Basic Questions

Back to the Basics

What is crypto?

Cryptocurrency consists of web-based digital assets that use cryptographic functions to conduct financial transactions. These digital assets typically utilize blockchain technology to gain transparency and decentralisation to varying degrees. Cryptocurrencies are essentially digital assets that aim to fix the problems of traditional currencies by putting the power and responsibility in the currency holders' hands. The most well known cryptocurrencies being Bitcoin and Ethereum. Cryptocurrencies are created by code, mostly through the help of smart contracts. These smart contracts are pieces of code that can be automatically executed and in a deterministic way. The video link below will explain the concept of smart contracts and their purpose within crypto: Smart Contracts Explained

What are the different types of crypto’s?

There are multiple different types of cryptocurrencies, Bitcoin and Ethereum being the most widely noticed. Adjacent to that, there are also other cryptocurrencies known as Altcoins and Stablecoins. Altcoins (alternative coins) is a classification given to any cryptocurrencies that are not Bitcoin. Stablecoins on the other hand are cryptocurrencies that are FIAT backed or algorithmically backed, among others. These stablecoins are pegged to another asset class, such as a FIAT currency with examples including USDT or USDC. This means one USDC/USDT has either 1 USD in the bank account, or 1 USD of representative value backing the asset - ensuring the value of each stablecoin (USDT, USDC, DAI etc).

What is the difference between bitcoin and blockchain?

Bitcoin is the world's largest cryptocurrency by market capitalisation. Bitcoin is a digital/virtual currency that was created in 2009 that uses peer-to-peer technology to facilitate payments without any intermediaries. There is often confusion about Bitcoin and blockchain and it's important to understand that Bitcoin utilizes blockchain technology. Blockchain is not a cryptocurrency, it is a ledger that records all the cryptocurrency transactions that are verified by cryptography and is open, secure and accessible by all. The ledger of transactions gets recorded in ‘blocks’ that are essentially ‘chained’ together making them immutable.

What is Ethereum?

Ethereum is the second-biggest cryptocurrency by market capitalisation after Bitcoin. It is also a decentralised computing platform that can run a wide variety of applications, however, unlike Bitcoin, it wasn’t created to be a digital currency. Whereas Bitcoin is essentially a store of value, making it a digital gold, Ethereum’s founders aimed to build a new kind of global, decentralised computing platform that takes the security and transparency of blockchains and extends those attributes to a vast range of applications. Everything from financial tools to games to complex databases are already running on the Ethereum blockchain. And its future potential is only limited by developers’ imaginations. Ethereum can essentially be used to codify, secure, decentralise and trade just about anything. Ethereum's native token is known as Ether or mostly heard, ETH. In order to interact with the Ethereum ecosystem, you will need to have some amount of ETH. The reason for this is that in order to send a transaction on Ethereum as well as other chains, you will need to have the protocol's native token to pay for the transaction cost. This is called gas and will be explained in greater detail in the video below: What is gas and why is it so high on Ethereum?

What is CeFi

CeFi, otherwise known as Centralised Finance, was the standard for trading cryptos. In centralised finance (CeFi), all crypto trade orders are handled through a central exchange and trading is based on the order book model. Funds are managed and governed by the central exchange which means you don’t own a private key that provides you access to your wallet. Moreover, the exchange identifies which coins they list for trading or how much fees you need to pay to trade with their exchange.

What is DeFi

DeFi, which is short for Decentralised finance, is a blockchain-based form of finance that does not rely on central financial intermediaries such as brokerages, exchanges, or banks to offer traditional financial instruments. Instead it uses the power of code and utilizes smart contracts on blockchain technology to build financial instruments that can be used in a vast amount of applications. Defi is essentially an umbrella term for peer-to-peer financial services on public blockchains. It gives you access to use your funds as you please and to earn substantially larger yields than you would in traditional finance. Situated below are links that should help you get a fairly comprehensive understanding of what DeFi is and how it works: What is Decentralised Finance? and DeFi, the future of finance.

What are liquidity pools?

You have heard the term liquidity pools several times in the videos above but might not fully understand them as of yet. Liquidity pools are pools of tokens locked inside a smart contract. They are used to facilitate trading by providing liquidity. A lot of centralised exchanges trading is based on the order book model in which buyers and sellers come together to meet at an equilibrium price. Buyers try to buy at the lowest possible price and sellers try to sell at the highest. Market makers come into play to facilitate trading by always willing to buy or sell a particular asset. They do so by providing liquidity. This process can be automated and used within DeFi protocols and hence the invention of liquidity pools. In order to grasp the full understanding as well as the risks involved with liquidity pools, watch the videos provided below: What are liquidity pools and how do they work? and What is impermanent loss?

What is yield farming?

Yield farming is one of DeFi’s hottest topics as the potential returns are much greater than you would see in the traditional financial sector. Yield farming is essentially a way to maximise your rate of return on your capital by leveraging different DeFi protocols. It is explained in much greater detail in the video below: What is yield farming and how does it work?