Dec
21
2021
What Are Blockchain Consensus Algorithms?

Blockchain Consensus Algorithms: Different Types and How They Work

By | Growing Wealth, invest, Investing | Comments Off on Blockchain Consensus Algorithms: Different Types and How They Work

What Are Blockchain Consensus Algorithms?

A crypto consensus mechanism forms the foundation of any blockchain. In 2009, Satoshi Nakamoto invented Bitcoin’s proof-of-work consensus algorithm to secure the Bitcoin network. Since then, several alternative consensus algorithms have been proposed.

The basic idea of achieving consensus on a blockchain is to create a way that everyone can agree that certain transactions are valid. That way, no one can cheat the system by creating fake transactions with money they don’t have, and the same funds can’t be sent twice.

Part of the reason Bitcoin was such a transformative technological innovation is that the proof-of-work method of achieving crypto consensus was the first-ever practical solution to the “double spend problem.”

With previous versions of electronic currency, one of the biggest hurdles programmers struggled to overcome was how to create a scarce digital asset that people couldn’t replicate and that couldn’t be spent more than once without everyone knowing.

Thanks in no small part to consensus algorithms, cryptocurrencies and the blockchain technology that powers them have overcome this problem.

Recommended: Crypto 101: What is Cryptocurrency?

What Is a Consensus Mechanism?

In a system run by one central authority (say, a bank), preventing double spending is simple. One entity manages the ledger of transactions, making sure everything runs smoothly. If Alice wants to give a dollar to Bob, the central manager subtracts a dollar from Alice’s account and adds that dollar to Bob’s account. Payment rails like banks and PayPal use this type of consensus mechanism.

With cryptocurrencies, however, there is no single entity in charge of the system, because it is a decentralized network by design. That makes keeping a record of the ledger of transactions — or, establishing a consensus mechanism — more difficult.

Recommended: What Is Distributed Ledger Technology (DLT)?

Consider Bitcoin, as an example. Instead of a single central server, many thousands of people around the globe run the Bitcoin software. The servers they run are called “nodes.” The nodes must somehow come to the same conclusion regarding what transactions have occurred on the network, or to “achieve consensus.” All the nodes need to be on the same page for the network to function.

How Does a Consensus Algorithm Work?

The way a crypto consensus mechanism works varies depending on the algorithm. But all have the same end goal: to achieve consensus on the network. This requires all nodes to agree on which transactions are valid and which are not. Consensus must be maintained from block to block in an orderly and secure fashion if things are to continue running smoothly.

Many of the potential cyberattacks that target blockchains involve disrupting the process of new block generation in some way. For this reason, it’s important that crypto consensus be achieved in a way that makes it difficult for bad actors to intervene.

Types of Consensus Algorithms

There have been many attempts to improve upon proof-of-work (PoW) algorithms. Proof of stake (PoS) might be the most popular of these, as many of the top cryptocurrencies by market cap today are PoS coins. Other crypto consensus methods like proof of burn or proof of capacity are less well-known and haven’t been tried as much.

Proof of Work

While there are now many different consensus algorithms, proof of work is still the most commonly used. To date, this method has shown itself to be reliable and secure.

Miners are the people who run computers that maintain the network by solving complex mathematical problems. The miner that first solves the problem gets to add the next block of transactions to the blockchain and also earns the new coins minted along with that block (the block reward). This is the process by which a verifiable history of transactions on the blockchain gets created.

PoW has shown to be a strong and secure method of achieving consensus. It would require so much computational power to overtake a large PoW network that any would-be hackers would be incentivized to become honest participants in the network instead. In other words, it’s easier and more rewarding to just mine for coins than it is to make any attempts at attacking the network.

Some of the downsides of PoW are that the process takes a lot of energy, it may not scale well, and it can trend toward centralization due to the high costs of new equipment — not everyone will be able to afford to mine. The main benefit of PoW is that it has the longest track record and has proven to be the most secure consensus algorithm. To date, there has never been a successful attempt at disrupting Bitcoin’s block production.

Proof of Stake

Proof of stake is a popular consensus mechanism that can be used by blockchains to verify their transaction history. While miners in PoW networks perform energy-intensive work to mine blocks, validators in PoS commit stakes of tokens to validate blocks.

With PoS, validators take the place of miners. They verify transactions by staking crypto on the network, which involves locking up a certain amount of coins for a set period of time, during which the coins will be unusable. Validators have a chance at being randomly selected to find the next block.

Other validators then “attest” that they also believe the block to be valid. Once enough validators have attested to a block’s validity, the block is then added to the chain. All validators involved in the process receive part of the block reward.

One of the big differences between PoS and PoW is that PoW requires miners to expend energy in the form of electricity to find blocks. PoS requires validators to stake their crypto, or in other words, to deposit money. For this reason, proof of stake is praised for being a less energy-intensive consensus mechanism than proof of work.

On the other hand, a disadvantage of PoS is that it favors the wealthiest token holders (who can stake more tokens) and trends toward centralization.

Proof of Burn

Proof-of-burn (PoB) algorithms employ the process of “burning” tokens to achieve crypto consensus. Burning coins involves sending them to an address from which they can never be recovered. Once sent to a burn address, coins are lost forever.

On a PoB network, people mine crypto by burning coins. The more coins burnt, the greater the reward.

An advantage of PoB is that it takes very little energy. A disadvantage is the question of how supply and demand will play out on such a blockchain. Burning existing coins to receive a reward of new coins seems counterintuitive. A delicate balance would have to be maintained for the system to work long-term.

What is the Bitcoin Consensus?

Bitcoin uses the proof-of-work consensus mechanism. Miners must contribute computing power and electricity to mine what remains of the 21 million bitcoins. Bitcoin mining involves processing transactions for the network, work for which miners are compensated with newly minted coins (the block reward). As of December 2021, each block rewards miners with a total of 6.25 BTC.

What is the Ethereum Consensus?

The Ethereum network also uses proof of work, although developers have been planning a move to proof of stake for some time. This change seems to be delayed each time it approaches, so there’s no telling when exactly it might happen.

The Takeaway

Consensus needs to be reached for a crypto network to know which transactions are valid. Otherwise, anyone could spend the same funds twice or make fake transactions using funds they don’t own.

While there are a number of other ways of achieving consensus, proof of work and proof of stake are the most well-known and widely used for now.

Photo credit: iStock/Eoneren

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.

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Dec
21
2021
Delegated Proof of Stake (DPoS): What It Is & How It Works

Delegated Proof of Stake (DPoS): What It Is & How It Works

By | Growing Wealth, invest, Investing | Comments Off on Delegated Proof of Stake (DPoS): What It Is & How It Works

One of the things that most defines a cryptocurrency is the way it achieves consensus. Because blockchains are decentralized, there must be a method by which all network participants agree on which transactions are valid. Accomplishing this task is referred to as achieving consensus, and that is typically done with either a proof-of-work (PoW) algorithm or a proof-of-stake (PoS) algorithm.

Where PoW uses large numbers of computers to perform “work” to confirm transactions, with PoS network nodes that have locked up or “staked” tokens as collateral are randomly assigned the task of verifying transactions.

PoS has been expanded upon in recent years, and has been increasingly adopted within the global blockchain community. Numerous variations upon the original PoS concept have been developed, including delegated proof of stake (DPoS).

What Is Delegated Proof of Stake (DPos)?

In DPoS, network users vote for “delegates” who will serve to validate the next block. Delegates can also be referred to as “block producers” or “witnesses.”

With DPoS, users get to vote for witnesses by adding their tokens to a staking pool and linking those tokens to the witness of their choice. Tokens aren’t transferred to another wallet but are staked in a pool by use of a crypto staking service provider.

By letting users choose the people they want to validate the next block and make decisions about the network’s future, it’s thought that the system will be fair and equitable.

Example of DPoS

Several popular blockchain networks use the DPoS consensus mechanism. One example, and one of the first to use this consensus method, is Steemit.

Steemit is a blockchain-based social media network that rewards users for creating and curating content. Rewards are distributed in the platform’s native token, STEEM. The platform is based on blogging and commenting and may be compared to Reddit or Medium. Steemit is managed by a private company called Steemit, Inc.

For a number of years, the Steemit experiment and its DPoS consensus worked wonderfully. But in 2020, Justin Sun (founder of the Tron network) took over the network by acquiring a large number of STEEM tokens.

To summarize a months-long drama that occurred over the course of 2020, here’s what happened:

•   Justin Sun somehow managed to acquire a large amount of STEEM tokens.

•   This empowered him to elect enough Steemit witnesses to control the entire DPoS network. This, of course, is the opposite intent of a decentralized network — no one person or entity should have controlling interest.

•   Sun elected his own witnesses who would then control the network in a manner of their own choosing.

•   Some Steemit users revolted by initiating a hard fork, creating a new network called Hive.

DPoS networks work well when tokens are distributed in an equitable fashion and users elect witnesses they believe will work in the network’s best interest.

But if one person or group acquires enough tokens — as Justin Sun did — they can put their own witnesses in charge. By doing this, they’re circumventing — and basically upending — the entire delegation process. Because delegates change from block to block, those who hold the most tokens can keep their chosen witnesses in power indefinitely.

It can end up working a lot like a democracy where politicians have no term limits and can be bought for a certain price to support certain causes.

Proof of Work (PoW) & Proof of Stake (PoS): The Predecessors

PoW is the original method of achieving consensus pioneered by Bitcoin creator Satoshi Nakamoto. Practically since it was created, developers have sought a way to improve upon what they perceive to be flaws in the Bitcoin network’s method of achieving consensus. This led to PoS — and when it became clear that PoS heavily favored those with the most wealth, DPoS was developed.

Proof of Work (PoW)

PoW involves nodes called miners performing work to validate transactions on the network. Each miner contributes hashing power, solving complex mathematical problems in an attempt to find the next block.

Each block comes with a reward of newly minted coins. Those who put in the most work have the greatest odds of finding a block and reaping the rewards.

Recommended: How Bitcoin Mining Works

Proof of Stake (PoS)

Instead of miners proving their work, in PoS, the nodes that validate transactions are called “validators,” and they prove they have staked a certain amount of coins. PoS doesn’t require energy-intensive mining. The PoS mechanism randomly chooses a validator to validate the next block.

PoS algorithms choose the next validator using several methods. In general, the more tokens staked on a node, and the longer those tokens have been locked in, the greater the odds that node will be chosen to validate the next block. The process is somewhat like a lottery, if you imagine the tokens staked are like lottery tickets.

How Delegated Proof of Stake Works

With DPoS, users vote for delegates or “witnesses” in a process that resembles representative democratic governments.

These delegates then receive the next block rewards (which are also distributed to those who staked tokens on the network in proportion to the amount of tokens staked) and have the power to make decisions impacting the network’s development.

Criticisms of Proof-of-Stake

Critics argue that PoS leads to centralization and favors the wealthiest token holders, who have greater opportunities to become network validators. It was this criticism, in part, that led to the creation of DPoS, in an attempt to make the process more democratic.

Unfortunately, things don’t always work out in practice the way they ought to in principle. What happened to the Steemit network is a good example.

Another criticism of PoS is that the coins must be pre-mined, meaning they are all brought into existence at one time, assuming the network begins as a PoS network. This requires users to trust the creators of the project, hoping that they didn’t hoard tokens themselves or engage in some other kind of corruption. By comparison, PoW networks don’t have this issue because new coins must be mined.

Some people believe that a version of PoS will one day be the main way that blockchains achieve consensus.

But for now, the only blockchain that has remained secure, decentralized, and trustless from its inception is Bitcoin, with its 12-year track record of success. Many PoS networks are only a few years old.

The Takeaway

DPoS is an innovative variation of the original proof-of-stake protocol. It’s thought that delegated proof of stake creates a more democratic network than traditional PoS, which tends to favor the wealthiest token holders.

Proof of work isn’t perfect, but so far, any attempts to improve upon PoW have proven to be vulnerable to centralization. Perhaps future variations of proof of stake will be more resilient.

Photo credit: iStock/Bobex-73

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.

SOIN0821332

Read more
Dec
18
2021
What Is Volume in Cryptocurrency? A Guide

What Is Volume in Cryptocurrency?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Is Volume in Cryptocurrency?

Trading volume is a metric that investors use to see how often an asset is trading hands, indicating how popular it is to buy or sell that asset at any given time. Investors examine trading volume for a variety of securities, including stocks, bonds, and international currencies.

In cryptocurrency, in particular, trading volume is an important factor that traders use to determine the potential trajectory of a coin.

Recommended: Crypto 101: Crypto for Beginners

Crypto Trading Volume Meaning

Crypto trading volume measures how many times a coin changes hands over a given time frame. Investors analyze crypto volume baked on either trades taking place on a given crypto exchange or on all exchanges combined.

The most common timeframe for measuring volume is 24 hours, and the most common format used to show this metric is a bar chart. Typically when high volume cryptocurrency trading can mean an increase in prices and low volume cryptocurrency could indicate prices falling.

Calculating Cryptocurrency Volume

Calculating crypto trading volume requires determining the total value of a type of cryptocurrency that has changed hands in a given period. For example, if the total amount of bitcoin (BTC) traded on Binance in the last 24 hours added up to $10 billion, then the 24-hour trading volume of BTC on Binance was $10 billion.

Why Is Volume Important in Cryptocurrency?

Tracking cryptocurrency is particularly important when trading coins with low crypto liquidity on smaller exchanges, the importance of volume becomes apparent. Say a trader wants to sell one million SHIB coins, for example. But the hypothetical exchange she is using doesn’t have a lot of SHIB volume. To sell 1 M SHIB could require going through dozens of buy orders, each one being at a slightly lower price than the one before it.

This results in the trader receiving a lower price for her coins than she might have if the exchange had higher volumes (a phenomenon referred to as “slippage”). In extreme cases, there might not be any buy orders at all, and a trader would have to make new sell orders, hoping they get filled at some point.

Likewise, if someone wants to buy a coin with low volume, they could end up spending more money than they would have if trading volumes were higher. Having to buy up existing sell orders bids prices higher.

Higher volume tends to translate to higher price stability and less volatility. Of course, times of extreme fear or greed might bring surges in volume and large price movements. But, in general, coins or assets that consistently have higher volume tend to have less volatility.

What Does Cryptocurrency Volume Indicate?

Crypto trading volume indicates interest in a cryptocurrency. The more people are buying and selling something, the higher the volume, which can drive even more interest in that cryptocurrency.

Surges in trading volumes suggest either strongly bullish or strongly bearish sentiment. Meme coins like Dogecoin (DOGE) and Shiba Inu (SHIB) have enjoyed plenty of volume during their big market run-ups. Over time, interest in such coins tends to wane, and volume tapers off along with the price.

A high-volume cryptocurrency can become a low-volume cryptocurrency and vice versa.

Low trading volume means investors aren’t very interested in buying or selling a particular asset. There could be any number of reasons for this. When prices and trading volumes diverge, this can mean that prices aren’t telling the whole story.

Can Volume Be Faked in Crypto?

Yes, it’s possible to exchange volumes through a practice known as “wash trading.” This practice involves placing buy and sell orders at nearly the same time. The orders can cancel each other out and not result in any material movement of markets. This gives the appearance of an active market but is really just noise.

According to crypto research firm Messari , “it is well known that many exchanges conduct wash trading practices in order to inflate trading volume.”

The exchanges may believe that higher volume will entice traders into using their platform, and the more traders that use their platform the more money they make.

Wash trading can take place in several different ways, including:

•   A trader colluding with an exchange

•   A trader colluding with another trader

•   The use of high-frequency trading algorithms

In cryptocurrency markets, high-frequency trading (HFT) algorithms may account for much of the fake volume. These are basically computer bots that can make large numbers of trades very fast.

Concerns about fake volume on exchanges may be one reason that some traders prefer decentralized exchanges, on which it’s harder to fake volume.

Crypto by Volume

Coinmarketcap is a commonly cited source for crypto prices and trading volumes. But the site makes no distinction between exchanges that may have high amounts of wash trading and those that do not. Messari provides “real” volume data, gleaned from exchanges that they believe with a high degree of confidence do not engage in wash trading.

This distinction is important to make because when looking at volumes for different coins or exchanges, the results can be very different depending on the source.

On December 9, the top 5 crypto assets by 24hr trading volume according to Coinmarketcap were:

1.    Tether (USDT)

2.    Bitcoin (BTC)

3.    Ethereum (ETH)

4.    Binance USD (BUSD)

5.    XRP (XRP)

However, according to Messari, the top crypto assets by 24hr “real” trading volume were:

•   Bitcoin (BTC)

•   Ethereum (ETH)

•   USD Coin (USDC)

•   Tether (USDT)

These rankings show that the popular stablecoins USDC and USDT are among the top 5 coins by volume with or without alleged fake trading transactions.

Binance’s exchange token, BUSD, is fourth when including wash trades, but didn’t make the top five for real volume.

Bitcoin (BTC), the oldest and largest cryptocurrency, had volume of more than twice the next-highest volume coin.

Is Volume a Necessary Metric for Valuing Coins?

Many crypto traders see volume as the most important metric for valuing a cryptocurrency.

In 2018, nearly 40% of 39% of respondents to a Coindesk survey chose volume as the indicator they couldn’t live without. The main reason they gave was that other technical indicators rely on an individual’s ability to interpret charts, while volume is more objective.

When price and volume fall together, traders may believe that the market is exhausted and will reverse course soon. On the other hand, when price rises and volume falls, investors often see that as a bearish sign that means prices will pull back soon.

The Coindesk survey quoted one trader as saying that trading volume “speaks to the sincerity of price action.” In other words, the movement of prices alone can be deceiving. When factoring in volume, it can be easier to get a more comprehensive view of how the market is behaving.

The Takeaway

Cryptocurrency volume trading is a measure of how many cryptocurrency transactions are taking place. Much of what’s been covered here also applies to volume in stocks, although there are more regulations around wash trading in equities.

Photo credit: iStock/hsyncoban

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.

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Dec
16
2021

Blockchain Application: 9 Ways to Use It That You’ve Never Thought About

By | Growing Wealth, invest, Investing | Comments Off on Blockchain Application: 9 Ways to Use It That You’ve Never Thought About

Blockchain technology involves the use of a decentralized, distributed ledger of transactions on a peer-to-peer network. One of the main reasons this discovery has been so revolutionary is that for the first time, people can do things in the digital world without needing a third-party intermediary.

Bitcoin, for example, allows people to send value to one another independent of any bank or payment app needing to process the transaction. In similar ways, many different blockchain applications have been popping up in recent years, attempting to create new-and-improved versions of many useful services.

The Impact of Blockchain Applications

The potential applications of blockchain are almost endless. For the first time, decentralized, peer-to-peer networks can be created using transparent, immutable ledgers of transactions. People can perform actions on a network without needing permission, in ways that everyone can see and agree upon, and those actions can be solidified securely on the blockchain.

Anything that can be improved by eliminating reliance on a third-party intermediary probably has one or more blockchain use cases available. Creating decentralized networks and databases opens up a world of possibilities that few could have imagined prior to the invention of Bitcoin back in 2009.

Recommended: Web 3.0 Guide for Beginners

Common Blockchain Use Cases

Today there are countless applications of blockchain, and many more that have yet to be discovered. Here is an overview of nine of the biggest and most eye-catching blockchain applications being explored in 2022.

Smart Contracts

Smart contracts are part of what makes many other blockchain use cases possible. Smart contracts constitute a programmatic agreement between two parties. The contracts exist on the blockchain and can’t be altered.

The resulting transactions are also processed by the blockchain, meaning they happen automatically without the need for a third party. The contracts only execute when the agreed-upon conditions are met.

The use of smart contracts has given rise to a wide variety of blockchain applications. Insurance companies, healthcare companies, governments and more are all looking at ways to use this tech to their advantage.

Decentralized Finance

One of the biggest crazes in crypto and blockchain applications in 2022 might be decentralized finance (DeFi).
The goal of DeFi is to give users control by using blockchain technology and open source coding to facilitate traditional financial services in ways that do not require a bank.

Peer-to-peer lending, for example, has been a big hit with the DeFi crowd. Instead of getting a loan from a bank, using DeFi, people can make loans to each other in the form of cryptocurrency and other digital assets. The terms of the loan will be enforced by programs written in smart contracts, holding both parties accountable.

Decentralized Virtual Private Networks (VPNs)

A virtual private network (VPN) creates some additional privacy and security for a user’s activity by passing all web traffic through an encrypted tunnel. The traffic is routed through the VPN’s servers before reaching its destination, masking the host IP address in the process.

One of the newest blockchain technology applications is the creation of a decentralized VPN, like the one created by the Orchid network.

With Orchid, users can purchase private bandwidth from other users who provide it, and pay with cryptocurrency. This way, there is no centralized service provider who could either snoop on user activity or be compromised in some fashion.

Decentralized Internet 3.0

Blockchains like Tron hope to create an entirely new internet based on the concept of decentralization. Programmers can develop decentralized applications on the Tron blockchain, with the hopes of enabling things like a content ecosystem where users are rewarded for their content.

The Brave browser is another crypto project that is helping to decentralize the internet. Instead of targeting users for advertising through tracking cookies, Brave lets users opt-in to which ads they’d like to see. And using the Basic Attention Token (BAT), Brave users can send BAT tokens directly to content creators they like.

Voting

This may be one of the most compelling and straight-forward blockchain use cases: Blockchain could make the possibility of voter fraud a thing of the past. People could cast their votes digitally in a way that could not be altered and could be seen and verified by everyone.

Healthcare

Medical record-keeping has already been moving toward the digital realm for many years. With blockchain, patient records could be stored even more securely in a way that would make them impossible to tamper with.
Some companies are even exploring the possibility of sharing healthcare data in a way that remains private yet can be verified by both parties as being true and accurate.

Supply Chain Management

Using blockchain, businesses could zero in on inefficiencies within their supply chains while also being able to know exactly where any item is at any given time. The immutable record kept by a blockchain could also allow businesses and consumers to verify information like how products were tested and where they came from.

Digital Identity

Companies like Microsoft are working on ways to create blockchain applications that would create digital IDs within an authenticator app, giving users full control of their digital identities. This could allow people in impoverished regions to gain access to the financial system, healthcare, various areas of industry, and so on. Like many blockchain use cases, Microsoft’s efforts to create a decentralized digital ID are still early and ongoing.

Equity and Currency Trading

Decentralized exchanges (DEXs) have been gaining large amounts of trading volume recently. These exchanges function autonomously, without a centralized party overseeing them, similar to how smart contracts work.

A DEX allows individuals to come together and trade assets like cryptocurrencies or equities. This trend could one day revolutionize the way people buy, sell, and trade assets of all kinds.

Future Blockchain Technology Applications

There’s no real way of telling what other blockchain applications will be developed in the future. The possibilities are numerous.

One potential future blockchain application is the creation of central bank digital currencies (CBDCs). The Federal Reserve, People’s Bank of China, and other central banks around the world have recently announced their plans to create their own digital currencies. The coins would likely be issued on centralized blockchains controlled by the central banks themselves, giving them greater control over monetary policy and the financial system at large.

The Takeaway

Blockchain technology applications like these are only the beginning. Many people are optimistic about the positive changes that blockchain uses can bring into the world. Still, many of the promising projects are still in the early stages of development, and widespread use of them in a meaningful way could still be years away.

Photo credit: iStock/Svitlana Hulko

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.

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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.

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2022 Guide: How to Bitcoin Arbitrage

By | Growing Wealth, invest, Investing | Comments Off on 2022 Guide: How to Bitcoin Arbitrage

Bitcoin arbitrage is an investment strategy in which investors buy bitcoins on one exchange and then quickly sell them at another exchange for a profit. Because bitcoins trade at different prices on different exchanges, it’s an opportunity that many investors have seized in recent years.

Arbitrage is not unique to Bitcoin investing. It occurs across the capital markets, wherever the same asset trades for different prices in different places. To take advantage of those inefficiencies, investors will buy in one place and sell in another to exploit those price differences.

Bitcoin arbitrage differs from other forms of arbitrage in that it’s harder to place a value on Bitcoin. Because it’s completely digital and not based on an underlying asset, it doesn’t have the same pricing conventions as do equities and bonds, which are tied to the performance of a company, municipality or nation.

With there are more than 200 exchanges available to people investing in cryptocurrency, there are likely to be many different Bitcoin prices available at any given moment for people who want to try crypto arbitrage. But not all exchanges are created equal. Some have enormous trading volumes, while others aren’t as active. The trading volume on each affects the liquidity and the available prices on a given exchange.

How Profitable Is Bitcoin Arbitrage?

Bitcoin arbitrage has the potential to be an enormously profitable way to invest in Bitcoin. One well-known 2017 example saw Bitcoin selling on Kraken for $17,212, but on Bitstamp for a mere $16,979. At that moment, investors potentially stood to make $233 per Bitcoin by buying them on Bitstamp, and then quickly selling them on Kraken.

On a basic level, successful Bitcoin arbitrage depends on looking for gaps between the prices on one cryptocurrency exchange and another, and then executing a buy and a sell. But the number of Bitcoin arbitrage opportunities have shrunk in recent years, as more large institutions with sophisticated trading algorithms have gotten into the Bitcoin arbitrage business with services commonly known as btc arbitrage bots.

Where to Look for Arbitrage Opportunities

Unlike many other cryptocurrency digital assets, Bitcoin has become very widely traded. Starting in 2017, trading volume has taken off from an average of $5-$10 million per day to $100-$200 million per day, which means more overall liquidity, and fewer price inefficiencies for arbitrageurs to take advantage of. That’s why many Bitcoin traders use software applications that track the hundreds of Bitcoin exchanges in real time to find opportunities.

An alternate way to use Bitcoin in an arbitrage play is through something called “triangular arbitrage.” Here, an investor would start with Bitcoin and then trade it for another cryptocurrency that is undervalued as compared to Bitcoin, on that same exchange. The investor would then trade that second cryptocurrency for a third cryptocurrency that is relatively overvalued when compared with Bitcoin. Finally, the investor would trade that third cryptocurrency for Bitcoin, completing the circuit, with slightly more Bitcoin than they started with.


Source: (https://blog.shrimpy.io/blog/cryptocurrency-arbitrage-a-lucrative-trading-strategy)

Nowadays almost all Bitcoin exchanges have the software capabilities to create a useful arbitrage tool when placing trades. For instance, on Coinbase, Bitcoin may be priced at $18,600, while on Binance it could be priced at $18,570. Since cryptocurrencies can be priced differently on different exchanges, the opportunity to easily capture profit lies in the price difference between exchanges.

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Bitcoin Arbitrage Tips and Potential Pitfalls

Investors typically need to devote a lot of time and energy to researching and executing a complex trade—not to mention the money required to buy the bitcoin. Trading speed is also a factor as Bitcoin prices change within milliseconds. By the time many investors can execute the trades to take advantage of Bitcoin price differences, those differences may no longer be big enough to be profitable.

Another factor in calculating potential profit is transaction fees on buying and selling across trading platforms. These fees—which vary from exchange to exchange—can sometimes be higher than the profit generated in an arbitrage trade.

The exchanges themselves also pose a risk to investors. One reason that a given exchange may offer such an appealing buy or sell price is that the trading volume on it is very low. And low volume may mean that the exchange can’t execute a trade large enough to deliver the profit an investor is hoping for. Low volume may also mean that the trade is possible, but will take too long to seize the pricing opportunity.

Finally, there’s a risk of loss if an exchange goes under. In engaging in Bitcoin arbitrage, investors might decide to engage with more unfamiliar exchanges—but cryptocurrency exchanges collapse or vanish on a regular basis, as a result of government shutdown orders, or being hacked, or mismanagement, or criminality by their owners.

Is Bitcoin Arbitrage Legal?

Bitcoin arbitrage is legal, as is arbitrage in most other financial assets. Arbitrage plays an important role in creating efficient markets and setting clear prices for market participants.

That said, Bitcoin and other cryptocurrencies are largely unregulated. In the United States, where cryptocurrency adoption has skyrocketed in recent years, officials can’t seem to agree on how they classify cryptocurrencies. The IRS tax guide categorizes cryptocurrencies as property; the Securities and Exchange Commission has called cryptocurrencies a form of security; and the Commodity Futures Trading Commission has called them a form of commodity.

How Are Bitcoin Arbitrage Gains Taxed

Because Bitcoin and other cryptocurrencies are considered property by the IRS, transactions are treated in much the same way as any other property transaction. Investors are expected to report capital gains or losses on the sale of cryptocurrency, taking deductions when permitted and applicable.

The Takeaway

With Bitcoin trading on hundreds exchanges, the idea of taking advantage of pricing mismatches for the same asset can seem irresistible to some investors. But it requires careful research before jumping in.

An interested investor should be prepared to do lots of research on different exchanges, different bitcoins, and any fees associated with buying and selling. Additionally, it’s important to have enough money required to execute an arbitrage move and still yield the desired profits.


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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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.

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2Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

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