Everything You Need to Know About Blockchain Investing
- 13.05.2022 09:10 am
Although you cannot actually invest in blockchain because it is a system for storing and processing transactions, its disruptive technology can be used to help investors make money in new ways that were impossible before. This has resulted in new concepts that were coined to explain different points of online trading, including arbitrage trading bots and tokenization of real estate assets.
If you’re interested in online trading and investing and have experience in traditional ways, you will still need to learn the differences between these two types. From understanding how blockchain and cryptocurrencies work to detecting good investing opportunities, you will need to spend some time getting familiar with this new worldand learning the basics.
There are some predictions from experts in the blockchain world that this technology will revolutionize international trade. As a distributed ledger technology, blockchain has the potential to make trading commodities more affordable, transparent, and simpler. We mostly connect blockchain with Bitcoin, the cryptocurrency, however, it can be used in almost every process that involves transactions and data exchange.
One of the popular ways to utilize blockchain is to buy and sell stocks. Actual stocks can easily be tokenized into digital ones, and easily transferred utilizing peer-to-peer transactions. The entire process of digital trading is the same as the conventional one, but instead of using your physical wallet with fiat money, you will use your digital wallet with cryptocurrencies to buy, sell, and trade your stocks.
One of the few things that have been coined with blockchain technology is the arbitrage trading bots, which are used to generate profits from spreads. These types of bots are generally created for people with advanced investing experience to facilitate the entire trading process for them.
Centralized vs Decentralized
When talking strictly about investing, most investors are still using centralized exchanges like Gemini or Coinbase. With centralized vs decentralized exchanges, there are a few key differences you will need to be aware of. Centralized exchanges are regulated, require licenses to operate, and are compliant with the regulatory authorities.
On the other hand, decentralized exchanges are much more complicated to regulate because they are not operated by a central regulatory authority. Decentralized exchanges are run on smart contracts, which enable the exchange to function without these regulatory authorities. Because of that, decentralized exchanges are permissionless, which means that anyone can join without requiring permission from the central authority.
One of the recent buzzwords in the blockchain world is yield farming, the automated process of utilizing decentralized finance (DeFi) to maximize returns. Yield farming users will lend or borrow crypto on a DeFi platform and then earn cryptocurrency for their services. There is a wide range of tactics yield farmers can employ to increase their yield output, such as constantly shifting their cryptocurrencies between several loan platforms to optimize their gains.
Yield farming allows interested investors to earn yield by putting coins or tokens in DApp or decentralized applications, such as decentralized social media, DEXs, crypto wallets, etc. Most of the time, yield farmers will utilize decentralized exchanges to lend, borrow, or stake their coins to earn interest and then speculate on price changes. Because it is supported by decentralized finance, yield farming also operates on smart contracts, which eliminate the need for the intermediary and allow agreement parties to proceed with their agreement due to the nature of the smart contract.
There are several different types of yield farming that are becoming increasingly popular as more investors are seeing this type of investment as a great opportunity to earn money. They are:
- Liquidity provider: The user will deposit two coins to a decentralized exchange to provide trading liquidity. These exchanges charge a low fee to swap the two tokens paid to liquidity providers, which can also be paid in new liquidity pool (LP) tokens.
- Lending: Those who have coins or tokens can lend their crypto to borrowers via a smart contract and earn yield from the loan interest.
- Borrowing: Yield farmers can utilize one token as collateral and receive another’s loan. This allows users to farm yield with the borrowed coins.
- Staking: Two forms of staking exist currently in the decentralized finance world. The more popular one is on proof-of-stake blockchains, in which users get paid interest to pledge their tokens to the network to show security. The second form is to stake liquidity pool tokens earned from supplying a decentralized exchange with liquidity, which allows users to earn their yield twice.