May
07
2021
Centralized vs. Decentralized Exchange: How to Choose

Centralized vs. Decentralized Exchanges: Six Differences to Consider

By | Growing Wealth, invest, Investing | Comments Off on Centralized vs. Decentralized Exchanges: Six Differences to Consider

When it comes to crypto exchanges, there are advantages and disadvantages in both a decentralized vs centralized exchange. Ultimately, the choice an investor makes will likely depend on factors like their trading goals, comfort level with newer technology, and the importance they place on things like security and anonymity.

What Are Centralized and Decentralized Exchanges?

A centralized exchange involves one central entity (e.g. bank, trading platform, government institution, etc.) controlling the operations of the exchange and its wallets for different types of cryptocurrency. This can make things easier for users but can also present all the problems centralization can entail, like a single point of failure.

Decentralized exchanges (DEXs) have no one entity controlling them—instead transactions are made peer-to-peer—and are thought to be more secure because they have no single point of failure. But these exchanges are still very new and can be more difficult to use, especially for those just learning crypto basics.

Recommended: 2021 Crypto Investing Guide

6 Key Differences Between Centralized and Decentralized Exchanges

Centralized and decentralized cryptocurrency exchanges are different in many ways. These are some of the major differences investors should know about.

1. Usability

One goal of centralized exchange platforms is to make it as easy as possible for new users to get started trading cryptocurrency. By design, creating an account and placing trades can be accomplished in very little time and with little technical expertise.

Decentralized exchanges, on the other hand, can make crypto investing somewhat more complicated. That’s primarily because 100% of the responsibility lies with the user, rather than a third party. If you make a mistake, there may be no way to fix it, whereas centralized exchanges sometimes have safeguards in place for certain user errors.

2. Security

Centralized exchanges, in their quest to make things easier for users, create a single point of failure. If hackers attack this single point with success and obtain private keys that protect users’ accounts, they can compromise the entire exchange and all of its funds. There have been several instances of this happening over the years, with ssers sometimes facing a total loss.

For those reasons, decentralized exchanges are thought to be more secure than centralized ones. Nothing’s ever for certain, and it might still be possible for a DEX to have some kind of bug. But for the most part, user error is a more common threat to DEX users than the exchange being hacked.

3. Fees

Centralized exchanges charge customers fees for their use of the service. Every transaction typically involves a fee and withdrawing coins may also come with a fee. For active traders, these fees may add up to large amounts over time.

Decentralized exchanges often have far fewer fees because they don’t have the same overhead expenses. Some decentralized exchanges don’t even have fees at all.

4. Liquidity

One of the biggest differences between centralized vs. decentralized exchanges is in liquidity.

Centralized exchanges tend to have more liquidity because they have more users, and these users are creating more orders. In-demand assets trade in higher volumes almost without fail. There are also market makers who further increase liquidity.

By contrast, because they typically have fewer users and no central entity organizing their order books, decentralized exchanges have less liquidity. The lack of liquidity in decentralized exchanges could pose problems for investors. For example, an investor may want to buy a particular asset but finds that high demand has led to a sharp rise in price compared to other markets, because other investors have bought up all the sell orders.

Recommended: What are Liquid Assets?

Liquidity and Slippage

Another example of a lack of liquidity causing problems for investors is if they attempt to sell an in-demand asset on a DEX—and end up falling victim to a lot of “slippage.”

Slippage refers to the losses that occur when selling large amounts of an asset, particularly in times of low liquidity. If someone wants to sell 100 tokens, for example, each at a price of $1, there may not be enough buy orders to actually sell them all at a price of $1. There might only be a buy order for 10 tokens at $1, then an order for 10 more at $0.99, 15 at $0.98, and so on. By the time a trader has liquidated their position, they wind up with less money.

Greater liquidity (such as one might find on a centralized exchange) means faster trades and less slippage.

5. Anonymity

Creating an account on a centralized exchange typically involves handing over lots of personal information. These exchanges might require a name, email address, mailing address, or even a selfie of the registrant holding their government-issued ID next to their face. This is typically done to comply with cryptocurrency regulations like know-your-customer (KYC) and anti-money-laundering (AML) laws.

Decentralized exchanges, on the other hand, might not require users to even create an account to get started. Traders can convert their gains into a centralized cryptocurrency like a stablecoin (one of many altcoins) and move those funds off the exchange to another crypto wallet, without needing to link a bank account.

6. Speed

Perhaps one of the most noticeable differences between centralized vs decentralized exchanges from a user’s perspective is the speed at which trades occur. Decentralized exchanges perform much slower than their centralized counterparts.

According to some estimates, trades placed on centralized exchanges take about 10 milliseconds on average to execute orders. That’s as good as happening instantly from the point of view of the person placing the trade.

Decentralized exchanges, however, can take anywhere from 15 to 60 seconds to match and fill an order. For investors who create a lot of buy and sell orders, that can add up to a good deal of sitting around waiting for trades to settle.

What Are the Biggest Advantages of Using a Decentralized Exchange?

The two main benefits of using a decentralized exchange might be increased security and anonymity. Some users prefer to keep their trades private and not have their personal information and wallet balances in the hands of a single entity.

Furthermore, the reduced risk of hacking eases both privacy and security concerns. Not only are funds thought to be safer, but the threat of a user’s info leaking and being used for identity theft or targeting for phishing attacks might be nonexistent, since DEX users might not even have to make an account to get started.

What Are the Biggest Advantages of Using a Centralized Exchange?

Centralized exchanges are easier to use (which may be especially important to those just getting started with crypto), have greater liquidity, and execute trades faster.

The Takeaway

Both centralized and decentralized exchanges have something to offer crypto investors. For investors who value usability, liquidity, and speed, a centralized exchange may be the way to go. For those who prioritize anonymity and security, a decentralized exchange is more likely to appeal.

Decentralized exchanges are a new concept and are still a long way from being widely used. Still, their volume has been rising steadily and could one day outpace that of centralized exchanges, especially as their usability improves.

Photo credit: iStock/Vertigo3d

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN21132

Read more
May
03
2021
Cloud Mining: What is Bitcoin Cloud Mining?

Cloud Mining: What is Bitcoin Cloud Mining?

By | Growing Wealth, invest, Investing | Comments Off on Cloud Mining: What is Bitcoin Cloud Mining?

Cloud mining is a way to mine cryptocurrencies like Bitcoin and Ethereum without investing in expensive, energy-intensive computer hardware and software. This article will explain the need for Bitcoin cloud mining, how it differs from traditional mining, and more.

We will explore:

•  What is Traditional Cryptocurrency Mining?
•  What is Bitcoin Cloud Mining?
•  Why Crypto Mining is Important
•  Is Bitcoin Cloud Mining Worth It?
•  Types of Cloud Mining
•  Getting Started with Cloud Mining

What is Traditional Cryptocurrency Mining?


First, a brief recap of how Bitcoin mining works: Bitcoins are created and released into the blockchain network through a process called mining. Mining involves using computing power to solve complex mathematical equations which help to verify previous Bitcoin transactions on the blockchain. Miners earn Bitcoin as a reward for helping to keep the network running. This same process is also used to mine other mineable crypto such as Ethereum.

The computing equipment and software required for mining can be both expensive and energy intensive—which is why many mining companies set up in cooler regions of the world that also have low energy costs.

What is Bitcoin Cloud Mining?


Another way to mine Bitcoin and other mineable cryptocurrencies is through cloud mining. Cloud computing includes services such as databases, software, file storage, server space, and processing which users access via the cloud. Many cloud computing services charge based on usage, similarly to paying for use of utilities like water or electricity.

With cloud mining, a person can rent cloud computing power instead of running their own local machines. This lets people participate in mining remotely by opening an account and going through a simple set-up process. Bitcoin cloud miners join a pool of miners, also known as a “mining pool,” which rents a certain amount of hashing power used to mine Bitcoin. Hashing power is the amount of computing power used to solve algorithms in the Bitcoin mining process. ​The individuals in the mining pool split the profits depending on how much hashing power each of them rented.

The lower costs and easy set up process make this an attractive choice for many, but it is no guarantee as to whether mining will be profitable.

Why Crypto Mining is Important


The mining process is key to maintaining and securing the Bitcoin blockchain. It keeps track of all Bitcoin transactions that take place, making sure there are no instances of double spending—where the same Bitcoins get sent to more than one address, allowing someone to spend the same amount twice. The mining verification process is one benefit of the blockchain system. It eliminates some problems that paper money has, like counterfeiting—because if someone hands a merchant a counterfeit bill and walks away there isn’t much that can be done.

Is Bitcoin Cloud Mining Worth It?


The major upside to cloud mining is that it eliminates the costs, time, and expertise associated with setting up a mining operation. Customers can earn a profit from partaking in cloud mining with very little upfront effort. They also avoid having to listen to noisy mining equipment and keeping electronics (and the home or business in which it’s located) sufficiently cool.

However, there are also downsides to cloud mining. The cloud mining space has had its fair share of scams. Customers signing up for a cloud mining account don’t have much way of knowing whether the mining operation really exists, and it could shut down at any moment. As with any potential investment, it pays to do some research before signing up: check industry news sites and forums to see what cloud services get good customer feedback, and which ones have been outed as scams.

Also, the return on investment for cloud mining is longer than simply buying and selling cryptocurrencies. Customers have to invest an upfront sum of money and then wait months or years for that investment to pay off.

Pros of Cloud Mining Cons of Cloud Mining
•  No equipment, set up, or maintenance costs
•  No technical knowledge required
•  No noise or heat
•  No ongoing maintenance
•  No need to continue buying new equipment
•  No risks of fire 		•  Potential for mining company to be a scam
•  Less choice of equipment or mining specifications
•  Mining company could go out of business
•  Long ROI

Types of Cloud Mining


There are two major forms of cloud mining.

Hosted Mining

The most popular type of cloud mining is hosted mining, where customers rent or buy mining equipment that remains in the cloud mining company’s facilities. The mining company handles all the set up and maintenance of the equipment. Since the company can scale up their operations, this brings the costs of energy and storage down, but customers have to pay the lease fee as well as paying for the maintenance services the company provides. Generally, there is a large upfront cost when getting started with hosted mining, but after that the ongoing costs go down.

Leased Hash Power

In mining, a good hashrate is key. Another type of cloud mining is leased hash power, where customers rent hash power, or computing power, from a mining company (also known as a mining farm), for a certain amount of time. The customer then gets a share of the crypto profits that the mining company earns. This type of cloud mining tends to be more popular for types of cryptocurrencies other than Bitcoin.

Getting Started with Cloud Mining


The first step in getting started with cloud mining is to find a reputable company. Forums and reviews can help suss out which companies are scams and which are real. It’s important to note that scam mining services will often advertise on industry sites, forums, and subreddit channels. If there is an advertisement but no information or positive reviews of the company, it might be a red flag.

The next step is to compare costs and options between different mining services. Some may charge higher fees or may have a larger upfront investment requirement. Things to look at include:

•  Price per GH/s (1,000,000,000 hashes per second) or TH/s (1,000,000,000,000 hashes per second)
•  Service fees (these may be ongoing or upfront)
•  Time to ROI (if the upfront investment is large, it may not make sense to sign up since it will take too long to see an ROI)

Once you decide on a cloud mining service, it’s as simple as creating an account, deciding how much to invest, and waiting to see how your investment pans out.

The Takeaway

Cloud mining offers some advantages over traditional Bitcoin and crypto mining. Notably, an individual doesn’t have to invest in expensive, energy-sucking computer equipment and software, or find a place to house it. But just because cloud mining is easier in some ways, doesn’t make it a sure thing in terms of an investment.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN21040

Read more
May
03
2021
What is Bitcoin Gold (BTG)? Bitcoin Gold vs. Bitcoin Cash

Bitcoin Gold (BTG): Creation, Controversy, and How it Stacks up to BCH

By | Growing Wealth, invest, Investing | Comments Off on Bitcoin Gold (BTG): Creation, Controversy, and How it Stacks up to BCH

Any conversation about cryptocurrency has to start with Bitcoin. It was the first crypto (it’s been around since 2009), it is the most valuable (worth over $1 trillion), and it’s the most traded (over $60 billion in daily volume). It also has the most spinoffs, or “forks,” that have become widely-used cryptos in their own right.

Perhaps the most well-known forks are Bitcoin Cash (BCH), which came out in 2017, and Bitcoin Gold(BCG), which was the product of a fork from Bitcoin a few months later.

What is Bitcoin Gold?

Bitcoin Gold was a hard fork from Bitcoin with the intent of further decentralizing Bitcoin. The idea was to use a new algorithm for the mining process that would not prioritize major mining operations, as some believed Bitcoin did.

Bitcoin Gold was an implicit criticism of Bitcoin, essentially arguing that it had betrayed or at least strayed from its initial roots as a decentralized currency with its increasingly centralized mining operations. Even if anyone can buy Bitcoin, it’s much harder (or at least not profitable) for anyone to create it.

Developers wanted to make it easier for normal computer users to mine on their own machines, a contrast to the massive Bitcoin mining industry, which is mostly done on specialized computer equipment purchased and operated by big-time operators in places like Iceland, where electricity is cheap. With Bitcoin Gold, however, the humble graphics card could carry the load.

Bitcoin Gold Controversy

Bitcoin Gold has been controversial almost since its inception. Typically with hard forks, owners of the initial cryptocurrency also receive units of the new one. For example, when Bitcoin Cash forked from Bitcoin, all Bitcoin owners got Bitcoin Cash.

When the Bitcoin Gold fork occurred, on the other hand, Bitcoin owners did not immediately get their new cryptocurrency. Instead, developers kept the Bitcoin Gold blockchain private for a few weeks so that they could mine BTG without competition—which they described as a “premine”. Critics opposed this practice, as it left fewer coins available for others to mine and also amounted to “free money” for the BTG developers.

As a result, cryptocurrency exchange and service provider Coinbase said it would not support BitcoinGold, explaining that because developers hadn’t made the code available for review by the public, it posed a security risk.

BTG Security Issues

Bitcoin Gold was worth over $8 billion when it launched, but fell dramatically in value as security issues emerged.

BTG has experienced multiple “51% attacks,” where an entity or individual or hacker is able to do the one thing that cryptocurrency is supposed to prevent: take control of transactions and “double spend” them, essentially stealing money. After one of the attacks, Bitcoin Gold was delisted from some exchanges.

In 2020, the developers behind Bitcoin Gold were able to fend off another attempt on the cryptocurrency’s network.
In early March 2021, the Bitcoin Gold team posted on its blog that its “hibernation has come to an end”—the 51% attacks that plagued the coin last year were ultimately defeated by the BTG miners and community.

What is Bitcoin Gold Worth Now?

Bitcoin Gold is ranked 73rd among cryptos according to CoinMarketCap (as of late April 2021) and has a total value of around $1.6 billion and a value per coin of around $90. Bitcoin Gold’s value was over $470 per coin at least twice in 2017, but has been under $100 since early 2018.

Bitcoin Gold vs. Bitcoin Cash Value

When comparing Bitcoin Gold vs Bitcoin Cash, the numbers speak for themselves: the original fork has a total value of almost $11 trillion, volume of almost $3 billion, and a value per coin of over $500. Bitcoin Cash is about 87 percent from its absolute peak value but is still substantially more valuable than its forked cousin on a “per coin” basis, at least so far, when it comes to Bitcoin Cash vs Bitcoin Gold, Bitcoin Cash is winning.

How to Invest in Bitcoin Gold

Bitcoin Gold is not available to buy and sell on mainstream exchanges like Coinbase, but, according to its organizers, it is available to trade on exchanges like Binance and Bitfinex.

The Takeaway

Bitcoin Gold is yet another hard fork of Bitcoin, like Bitcoin Cash. What distinguishes Bitcoin Gold is its intent: To further decentralize and democratize mining, making it more accessible to individual miners, rather than large groups with massive computing power.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOIN21136

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Apr
13
2021
What Are Altcoins? Guide to Bitcoin Alternatives

What Are Altcoins? Guide to Bitcoin Alternatives

By | Growing Wealth, invest, Investing | Comments Off on What Are Altcoins? Guide to Bitcoin Alternatives

There are many alternative investments available for people who hope to grow their money—from age-old collectibles like baseball cards, to new and somewhat confusing assets, like NFTs. Another alternative investment is cryptocurrency—and within that category falls another “alt”: alt coins, better known as altcoins.

Altcoins are crypto coins that are an alternative to Bitcoin, the original cryptocurrency and reigning crypto leader. There are many different altcoins—different types, and within those categories, different specific products.

This article covers everything you need to know about altcoins, including what they are, where to buy them, and examples of the more popular coins on the market. Familiarize yourself with altcoins here, then check out the top things you should know before investing in any cryptocurrency.

What Are Altcoins?

Bitcoin is just one of the myriad coins and tokens that comprise the cryptocurrency space. You’ve likely heard some of their names—such as Ethereum, Ripple, and Litecoin. These coins and cryptos are, in effect, alternatives to bitcoin.

“Altcoin” is a catch-all term for alternative cryptocurrencies to bitcoin. They’re altcoins. It’s that simple. Currently, there are more than 9,000 cryptocurrencies in existence. That’s a lot of altcoins.

💡 Recommended: Bitcoin vs Altcoins: Differences and Similarities, Explored

How do Altcoins Work?

Like Bitcoin, altcoins rely on blockchain technology, which allows for secure, peer-to-peer transactions. But each altcoin operates independently from the rest, and each has its own sets of rules and uses. For example, cryptocurrencies like Bitcoin and Ethereum are mineable, whereas Ripple and Stellar are not.

That said, in general, most altcoins operate in much the same way: They’re traded among investors, with transactions recorded via blockchain in a distributed ledger.

Different Types of Altcoins

Most altcoins can be slotted into a few different categories, which can help potential crypto investors get a better grasp of the field. This is not an exhaustive list, as categories and subtypes are always changing. But here are some of the most prevalent types of altcoins:

Digital currencies

The digital currency category comprises most of the cryptocurrencies that investors are familiar with, including Bitcoin. They’re exactly what they sound like: currency in digital form. They can be acquired as a form of payment, through trading on an exchange, or through mining (when applicable), and are generally used to conduct transactions.

Tokens

Unlike crypto like Bitcoin or Ethereum, which can be used on any platform, tokens are tied to their parent platform. For example, Tether and Golem are tokens used only on the Ethereum platform.

A utility token provides holders with some sort of service. BAT (Basic Attention Token) is an example of a utility token, meant to be used specifically as a method of payment on the Brave open-source browser.

Stablecoins

Stablecoins are built to be stable—they are pegged to an existing asset like the Euro or the U.S. dollar. The logic is that by pegging the asset to an existing one, it should help stabilize value and reduce volatility.

In contrast, consider Bitcoin: while its value has risen substantially in recent years, its price is highly volatile. Values have dropped to less than $6,000 per coin to more than $60,000—all within a couple of years. Stablecoins are designed to help investors avoid fluctuations.

Common Altcoins

There are seemingly more and more altcoins hitting the market every day. Here are a few of the more common altcoins:

Ripple: Also known as “XRP,” this altcoin is used primarily on its namesake, the Ripple currency exchange system. It was designed for use by businesses and organizations, rather than individuals, as it’s most often used to move large amounts of money around the world.

Ethereum: Ethereum is a programmable internet platform used to build decentralized programs and applications, and its native currency, Ether (ETH), is the altcoin in question that can be traded by investors.

Litecoin: Litecoin is another popular altcoin, which is often referred to as “Bitcoin lite,” hence the moniker. It’s one of the largest cryptocurrencies on the market, and operates in a very similar way to Bitcoin.

Dogecoin: There are a bunch of “joke” altcoins that are on the market, and Dogecoin is perhaps the most recognizable right now. Dogecoin started as a joke (its genesis is actually an internet meme), although it has gained value in recent months.

Where to Buy Altcoins?

Looking to buy altcoins? They’re available on most any cryptocurrency exchange, like Coinbase or Binance. Not all altcoins may be available on every platform, so interested investors should do their research before choosing an exchange.

In terms of actually trading for coins, the process can be as simple as depositing money into an account on your preferred exchange, and then trading either dollars or crypto for a targeted altcoin.

The Takeaway

Altcoin is a catchall term for cryptocurrency other than Bitcoin, the original crypto. There are a variety of different altcoins—from tokens to stablecoins—but many are available for interested investors.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN21139

Read more
Apr
06
2021
What is DeFi? Decentralized Finance, Explained

What Is DeFi? Decentralized Finance, Explained

By | Growing Wealth, invest, Investing | Comments Off on What Is DeFi? Decentralized Finance, Explained

DeFi, short for decentralized finance, is more than just a popular buzzword in the cryptocurrency sphere. It’s a concept that is disrupting the centralized financial services model, equalizing access and bringing more control to users across the globe.

In this article, we will cover everything a consumer might want to know about DeFi, including:

•   What is DeFi?
•   How does DeFi work?
•   How DeFi is disrupting traditional financial services
•   What’s a DApp?
•   Examples of DeFi DApps

What is DeFi?

DeFi is a blanket term referring to trustless and transparent protocols that don’t require intermediaries to operate. Traditionally, financial services and products have relied on centralized authorities such as banks, financial advisors, and clearinghouses. DeFi has reengineered this power dynamic to provide the same financial services programmatically without a central authority, thus reducing fees and making financial services and products more accessible to more people everywhere.

One way to better understand this concept is to look at the two parts of the term separately.

”De” = Decentralized

DeFi’s “de” stands for “decentralized,” or distributed control. By removing power from the hands of a few central authorities and distributing it across programmatic and autonomous code, DeFi transforms a previously centralized governance model into a decentralized one controlled by no one.

”Fi” = Finance

DeFi’s “Fi” is an abbreviation for “finance”—and more specifically, it refers to financial services. DeFi has disrupted traditional finance by transforming popular and long-standing financial services into decentralized versions without any central authority. DeFi offers an alternative to traditional financial services like the following:

•   Borrowing
•   Lending
•   Investing
•   Trading
•   Saving
•   Insurance
•   Crowdfunding
•   Crowdraising

DeFi has also enabled the creation of new financial products:

•   Cryptographic tokens: There are a number of these digital assets, one of the most common tokens is a “utility token,” which serves a specific function within a digital ecosystem. One example is the Basic Attention Token (BAT), which is used as payment for advertisers, users, and content creators on the Brave browser.

•   Non-Fungible Tokens (NFTs): These tokens transform digital images (for example, works of art, a tweet, a video clip, a GIF) into unique assets that can be traded on a blockchain.

How Does DeFi Work?

With DeFi, services and products are not subject to approval by a small group of decision makers but rather by smart contracts. Like traditional contracts, smart contracts contain information and terms regarding transactions between parties, but they are completely digital. They function like a small computer program stored inside of a distributed ledger known as a blockchain, a permanent and ever-growing record of information and transactions stored in individual blocks.

DeFi shares many aspects with cryptocurrencies, including the following:

Permissionless/Borderless

DeFi applications are permissionless—completely free of charge and available to anyone who wants to use them, the only requirement being an internet-connected smartphone or computer. Unlike traditional financial services, DApps don’t require lengthy applications to create an account, as users interact directly with smart contracts from their crypto wallet.

DeFi applications are also borderless, meaning they are country-agnostic and do not discriminate against users based on citizenship, geographic location, or government standing. Anyone can access funds on a DeFi app in one country, travel to another, and access their funds abroad without any restrictions whatsoever.

Transparent

DeFi applications are built on a blockchain network, a distributed ledger composed of smart contracts that stores transaction details as they occur and builds on top of them. Transaction activities become permanently cemented into the blockchain’s history of transactions across the entire network, while constantly updating it with new ones.

Because smart contracts and blockchain technology are designed to be permanent and publicly visible, transaction records cannot be hidden or altered thereafter. This allows all transaction activities to be visible to all market participants without violating privacy, because addresses are not directly tied to personal identities. It also allows anyone to audit the code and find bugs.

Trustless

DeFi recognizes and circumvents the trust problem of traditional finance by minimizing the need for third parties, banks, and clearinghouses. For most DeFi apps, users interact with self-executing smart contracts based on conditions being met, as opposed to waiting on approval from overseeing stakeholders.

Interoperable

Different DeFi applications (DApps) are designed to be compatible with each other, allowing DApps to be built or composed by combining DeFi products. This interoperability enables simple blockchain operation and a scalable ecosystem.

How DeFi is Disrupting Traditional Financial Services

Financial services such as borrowing, lending, and investing have traditionally been areas with a high barrier to entry, typically preventing people with little money or financial expertise from gaining access to these services. Though traditional banking is common in first world countries, there are over 1.7 billion people who are unbanked globally , representing over 30% of the human population, according to the most recent World Bank Global Findex report.

Domestically, 22% of US adults are underbanked or unbanked , according to the Federal Reserve’s most recent Report on the Economic Well-Being of U.S. Households. “Underbanked” means they have at least one account at an insured institution but also obtain financial services outside of the banking system such as money orders, check-cashing stores, payday loans, pawn shops, and more. The FDIC found in its 2019 “How America Banks” survey that 5.4% of US adults are unbanked entirely , having no accounts with any financial institution.

With the advent of DeFi, previously inaccessible financial services such as borrowing, saving, investing, and international payments are now accessible to anyone with access to the internet regardless of age, income, nationality, financial background, or credit score. To date, there are currently 3,809 DApps, with 140.59k daily active users.

What’s a DApp?

A DApp, or decentralized application, is a digital program that runs on a decentralized blockchain network without the control of a single authority. DApps are open-source and the basis for any cryptocurrency project; Bitcoin is considered the first DApp.

While the actual DApps themselves are typically ‘unownable’ services, DApps sometimes distribute underlying tokens that allow users to buy crypto.

DeFi applications can be built on any decentralized protocol but are primarily built on Ethereum, the premier decentralized blockchain network used for building new DApps which is powered by smart contracts and its native digital currency Ether. Ethereum enables developers to write smart contracts on the Ethereum blockchain which automatically execute when certain conditions are met. Smart contracts are then stored and executed across every node on the Ethereum network, making them decentralized applications.

The Ethereum DApps enable developers to build far more advanced technology than just trading cryptocurrency. Instead of needing to develop a new blockchain for every application, Ethereum created a secure platform for DApps to be built and deployed. Ethereum is one of the most popular blockchain networks and its native Ether token is the second-largest cryptocurrency behind Bitcoin.

DApps are similar to centralized applications but benefit from the features of existing on a decentralized blockchain network. Because they don’t have a single point of failure, they are thought to be more secure against cyberattacks. A distributed network of nodes maintains the network and prevents any system downtime common among centralized applications. DApps aren’t owned by anyone and aren’t subject to owner malfeasance such as embezzlement.

Examples of DeFi DApps

DeFi is a new space that only started to see the launch of live products in 2017 or so. Here are a few of the most popular types of DApps that emerged in 2020:

Borrowing and Lending Platforms

Securing a traditional loan typically involves submitting an application at a financial institution with ample personal information, agreeing to a credit check, pledging collateral (if necessary), and waiting for interest to be factored in by the intermediary for facilitating the loan that’s sourced by a federal institution. With DeFi, smart contracts connect interested lenders and borrowers, impose terms of loans, and impose interest without a third party. Lending DApps typically require collateral to be pledged in the form of crypto or stablecoins as a measure of insuring risk taken on by the lender. Through smart contract automation and elimination of a third-party intermediary, DApp lending platforms have formed loans with interest sometimes below 10 percent .

Decentralized Exchange (DEX)

A decentralized exchange (DEX) is an exchange that uses smart contracts to enforce trading rules, execute trades, and securely handle funds if necessary. Unlike centralized exchanges, DEXs don’t have an exchange operator nor do they require account creation, identity verification, or impose exchange fees. Because DEX’s are unique and don’t have a centralized authority, it is debated whether or not some or all DEX’s are subject to the crypto regulations enforced on centralized exchanges. Further, many DEX’s do not custody users’ funds at any point during trading, adding additional uncertainty as to the application of regulations. However, like any exchange, they do require liquidity to be able to match buyers and sellers.

Betting Platform

DeFi disrupts one of the most restricted and heavily centralized industries in existence: Gambling. In addition to an intensive and exclusive registration process, users of traditional online gambling platforms are subject to getting their betting limits lowered and accounts closed. With a decentralized peer-to-peer platform, this is not possible.

Several betting DApps have been launched as global betting platforms with no limits, allowing users to bet on traditional sports events as well as real-world events such as economics, elections, pop culture, and m
ore. Users can place bets using digital currencies and get rewarded in them upon winning a bet. Users buy or sell on a particular outcome of an event, with the DApp showing the current odds based on active user bets.

NFT Marketplace

An innovative DeFi development has been the launch of marketplaces for exchanging non-fungible tokens , or NFTs. NFTs are unique cryptographic tokens that represent digital goods such as online gaming goods and also tokenize real-world assets such as art, collectibles, company equity, and commodities. An NFT marketplace allows users to freely buy, sell, and trade NFTs representing otherwise non-fungible assets.

The Takeaway

DeFi is a term for the decentralized finance model that’s reengineering traditional financial services and products. By reallocating decision-making from central authorities to executable code within smart contracts, many financial services are becoming cheaper and easier to access for anyone.

Photo credit: iStock/akinbostanci

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