validator. This clever system allows regular people who don’t have money to spend on expensive mining rigs to participate in the cryptocurrency creation process via direct investment. Also, staking works as an incentive for people to hold on to their coins, instead of selling them for profit, as well as a mean to boost network security.
More precisely, if block validators fail to maintain network security, their stake is at risk, but if they operate legitimately, they get a nice reward.
3. Buying & HODLing
This process can also be called investing in crypto. More specifically, one will choose a coin of their liking, hopefully a successful one with good prospects for the future, invest money in it, and then hold on to the coins, expecting for the price to go to the Moon, to use the parlance of our times.
If/when the respective coin one’s HODLing has reached a price high enough, a nice profit can be made by liquidating the respective investment via a crypto exchange like Coinbase.
This is HODLing 101: buy crypto low, and sell high for profit.
4. Trading
As the name suggests, trading means that crypto is very similar to stocks. As in, you can buy and sell cryptocurrency/tokens for profit like regular day traders, using a crypto exchange of your liking.
Just like with stock trading, there’s crypto day-trading, so profits can be made by selling/buying crypto on the same day.
As usual, there’s only one rule: buy low, and sell high.
5. Investing
The main strategy for earning money in the crypto space is investing. There are many ways to earn money by investing in crypto. The most common way is to literally buy crypto, i.e. direct investment or partnership, and wait for the price to go up. Another method is through initial coin offering, and finally, through exchanges.
Investing in cryptocurrencies makes for a two-prong approach in terms of investing: first, you make money as the coin/token appreciates in value over time, but there are also profits to be made through one’s share in the respective project.
Some cryptocurrencies offer various perks to investors, such as access to the project or product, or, the ability to use the respective coin to make payments.
6. Bonus Coins/Tokens
This is one of the easiest ways to earn cryptocurrencies, and the best thing about it is that you don’t have to actually invest (as in spend money) in anything. All you have to do is to participate in the airdrop/bounty program of the respective coin, perform a bunch of easy tasks, and you’ll get a nice reward, i.e. free coins.
Bonus tokens can also be earned in the ICO phase of a particular cryptocurrency, or the token sale phase, as early investors in new projects are often rewarded in such way.
7. Referral
Referral programs should be familiar to all internet users, and crypto referral programs work in the same way as, let’s say Amazon referral links. Needless to say, referral programs are the way to go if you don’t have money to invest in a cryptocurrency, but you still want to participate in a particular project.
In most cases, all that’s required is to register on a website, get a unique referral code, and then start refer the cryptocurrency to earn bonus tokens. To give you an example, WISE, as well as other cryptocurrencies, encourages this approach by offering juicy bonuses for referrals, i.e. both the referrer and the referee get 10 percent bonus tokens for each successful transaction that takes place through referral.
8. Sell for Cryptocurrencies
Basically, if you’re an internet merchant, you can always accept crypto like BTC or Ripple in exchange for your goods or services.
Cryptocurrencies are literally digital money, or at least that’s the theory, and they are designed to be easily transacted world-wide, without having to rely on third parties or convert them in other currencies.
The only problem with accepting payments in crypto is that their price relative to the US dollar is always fluctuating and “price discovery” in crypto is almost impossible (you’ll still have to price your stuff in $).
Other than that, global transactions can be easily switched to crypto, and there are many payment processors that can help your online/offline shop to integrate crypto payment options.
9. Dividends
Just like with stocks dividends, you can invest in cryptocurrency and earn fixed interest in the form of dividends. Ideally speaking, you will have to HODL, as in buy and hold for a certain period of time in order to earn interest.
Top dividend cryptocurrencies include NEXO and BNB, to name just a few, and most of them will earn you interest without having to stake.
10. DeFi
DeFi stands for decentralized finance, and the main advantages of DeFi include managing payroll and earning a passive income. Everything is made possible due to dapps also known as DeFi apps, via regular web interfaces or decentralized Web 3.0 gateways.
The rise of DeFi allowed both individuals and businesses easy access to alternative financial products and services and due to the decentralized nature of DeFi and the rapid growth of its software ecosystem/components, customers are now able to interact with the system via various methods.
DeFi’s smart contract tools are a boon for businesses, as power users can now leverage smart contract functionalities to get the most out from escrow and insurance pooling, to give you just a couple of examples.
Early adopters of DeFi used decentralized synthetics hubs like Shadows Network, which allowed users to trade, issue, borrow and lend synthetic assets (derivatives or clones of real-world assets).
NFTs are also booming, going further than mere collectibles, and even the very fabric of the internet (content provision) is becoming decentralized via networks like AIOZ. Arguably, the best thing about DeFi is that it allows participants to leverage existing crypto capital in order to make profit.
More precisely, you can earn profit or yield by staking the crypto you own into DeFi protocols, without having to risk your stack in trading/speculating. Even if interacting with DeFi is not risk free, it’s still fairly safe compared to other crypto-involved economic activities in terms of generating profit.
For patient people with a modest initial capital, DeFi is a great opportunity to earn a residual income via staking, yield farming and lending. Slowly, your initial capital will grow, even if you’ll not get rich overnight, and the main advantage of a passive guaranteed income is that you won’t have to worry about the crazy rollercoaster ride also known as the crypto market, and we’re talking about market dips obviously. That is to say, you’ll keep on earning even as prices are dropping.
Here are four of the most popular ways of generating a passive income in decentralized finance:
Method 1: Staking
We already talked about staking, but in this context, staking refers to locking or staking tokens into a smart contract, like an investment of sorts, and then earning more of the same token over time in return. A token is the native asset of the blockchain, like ETH is the token of Ethereum.
If you are wondering what is the incentive for someone giving you tokens for free just for staking your existing tokens, the answer is Proof of Stake, and yes, we already talked about that also.
The philosophy behind token incentives to reward network users is that blockchain is secured via Proof of Stake, with network validators being the people in charge of security, i.e. those who make sure no one is trying to cheat and uphold consensus rules.
In order to have a blockchain backed up by Proof of Stake, you require users locking/staking their assets into smart contracts, and these contracts are controlled by network validators.
Dishonest validators are punished by losing part of their stake, and stakers are given free tokens as an incentive to keep their assets locked for an extended period of time, as they contribute to the blockchain’s decentralization and security.
To make it simple, the free tokens are offered to keep people involved in the blockchain, i.e. to keep the network online and secure. In the case of Ethereum, users with ETH tokens locked into the Ethereum 2.0 smart contracts will earn extra ETH for upholding consensus rules in a fully automated process that requires no human input or oversight.
That means once you’re locked into an Ethereum 2.0 smart contract (you deposit the funds respectively), the Proof of Stake mechanism will automatically kick in and claim your rewards periodically. It’s worth mentioning that Ethereum 2.0 requires you to stay invested (staked) for an extended period of time, which means it makes for a good option for people with a low-time preference.
Also, even if the minimum requirement to stake in Ethereum 2.0 is 32 tokens or ETH, the restriction can be circumvented on certain platforms that use a pooling mechanism, so you can deposit a lesser amount.
Method #2: Become a liquidity provider
Liquidity providers, also known as LPs, are made possible by decentralized exchanges which allow swapping between token pairs, such as USDT and ETH for example; by doing so, regular DeFi users can pool their resources (tokens) via smart contracts, and earn a fee from all transactions (swaps), proportionally to their pool share.
Obviously, the more transactions are made via the respective pool, the more money is to be earned. However, being a liquidity provider is not fail proof, as in you’re not guaranteed to make a profit, due to market volatility. More precisely, the price of tokens is always fluctuating, and if the price of one of the pooled tokens goes down significantly, you may lose money.
This process is called IL or impermanent loss, but you can mitigate the IL issue by investing in highly liquid pools with less volatile tokens, such as ETH/WBTC.
In order to maximize profits, we would recommend a thorough analysis of real-time data gathered by LP aggregators; in this way, you can make an educated guess regarding potential returns from different pools.
Method #3: Yield farming
As explained previously, liquidity providers are rewarded with free tokens proportional to their pool share. Yield farming consists of further locking these tokens into essentially DeFi protocols that will earn you even more tokens (the same or different tokens), and that’s basically a double-whammy for investors: you earn a share of all fees with your pooled assets, and on top of that, you can also earn LP tokens.
When engaging in yield farming, it is highly important to make sure the platform you’re using is legitimate, i.e. the developers are serious and will not try to scam you long-term by stealing LP tokens for example, and using them to cash out from DEX pools.
Always look for established platforms with a ton of positive reviews, and, most importantly, platforms whose smart contracts have been audited by third parties.
Method #4: Lending
If you’re locking your tokens into a smart contract on a lending platform, you’ll earn an annual percentage yield, or APY (the same goes with bank deposit accounts). Your tokens are further lent to borrowers, who obviously pay interest, and part of the respective interest is your kickback.
3 Challenges and Risks for cryptocurrency enthusiasts (~3 pages)
As with any other technology, cryptocurrency can be a benefit or a hazard. The rise of crypto and widespread adoption of blockchain attracts both legitimate investors and unsavory characters looking to profit one way or the other.
Criminals are looking to use cryptocurencies for money laundering operations, while legitimate investors try to profit from the lack of regulation in the industry, which allows for large gains to go unreported with financial authorities in order to avoid taxes, capital gains and so on.
As the market cap for crypto is in the trillions, governments as well as international financial institutions are already screaming bloody murder.
Here are the main financial and legal risks of using cryptocurrencies:
Little to no regulation
Even if the crypto market is a free-for-all kind of a deal, there are good arguments to be made in favor of governments getting involved.
The scope of having a government after all is to protect the interest of the people and assure a fair playground for all, hence regulating the crypto market should mean protecting people from fraudulent/abusive actors rather than attempting to capitalize on revenue (crypto gain tax is already a thing in the US by the way).
For example, US based financial actors must acquire an accreditation from the SEC before making large speculative investments, in order to prove they can afford potential loses.
Some argue that cryptocurrencies should be treated the same, while others are going for the libertarian argument of allowing people to blindly invest in a 100% free/unregulated market, and let the invisible hand of the market sort things out.
The thing is, having a 100% free market and a decentralized/universal cryptocurrency sounds great, but the problem is that the price of crypto fluctuates wildly on a daily basis due to speculators (including banks and multi-billion-dollar hedge funds) flooding the crypto-market and engaging in get-rich-quick schemes (pump and dump basically).
It’s true that a large part of crypto wealth is in the hands of legitimate, long-term thinking investors, who are trying to make a positive impact on the world. However, when it comes to crypto, there’s always the threat of civil war, like the recent adoption of Bitcoin Cash and various forks, which are eroding crypto valuation, market share and adoption.
Another problem is that large crypto holders, called whales, have a disproportionate amount of influence over the crypto market, as they are definitely capable of affecting price fluctuation and things of that nature; and despite the libertarian utopian talk about a future world with no central authorities and ruled by blind scalable trust, the big fish always eats the little fish in the real world, especially when it comes to crypto.
Hence, state actors are faced with a difficult challenge when it comes to regulating cryptocurrency: first, they must properly classify the range of crypto in existence, and many analysts regard crypto as an entirely different (as in new) asset class.
This is definitely true when it comes to utility tokens, and somewhat true for tokens that function like securities.
To clear things up, utility tokens are described as having intrinsic utility besides being valuable as an investment vehicle, and the argument for supporting utility tokens is that they don’t qualify as securities under the Howey Test, i.e. they don’t qualify as a common enterprise with an expectation of profits predominantly from the efforts of others.
“Gray” taxes
The concept of gray taxes in regard to cryptocurrency revolves around crypto exchanges. Basically, instead of having to deal with the blockchain themselves, everyday consumers usually buy and sell crypto via cryptocurrency exchanges.
As we already told you, digital assets are stored on blockchains, but cryptocurrency exchanges are designed to make the process easier for everyday users. All you have to do is to log into a crypto-exchange of your choice, and with just a few clicks, you’ll be able to purchase or buy crypto in a matter of minutes. This is yet another example of DeFi making people’s lives easier.
Cryptocurrency exchanges operate on blockhain obviously, and by its sheer nature, blockchain is synonymous with privacy and anonymity, i.e. you will be able to send crypto into your exchange account from locations outside of the exchange’s own network.
To make things clear for people unfamiliar with the concept, you can buy crypto on a particular exchange, let’s say Kraken for the sake of argument, and then transfer the crypto you just bought to another exchange, like Coinbase, from where you can withdraw your money in fiat currency (USD). This happens often in the crypto-world, and it is actually the whole premise of using crypto, i.e. being able to send cryptocurrency from one wallet to another, and/or to other location without requiring third party verification, and, most importantly, without having to pay taxes.
And that’s actually the main issue with crypto: a massive tax problem for state actors.
High asset volatility
If you’d have to describe crypto investing, the best word would be volatility, as in asset volatility, which is due to speculation and lack of regulation.
Volatility is great for speculators (whales), and according to some, vital for the growth and interest in crypto, but not so great for regular people trying to hedge their fortune from inflation, provided the price of a particular cryptocurrency they’re invested in takes a dive.
Volatility may also mean that cryptocurrencies have failed in their main task, i.e. to provide a viable alternative to the banking system as a “democratic” digital currency, because you can’t have price discovery with any particular cryptocurrency if the value of the respective crypto goes up and down on a daily basis.
Simply put, volatility is the enemy of crypto functionality and widespread adoption, and that’s mainly due to market manipulation.
Market manipulation
According to Investing 101, you should never take risks with money you’re not prepared to lose, but what’s happening in the crypto market nowadays is taking that concept to another level. As in, the crypto market is heavily influenced by misinformation that spreads through social media like wildfire, and it’s prone to social engineering, like Elon Musk or Donald Trump tweeting about Bitcoin or Dogecoin.
People unfamiliar with the crypto space are an easy target for fraudsters, market manipulators, cyber extortionists and so on. In order to draw awareness, the U.S. Securities and Exchange Commission (SEC) went so far as to create a fake initial coin offering website, aimed at educating would be crypto investors about scams and, let’s say shiny objects threats.
The SEC taking interest in educating investors on the risks of cryptocurrencies is long overdue, and we definitely require emerging regulatory clarity on what makes for a truly decentralized crypto asset, like Bitcoin or Ethereum, which cannot be controlled by any single actor, vs. company (or state) issued crypto like Facebook’s Libra.
Speaking of misinformation and market manipulation in the relatively small yet highly speculative crypto market, we must mention the massive impact of the media, whose headlines may make or break the crypto market at any given moment.
Investors and speculators alike are literally hunting news headlines for the next big “event” that has the potential of influencing the markets, up or down. Any news item that may impact crypto prices leads to a race to sell or buy fast, as the quickest to do so will profit the most, and the truth is that media stories have a disproportionate impact over the crypto market.
Also, the fact that there are many fake news outlets influencing people’s investing decisions in crypto doesn’t help things much in regard to market manipulation.
4 Latest Blockchain Tech (2-3 pages)
The current DeFi/blockchain paradigm is arguably the merit of Bitcoin, as it was first introduced as a cryptocurrency back in 2008 and it definitely changed the world for the better. Blockchain and crypto were revolutionary innovations when first introduced more than a decade ago, and these experimental technologies have come a long way since.
We can safely affirm that 2020 was the year that cemented Bitcoin’s position as the dominant cryptocurrency of the world, as a solid and trustworthy technology. Moreover, the Covid-19 pandemic further empowered the role of blockchain and crypto and contributed to their mass adoption, as many individuals and businesses were exploring for alternative means to transfer money abroad, and/or keep their business afloat.
During the pandemic, blockchain came in handy as an already established technology, and offered comprehensive solutions to existing businesses, as well as start-ups and individuals.
Permissioned Blockchain on the Rise
If you’re into crypto, you’re probably familiar with distributed ledger technology, and, most importantly, Public blockchain. The next layer though is the permissioned blockchains, which can only be accessed by specific users only, and offer reliability and efficiency via a private key for accessing authorized nodes.
Permissioned blockchains have gained significant momentum in 2021, as they’ve become a significant contributor to overall crypto/blockchain market growth. This particular type of blockchain is specifically aimed at enterprises/organizations and not so much at private individuals, as it offers a unique solution for business users to leverage blockchain technology to suit their particular requirements/interests.
DeFi Adoption on the Rise
In the aftermath of the covid-19 pandemic, the world has changed in many ways, and that includes DeFi. Prior to 2021, there has been a good amount of skepticism in regard to mass adoption of decentralized financial transactions, but in 2021, things changed dramatically, as millions of people have been exposed to cryptocurrency and had the opportunity of becoming investors from the (forced) comfort of their own homes.
Many people did so, i.e. they invested in crypto and DeFi related technologies, as DeFi transactions were slowly gaining traction compared to regular banking. And one of the biggest winners in terms winning the hearts and minds of users in 2021 is DeFi lending platforms
Supply Chain Optimization
Supply chain optimization is a familiar term for people involved in businesses that transact internationally, like dropshipping. Optimizing the supply chain is relatively difficult even for experienced entrepreneurs, especially in terms of logistics and/or the flow of goods and services.
Daily operations involve a ton of paperwork, bureaucracy and headaches, but fortunately, blockchain offers comprehensive solutions to all supply chain optimization problems, including the painstakingly slow traditional clearing process. Complex international transactions and trades on blockchain powered platforms can be optimally recorded digitally, and documented on a distributed ledger, regardless of the volume of data, and that includes logistics and technical processes.
Blockchain/distributed ledger technology makes for the perfect solution to all businesses that transact internationally, as all the details of each transaction are recorded and made available to every party involved in the respective transaction, and there’s no limit to recording and storing any amount of data.
Mass Adoption of Blockchain as a Service (BaaS)
Another DeFi service gaining more acceptance this year is BaaS, as numerous enterprises already integrated blockchain as a service into their daily operations. Blockchain as a service is pretty similar to a web hosting provider, i.e. it’s basically a cloud based service that allows the development of digital products by working with blockchain. With Baas, enterprise services or operations can integrated blockchain technology into their system.
Influence in Social Networking
As per April 2021 figures, 4.33 billion people are using social media, which means social media is an intrinsic part of the human life. According to various experts and/or enthusiasts, we can expect for blockhain technology to become embedded in new social networks.
The advantages of building a blockchain powered decentralized social network include better data privacy and full control over content and personal data by users, content relevance without biased search algorithms, and basically all advantages offered by blockchain, including end-to-end encryption and things of that nature.
Hybrid Blockchains
The concept of hybrid blockchain is relatively new, and to define it succinctly, it makes for a combination of public and private entities. A hybrid blockchain merges the benefits of both private and public systems in order to offer both freedom and controlled access at the same time.
One big advantage of hybrid blockchains is that they are cheaper to set-up and operate, and due to their influential nodes, verifying transactions is quick and easy. Since hybrid blockchains are secured, hacking is not an issue, and we can expect for hybrid blockchains to be the next big thing with the emergence of new cryptocurrencies in 2021.
5 Insufficiency of current Money
The Keynesian fiat-based modern monetary system is highly inflationary, and has a lot of problem, including economic, environmental and social consequences, including a debt based economy with public and private debt at historic highs, high house prices, income inequality, environmental problems, periodic booms and busts, depressions/financial crises, not to mention debt deflation and negative consequences for investment, economic growth and the labor market.
These are the main effects of the modern monetary system over income inequality, house prices, debt, the environment, recessions and crises, the level of democracy, jobs, businesses, taxes and public spending:
Debt
In the current monetary system, money is created as debt by central banks as well as private lending institutions via fractional reserve banking. Which means the entire system is a perpetual debt trap, leaving both individuals and companies beholden to banks in perpetuity.
Inequality
Since all money in circulation is issued as debt, we end up with a system that required perpetual debt, i.e. the level of debt is always raising. The interest that has to be paid on the debt exacerbates inequality, as it makes for a massive transfer of wealth from the 90 percent of the population (by income) to the top 10 percent.
Financial Crisis & Recessions
Most financial crises, including the recent one in 2008, are the result of too much money printing by banks, which creates an asset bubble, whether it’s speculation in the financial markets or increased house prices. As we already explained, each time a loan is made by a bank, new money goes into circulation as debt, and that’s how banks are fueling emerging financial crisis by making loans and creating huge sums of new money.
Environment
The economic paradigm of the modern world is endless consumerism with no regard for the environment, and this economic system is highly detrimental in terms of environmental destruction via accelerated resource consumption (deforestations etc.). This should be viewed as constructive criticism, as we do not claim to have all the answers, yet we must acknowledge there’s a problem with the current system.
Jobs & Business
The current system works by pumping money into the economy via personal debt, in the form of credit card and/or personal debt. The apparent economic prosperity created by people spending more on money they don’t have encourages businesses to hire more people and expand, but since these consumer-led booms are actually based on debt not on increased income, recession occurs with mathematical precision, people lose their jobs and businesses go bankrupt.
Needless to say, the modern money mechanics is bad for both businesses and jobs creation.
Democracy
The current system blames all economic and social issues on politicians, yet the truth is that the banking sector has more power than governments, as banks are the ones that create money (you can use the Rothschild quote: “I care not what puppet is placed upon the throne of England to rule the Empire on which the sun never sets. The man who controls the British money supply controls the British Empire, and I control the British money supply.”).
Taxes & Public Spending
If you allow private banks to control a nation’s money supply, you’ll end up with everyone paying more taxes, and that’s built-in the system; as in, it’s a feature, not a bug. More precisely, banks are the ones profiting from the newly created money, while the taxpayers are left holding the bag, as they’re ethe ones that have to pay the costs of the impending financial crises (too big to fail etc.), which are created by the banks in the first place.