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Oct

2021

What is a Private Blockchain? Public vs Private Blockchain

What is a Private Blockchain and How Does It Work?

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

The term “blockchain” most often implies a public blockchain. The Bitcoin blockchain, the first ever created, is a public blockchain, and for a time it seemed like all blockchains functioned the same.

But in the 12 years since the creation of Bitcoin, many individuals and organizations have experimented with different versions of blockchain technology. As a result, the answer to the question “what is blockchain” has become somewhat more complicated. In this article, we will examine the differences between a public vs private blockchain.

Basics of Blockchain

Blockchain technology is a form of decentralized ledger technology (DLT). A distributed ledger consists of multiple servers that can be spread across different geographical regions. The ledger can be used to record transactions or other information without relying on a single computer.

A blockchain is unique in terms of DLT in that blockchains are decentralized, permissionless, and create an immutable public record of transactions. The servers in a blockchain are referred to as “nodes,” which are computers that make sure everyone on the network agrees on the blockchain’s history, a feat known as “consensus.” At least, that’s the case for the Bitcoin blockchain, which was the first ever created.

Since the launch of Bitcoin in 2009, many variations of the original blockchain technology have sprung up. Some are more centralized, require permission to use, or use different consensus mechanisms.

Recommended: What Happens When Bitcoin Forks?

What is a Public Blockchain?

A public blockchain is one that is decentralized, can be used by anyone, and maintains a public ledger of all network activity.

Bitcoin is a good example of a public blockchain. All Bitcoin transactions are recorded on the blockchain and can be seen by anyone using a simple block explorer like blockchain.info. There are also more advanced tools, like those created by companies such as Chainalysis, that can analyze blockchain data for more specific details. Those details can be useful for finding illicit transactions or hacked coins, for example.

Bitcoin is also a permissionless blockchain, meaning anyone can use it without needing permission. This makes the network equitable in that there are very few barriers to entry. All anyone really needs to initiate a Bitcoin transaction is either a home computer or a smartphone and a Bitcoin ATM.

What is a Private Blockchain?

A private blockchain can be thought of as the opposite of a public blockchain. It’s kind of like a personal blockchain for whoever runs it.

Rather than a decentralized network of nodes achieving consensus on a network that can’t be owned or controlled by any single person or group, private blockchains represent a different kind of system.

Private blockchains are more like centralized distributed ledgers. Some might even argue that they are not blockchains at all, given that decentralization is often thought to be a key feature of blockchain technology.

How Do Private Blockchains Work?

Rather than being decentralized, a private blockchain is owned and controlled by one person, group, or organization. This party will control:

• who can participate in the network (users must be invited and verified, meaning that private blockchains are also permissioned blockchains)

• how consensus will be achieved between the nodes

• how mining rights and rewards will be distributed

• how the ledger will be maintained

Whereas public blockchains create an immutable ledger, the owner of a private blockchain can override, reverse, or delete transactions as they see fit.

When it comes down to it, a private blockchain is a distributed ledger that functions as a closed database based on cryptography. The only parties who can run full nodes on a private blockchain are those that have received permission from the owners of the network.

Readers interested in learning more about a specific private blockchain example could research projects like Ripple, Quorum, or Hyperledger Fabric.

Recommended: What is Ripple XRP?

Pros and Cons of Private Blockchains

Private blockchains offer some pros and cons that are distinct from those of public blockchains.

Pros of Private Blockchains

There are a number of pros of private blockchains, including potentially lower energy usage, higher transaction throughput, and more control over unwanted network activity.

Lower Energy Usage

The computing power required to run thousands of nodes around the world to achieve consensus on a public blockchain can add up to a significant amount. In contrast, centralized private blockchains use less energy because they run on just a handful of servers.

Ability to Remove Unwanted Activity

A private blockchain gives its owner the ability to reverse or delete transactions. So, if someone steals funds or information, that problem can be solved easily.

Faster Transactions

Private blockchains can scale more easily than public ones. The number of authorized participants will be much less in a private blockchain, allowing it to process many more transactions per second than a public blockchain.

Cons of Private Blockchain

There are a few downsides to a private blockchain, both of which trace back to its centralization.

Potential for Censorship

Private blockchains face the same challenge as all centralized systems: They require users to put full faith in whomever runs the system. If that person or group decides to take actions that benefit themselves and hurt network participants, there is often little anyone can do. And if the network operators want to exclude certain people from participating in the network for whatever reason, they can do so.

Decreased Security

Private blockchains may be seen as less secure because they create a single point of potential failure. If attackers can seize upon this single attack vector, the network could be in big trouble. Public blockchains, in contrast, have greater blockchain security because controlling the network requires controlling 51% of the network’s nodes.

Recommended: What is a 51% Attack?

Public vs Private Blockchains: Main Differences

In many ways, the distinctions between a public and a private blockchain are easy to point out because they are polar opposites. Here is a recap of their main differences.

Public Blockchain	Private Blockchain
Anyone can run a full node.	Only selected participants can run a full node.
No one needs permission to use the network.	Only selected participants can use the network.
An immutable public ledger is maintained in a decentralized manner.	The ledger can be altered by the entity that controls it.
It’s owned by no one.	It’s owned by a single centralized entity.

Is a Public or Private Blockchain Better?

There is no definitive answer as to whether a public or private blockchain is better.

Private blockchains might have some specific use cases in private industry. But because they can be centrally controlled, some might argue that private blockchains defeat the entire purpose of blockchain technology.

Yes, a private blockchain could consume less power, enable faster transactions, and give greater privacy to its users. But the tradeoff is that power becomes concentrated into the hands of whoever controls the network, and they can change the rules anytime they like.

An open, public blockchain like the one that Bitcoin runs on is the most equitable approach and makes the system nearly immune to censorship or corruption. No one can stop someone from using Bitcoin, and no single person or entity can control Bitcoin. Changing the rules on a decentralized network requires a majority of nodes to come to an agreement.

The Takeaway

Public and private blockchains couldn’t be more different from each other. And while the permissioned approach of private blockchains may result in higher speed and efficiency, it can also come with a higher potential for corruption.

Photo credit: iStock/anilakkus

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Oct

2021

What Is a Credit Spread? Explained and Defined

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

The term “credit spread” refers to two separate financial terms.

A credit spread is an important indicator of investor sentiment that compares the yields offered by Treasuries and corporate bonds as a way of understanding how optimistic or risk-averse investors are feeling.

But credit spread also refers to an options-trading strategy where an investor sells a high-premium option and simultaneously purchases a low-premium option on the same underlying security.

Credit Spread – the Market Indicator

A credit spread is the gap between the interest rate offered to investors by a U.S. Treasury bond versus another debt security with the same maturity. The differences in the yield of the different bonds, or credit spread, typically reflects differences in credit quality between Treasuries and other bonds.

Investors will also sometimes call credit spreads “bond spreads” or “default spreads.” For investors, credit spreads give investors a quick shorthand for comparing a particular corporate bond versus its risk-free alternative.

When investors refer to credit spreads, they usually describe them in terms of basis points, each of which is a percent of a percent. For example, a 1% difference in yield between a Treasury bond and a debt security of the same duration would be called a credit spread of 100 basis points.

For example, if a 10-year Treasury note offers investors a yield of 3%, while a 10-year corporate bond offers to pay investors a 7% interest rate. There would be a 400 basis-point spread.

Recommended: What is Yield?

The bonds issued by the U.S. Treasury are the benchmark of choice because the financial-services industry considers them relatively risk-free, given their backing by the U.S. government. Investors consider corporate bonds, on the other hand, riskier, even when they’re issued by the largest, longest-tenured and most highly rated companies in the most stable industries.

To purchase debt securities with that added risk, investors look for compensation in the form of extra yield. That’s why investors sometimes look at a debt security’s credit spread as an indicator of the perceived riskiness of a company’s bonds or the creditworthiness of the company itself.

Because they have a lower risk of defaulting, higher quality bonds can offer lower interest rates – and lower credit spreads – to investors. Conversely, lower quality bonds have a greater risk default, and so they must offer higher rates – and higher credit spreads – to compensate investors for taking on that risk.

Recommended: Pros and Cons of High-Yield Bonds

Why Do Credit Spreads Fluctuate?

The credit spreads of the bonds issued by a given company may change over time for a number of reasons. They may change because of macroeconomic fluctuations such as inflation, or the degree of market enthusiasm for the company issuing the bond.

When the equity markets seem headed for a downturn, both institutional and retail investors often sell stocks and corporate bonds, and then reinvest in U.S. Treasuries. That pushes down the yields offered by U.S. Treasury bonds as investors flee to safety, while the yields paid by corporate bonds rise in order to entice skittish investors. The result is a general widening of credit spreads across the board.

That dynamic is one reason that investors look at average credit spreads as a window into the overall market sentiment, in which wider credit spreads indicate declining investor sentiment. Narrower credit spreads typically signify more bullish sentiment among investors. That’s because during a bull market the safety of Treasuries holds less appeal to investors, forcing the notes to offer higher rates. Meanwhile, that same confidence leads investors to see corporate debt as less risky, allowing companies to issue bonds with lower yields.

What Is a Credit Spread in Option Trading?

Sometimes, investors use the term “credit spread” to refer not just to the difference in yield offered by a Treasury bond and a similar security, but also as a specific options trading strategy. The strategy is also sometimes known as a “credit spread option” or a “credit risk option.”

In an option credit spread strategy, an investor buys and sells options on the same underlying security with the same expiration, but at different strike prices. The premiums the investor receives on the option they sell should be higher than the premiums they pay on the option they buy, which leads to a net return for the investor.

The strategy takes two forms:

Bull Put Spread

In the bull put spread, in which the investor buys and sells options in which they’ll make a maximum return if the value of the underlying security goes up.

A bull put spread is often also called a put credit spread. In it, an investor sells a put option and purchases a second put option with a lower strike price. For the strategy to work, the investor buys the same amount of both options and, both options will have the same expiration date.

In a bull put spread strategy, as long as the price of the underlying security remains above a certain level, the strategy will begin to produce profits as the differences between the value of the two options begins to evaporate as a result of time decay. Time decay is how much the value of an options contract declines as that contract grows closer to its expiration date.

As the name indicates, the bull put spread is a strategy used by investors who are bullish on a security. And the higher the underlying security rises during the options contract, the better the investor will do. But if the underlying security falls below the long-put strike price, then the investor can lose money on the strategy.

Bear Call Spread

The other credit-spread is called the bear call spread, or a call-credit spread. That strategy is, in many ways, the mirror opposite of the bull put spread. Investors in this strategy expect that a security’s price will go down. In it, the investor buys and sells two options on the same security, with the same expiration date but at prices where the investor will receive the maximum return if the price of the underlying security sinks.

A bull put spread can be a profitable strategy if the investor remains under a certain level over the duration of the options contracts. If the security is below the short call’s strike price at expiration, then the spread seller gets to keep the entire premium, giving the investor a healthy return. But the risk is that if the price of the security rises above the long-call strike price at the expiration of the strategy, then the investor faces a loss.

Recommended: A Guide to Options Trading

The Takeaway

A credit spread is an important indicator of investor sentiment. It’s also an options strategy where a high premium option is written and a low premium option is bought on the same security. Understanding the meaning of terms like credit spread is an important step for new investors who are just starting to invest in stocks.

The SoFi options trading platform is a great way to get started, thanks to its user-friendly design. Investors can trade from the mobile app or web platform. And should any questions come up along the way, there’s a library of educational resources about options available.

Trade options with low fees through SoFi.

Photo credit: iStock/Astarot

Oct

2021

What Is Yield Farming in Crypto & DeFi?

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

Yield farming involves lending crypto in exchange for high returns, also called yield, typically paid out in crypto. It requires a liquidity pool (smart contract) and a liquidity provider (an investor).

Yield farming has been one of the biggest factors driving the growth of decentralized finance (DeFi), blockchain-based platforms providing financial services, such as borrowing and lending, without a centralized authority like a traditional bank or lender.

What is Yield Farming?

Yield farming crypto protocols reward liquidity providers (LPs) for locking up their crypto in a liquidity pool governed by smart contracts. In this way, the LPs are effectively lending their crypto. The rewards generally come in one of three forms:

• A percentage of transaction fees

• Interest from lenders

• A governance token

Regardless of the method of payout, returns are expressed as an annual percentage yield (APY). The more funds added to the pool by investors, the lower the value of the issued returns will fall.

In the early days of yield farming, most investors staked stablecoins like USDC, DAI, or USDT. But today, the most well-known DeFi protocols run atop the Ethereum network and provide governance tokens as an incentive for “liquidity mining.” In exchange for providing liquidity to decentralized exchanges (DEXs), tokens are farmed in liquidity pools.

💡 Recommended: What Is a Liquidity Pool, Exactly?

With liquidity mining, yield farming participants earn token rewards as an additional form of compensation. This type of incentive gained traction when the Compound network began issuing COMP, its rapidly appreciating governance token, to users of its platform.

The majority of yield farming protocols today reward liquidity providers in the form of governance tokens. Most of these tokens can be traded on centralized and decentralized exchanges alike.

How Does Yield Farming Work?

Yield farming uses an order-matching system known as the automated market maker (AMM) model.

The AMM model, which powers most decentralized exchanges, does away with the traditional order book, which would contain all “bid” and “ask” (buy and sell) orders on an exchange. Rather than stating the current market price of an asset, an AMM conjures liquidity pools through smart contracts. The pools then execute trades according to preset algorithms.

This DeFi yield farming method relies on liquidity providers to deposit funds into liquidity pools. These pools provide funding for DeFi users to borrow, lend, and swap tokens. Users pay trading fees, which are shared with liquidity pools based on how much liquidity they provide to the pool.

How to Calculate Returns in APY

Estimated DeFi yield farming returns are calculated on an annual basis. The key word here is “estimated,” because interest rates can change dramatically over the course of the year, or even the course of one week.

There’s no particular method to calculate exactly how much APY a protocol will earn. Word tends to spread quickly about a yield farming strategy that earns high returns. The masses then rush in, pushing down yields.

There’s another variable factor: the token in which rewards are denominated. If investors are paid in the form of a DeFi token of some kind, and that token drops in value relative to other currencies, even high percentage gains could be reduced or wiped out.

Yield Farming vs Staking

Staking is different from yield farming. Proof-of-stake (PoS) tokens allow users to become transaction “validators” who confirm transactions on the network by locking up tokens for a set period of time. In exchange, users earn interest on their tokens.

While both staking and yield farming involve depositing tokens and earning a kind of crypto dividend (which is why the terms “staking” and “locking up tokens” are sometimes used interchangeably), what’s going on behind the scenes is much different in each case.

Staking crypto involves validating network transactions and earning a portion of newly minted block rewards. This action happens directly on the blockchain of the network of the token being staked. Staking serves the same function on PoS networks as mining does on proof-of-work networks — that of achieving consensus. Through staking, all nodes in a network agree on which transactions are valid.

Yield farming is participating in a decentralized financial product, earning interest on crypto that has been loaned out to someone else. These transactions are facilitated by smart contracts, most commonly on the Ethereum network.

What Are the Risks of Yield Farming?

This application of DeFi is as risky as it is volatile. At best, LPs might find themselves earning far less interest than expected, since rates can swing upwards or downwards quickly. At worst, they can lose everything they invested — in some cases thanks to hackers, and in other cases to what’s known as a “rug pull” scheme.

How Can Yield Farming be Hacked?

Software-related vulnerabilities can lead to hacking. For example, in 2020 Harvest Finance was hacked when flaws in the smart contracts used to govern the protocols were exploited by attackers. It resulted in more than $420 million of investor funds being lost. Those funds can never be recovered and there is no regulatory authority that investors can appeal to.

What is a “Rug Pull” Scheme?

A rug pull involves a group of people creating a seemingly promising new platform that is in fact a scheme to steal user funds. Once enough unsuspecting liquidity providers have bought into the scam by depositing tokens, the protocol goes offline — and the creators make off with all the invested funds. Investors lose everything and have no recourse. Simply search for the term “defi rug pull” and a long list of related stories will come up.

Beyond the risk of hacks and schemes, there are also additional risks like high gas fees, the complexity of interacting with the protocols themselves, and the fact that DeFi applications depend on several underlying applications to work correctly. If something goes wrong on any layer, it could disrupt the whole thing.

Is Yield Farming Right for Me?

Yield farming is likely to appeal to a very select group of people — those who have both the required technical skill and high risk tolerance.

If you’re reading an introductory article on the idea of yield farming, chances are it’s not for you. This kind of risk-taking isn’t for crypto beginners or those who can’t risk losing much capital.

Recommended: A Beginner’s Guide to Cryptocurrency

The Takeaway

Yield farming can be a high-risk, high-reward venture for the curious, tech-minded few who are comfortable with the possibility of losing their principal investment.

Since the summer of 2020, when DeFi was at the height of its popularity, enthusiasm has waned somewhat. Tales of extravagant returns have been tempered by tragedies of hacks and rug pulls.

Photo credit: iStock/PeopleImages

Oct

2021

What is SushiSwap (SUSHI)? How to Buy SUSHI

Guide to Investing in Sushi Swap (SUSHI)

By Matthew Zeitlin | Growing Wealth, invest, Investing | Comments Off

Behind every new cryptocurrency these days, there’s typically an old one. One classic example is when Bitcoin Cash split off from Bitcoin. In the volatile and dynamic world of DeFi (decentralized finance), consider SushiSwap forking from Uniswap, one of the biggest and most valuable decentralized cryptocurrency exchanges.

SushiSwap is one of the fastest growing types of cryptocurrency. Here, we’ll explore what it is, how it works, and whether it’s a good crypto investment.

What is SushiSwap (SUSHI) Cryptocurrency?

SushiSwap, a decentralized cryptocurrency exchange, is run on smart contracts. Individuals can trade cryptocurrency with each other using the Ethereum blockchain. The Sushi coin is a token that allows its holders to make decisions about how SushiSwap is run.

This is different from how more mainstream, centralized cryptocurrency exchanges operate. How those cryptocurrency exchanges work is not that different from a traditional brokerage: you set up an account, load it up with money, and buy an asset — with the exchange taking either a fee or the “spread” between how much the asset is selling for and how much people are willing to pay for it (or sometimes both).

Decentralized exchanges like SushiSwap try to live up to cryptocurrency’s anarchic ethos by building a framework for people to exchange cryptocurrency with each other. One way this happens is by “liquidity mining”, where users contribute cryptocurrency they own to “pools” (pairs of crypto that can be traded on the exchange) in return for fees from the platform or, in this case, Sushi. Conceptually, this is similar to Bitcoin mining, but it typically happens on Ethereum-based blockchains and in some ways is also analogous to how banking works.

Recommended: What is a Decentralized Exchange (DEX)?

SushiSwap incentivizes users to provide liquidity for certain token pairs so that they’re available to traders on the platforms by adjusting how much they get paid out in fees. The pairs are usually Ether and another token.

Governance is another defining feature of Sushi crypto. The Sushi token enables its holders to vote on platform policy and technological choices.

How Does the SUSHI Token Work?

The Sushi token works as an incentive for staking SushiSwap with cryptocurrency pairs that can then be exchanged by its users. By staking your crypto, you get paid out in Sushi as well as fees from the exchange itself. You can also buy and sell Sushi itself.

SUSHI Price

Despite only being around for less than two years, Sushi has taken a wild ride in terms of price. As of September 30, 2021, it was the 76th most valuable token on CoinMarketCap and was trading at nearly $11. It had been priced as low as 49 cents late 2020 and as high as $23 in March of this year. The token has a market cap of $1.4 billion.

Because SushiSwap underlies a whole ecosystem of tokens, there are other relevant statistics besides the price of the Sushi token. One should also look at the whole sushi exchange universe, including SushiSwap. There’s about $4.3 billion of “total value locked” on SushiSwap, representing the value of assets staked on the platform.

History of SushiSwap

SushiSwap grew out of the most prominent DeFi exchange, Uniswap, in 2020. The Uniswap developer, “Chef Nomi,” explicitly designed SushiSwap to reward Uniswap users who migrated to the fork.

But controversy soon followed. Nomi admitted to and apologized for extracting $14 million worth of Ether from the platform before returning it to the crypto wallet used for the platform. This led to a major crash in the price of the Sushi token that it didn’t recover from until earlier this year.

Since then, the governance of SushiSwap has been overhauled and it has more than made back the losses it earned from its early developer errors.

What Can You Use SUSHI For?

The primary use for Sushi is on SushiSwap, as a reward for staking crypto to make its decentralized exchange function. Additionally, owning Sushi allows holders the right to vote on decisions regarding how the exchange functions.

As with any cryptocurrency or token, when people decide to invest in SUSHI it’s because they hope it will go up in value. Of course, given how volatile cryptocurrencies are, it’s impossible to predict the price of SUSHI or any other coin. This is part of the basics of investing in crypto. Before buying, selling, or trading crypto, investors should become familiar with crypto rules and regulations. For example, Sushi can’t be bought in every U.S. State.

Is SUSHI Crypto a Good Investment?

Interest in DeFi platforms and associated tokens is growing. There are two main reasons for this:

1. People want to trade tokens with each other in a way that doesn’t involve direct use of centralized exchanges and fiat currency.

2. They see the associated tokens as good investments.

On the other hand, this increased interest means there is fierce competition between platforms for staking, liquidity, and token investment. SushiSwap is perhaps the best example of the risks of investing in a given DeFi platform — it was itself a clone that explicitly tried to suck away liquidity from an earlier platform and was rocked by an early scandal with one of its lead developers.

In the wild west of DeFi, software products can spring up very quickly. And because the field is so new, there’s little brand or institutional loyalty among customers, users, and other stakeholders.

How and Where to Buy SUSHI Cryptocurrency

There are two ways to acquire Sushi.

The first is through an exchange that lets you buy cryptocurrencies with U.S. dollars or other fiat currencies. You fill an account with dollars and buy the corresponding crypto. Some exchanges that allow you to buy Sushi are Kraken and Coinbase. Some exchanges also let you trade mainstream, establish cryptocurrencies like Bitcoin for coins like Sushi.

Second, there’s the more native way to earn Sushi. You can connect your existing crypto wallet to
SushiSwap to provide liquidity to the exchange and receive Sushi as a reward.

The Takeaway

SushiSwap is a decentralized cryptocurrency exchange run on the Ethereum blockchain. It encourages staking by incentivizing users with Sushi tokens. And in turn, Sushi tokens offer governance to holders, so they can vote on platform policy and technology.

Before investing in any cryptocurrency, it can be helpful to read a cryptocurrency guide. The world of crypto is dynamic and can sometimes be counter-intuitive. Doing your own research is always worthwhile.

Photo credit: iStock/Михаил Руденко

Oct

2021

What Is a dApp? A Guide to Decentralized Applications

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

The invention of cryptocurrency, blockchain, and smart contracts has opened up a new world of technological possibilities.

Bitcoin, the first cryptocurrency, provided a way for people to transfer value independently of any third-party payment processor thanks to blockchain technology. This same concept has also been applied to more complex transactions, like those involving software applications.

Software applications that run independently of a central authority are known as dApps, or decentralized apps.

What is a dApp?

An application that has no central authority governing it, isn’t hosted on one centralized server, and runs on a distributed, decentralized peer-to-peer network is known as a decentralized application (dApp).

A dApp is, for the most part, similar to any other software application — for instance, it could function on a desktop or mobile device, and will have a graphical user interface (GUI) just like any other app.

What makes dApps different is how they function behind the scenes, with the app being powered by transactions taking place on a decentralized network. Most or all of the backend programming happens on a decentralized network like Ethereum.

How dApps Work with Ethereum

Most dApps run atop Ethereum. Other protocols exist that perform similar functions, such as Tron or EOS, but Ethereum is the dominant market player in this space.

The Ethereum protocol gives users the ability to deploy and run smart contracts. A smart contract is a virtual agreement contained in code that can run specific operations and interact with other smart contracts.

The use of smart contracts eliminates the need for a third party to handle transactions and contract execution between two parties. Replacing the middle man with a program can speed up processes, reduce the potential for fraudulent transactions, and reduce costs.

Where do smart contracts exist? On thousands of servers called “nodes” distributed around the world. The nodes continually work to make sure they all agree on the current state of the network and which transactions are valid.

What Makes dApps Different?

There are a few key characteristics that differentiate dApps from other programs:

• dApps run on a blockchain

• Their code is open-source and operates independently of any person or group

• Many dApps generate tokens in an effort to bring value to their nodes

• Users often must contribute tokens to gain access

• Miners receive new tokens as a reward for contributing to the ecosystem

Not all dApps have a native token. The Crypto Kitties game, for example, was one of the first and most popular dApps of its time, beginning in 2018. Playing the game required ETH gas fees and the value exchanged between players were pictures of digital cats.

Any dApp running atop Ethereum will require gas fees, paid in ETH (the native token of the Ethereum network), to facilitate smart contract transactions. The same holds true of other smart contract protocols. Some dApp protocols may have their own native tokens as well.

Recommended: What is a Crypto Token? Tokens vs Coins

What Can dApps Be Used For?

DApps can be used for just about anything that requires two or more parties to agree on something. When the appropriate conditions are met, the contract will execute automatically.

4 Different Types of dApps

1. Money management applications

These allow users to make peer-to-peer transactions on a blockchain network. Dapps of this kind often have their own independent blockchains, and are commonly called cryptocurrencies.

One of the most popular use cases for decentralized applications in recent years has been decentralized finance (DeFi). Decentralized exchanges (DEXs), for example, allow for peer-to-peer trading of digital assets without the need for a single entity maintaining order books, user accounts, and security. Financial services like borrowing and lending can also take place thanks to dApps. This can provide access to loans for people with poor credit (as no credit check is required) and give investors a chance to earn yield on their idle investments.

Recommended: A Guide to Decentralized Finance (DeFi)

2. Applications that align real-world events with digital assets.

An example could be oracles that feed real-time price data to decentralized exchanges or other interested parties. Or a logistics company could use a location-tracking chip to verify that a cargo shipment has reached its destination, at which time payment for the shipment could be released. Such a transaction could be accomplished with crypto, with no action taken on part of the humans involved aside from both the buyer and seller entering into a smart contract agreement beforehand.

Such agreements wouldn’t require notarization by a formal authority, as there would be no way for participants to avoid their contractual obligations (assuming the smart contract code was written correctly).

3. Decentralized Autonomous Organizations (DAOs).

These are decentralized blockchain-based organizations with no leader. Such organizations run according to rules defined by code from day one. These programmatic rules can define who can be a member, how voting works, what activities members can engage in, and how funds or value can be exchanged. After deployment, a DAO operates autonomously.

Recommended: What Is a DAO and How Do They Work?

4. Oracles.

These are an interesting kind of dApp that can be used to compliment other dApps. Oracles like Chainlink are protocols that provide real-time data about something happening in the real world. Synthetic assets, for example, allow people in the DeFi world to trade crypto tokens that are designed to have the same price as a real, physical asset like gold or oil. Oracles provide the price data that allows this kind of trading to happen.

The Takeaway

A decentralized application, or dApp, is a software app that can run atop a blockchain protocol independently and autonomously, without the need for constant human intervention.

DApps have many potential use cases, some of which are still being developed. Decentralized finance (DeFi) and non-fungible tokens (NFTs) are a few of the latest examples, but they likely won’t be the last.

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What is a Private Blockchain and How Does It Work?

Basics of Blockchain

What is a Public Blockchain?

What is a Private Blockchain?

How Do Private Blockchains Work?

Pros and Cons of Private Blockchains

Pros of Private Blockchains

Lower Energy Usage

Ability to Remove Unwanted Activity

Faster Transactions

Cons of Private Blockchain

Potential for Censorship

Decreased Security

Public vs Private Blockchains: Main Differences

Is a Public or Private Blockchain Better?

The Takeaway

What Is a Credit Spread? Explained and Defined

Credit Spread – the Market Indicator

Why Do Credit Spreads Fluctuate?

What Is a Credit Spread in Option Trading?

Bull Put Spread

Bear Call Spread

The Takeaway

What Is Yield Farming in Crypto & DeFi?

What is Yield Farming?

How Does Yield Farming Work?

How to Calculate Returns in APY

Yield Farming vs Staking

What Are the Risks of Yield Farming?

How Can Yield Farming be Hacked?

What is a “Rug Pull” Scheme?

Is Yield Farming Right for Me?

The Takeaway

Guide to Investing in Sushi Swap (SUSHI)

What is SushiSwap (SUSHI) Cryptocurrency?

How Does the SUSHI Token Work?

SUSHI Price

History of SushiSwap

What Can You Use SUSHI For?

Is SUSHI Crypto a Good Investment?

How and Where to Buy SUSHI Cryptocurrency

The Takeaway

What Is a dApp? A Guide to Decentralized Applications

What is a dApp?

How dApps Work with Ethereum

What Makes dApps Different?

What Can dApps Be Used For?

4 Different Types of dApps

1. Money management applications

2. Applications that align real-world events with digital assets.

3. Decentralized Autonomous Organizations (DAOs).

4. Oracles.

The Takeaway

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