Yield farming is putting your assets to work. Because what’s better than buying something that’s going up? It going up while also earning a yield. 

In a way, yield farming is kind of like an addiction. If you get into it, you’ll soon be disgusted by even the idea of holding something that only goes up but doesn’t even earn a yield on top.

But what’s happening in the background, and where is the yield coming from? Let’s go through a brief overview of yield farming.

It can be much, but at least it isn’t honest work

So, how does a dead simple yield farming strategy look like? Let’s say you have some BTC and want to earn some yield on it. Let’s also assume that the current APY for supplying USDT to Compound is 25%, while borrowing it costs 20% on Aave. 

First, you convert your BTC to Wrapped BTC (WBTC), a tokenized version of Bitcoin on Ethereum. Then, you take your WBTC, and deposit it into Aave as collateral. Now, you can borrow USDT against it on Aave, supply that USDT to Compound, and boom, you’re earning 5% per year on your Bitcoin (minus the fees and other expenses).

We could call this an arbitrage strategy, sure. But yield farming is a very generic term, and this is probably one of the most straightforward examples. In reality, these chains can become incredibly complicated and involve many different types of liquidity pools (and yields much higher than 5%). Imagine if you could deposit your cUSDT from Compound to a third protocol and earn a yield on top. Then, you can take the token you got from depositing into the third protocol, deposit that into yet another protocol, and so on. This is essentially how yield farming works.

If we have enough DeFi protocols, maybe someday we can create a perpetual motion machine where everything is earning a yield on top of everything else (2008 financial crisis has entered the chat to say nope).

Now, this sounds like an awful lot of clicking ― and that’s hard work! You see, checking interest rates across many protocols, withdrawing, depositing takes a lot of time and effort and may not be worth it, especially if you’re shuffling a smaller account. 

Something easier you can do is deposit your funds in a yield aggregator like yearn, Alpha Homora, Harvest, or many others. (CoinGecko has a dedicated filter for this type of product.) 

The good thing about these aggregators is that they do all this work for you. You could think of it as a bunch of smart and nimble apes handling your funds and putting them wherever they can earn the highest yield. This will vary with each protocol, but usually, you’ll have to pay some kind of performance fee for the convenience. At the same time, this is probably as close to “set and forget” as it gets in DeFi right now. 

Even so, smart contract bugs are still relatively frequent. As we’ve said, these strategies can get very complex. If that’s something that keeps you up at night, you could consider buying decentralized insurance through protocols like Nexus Mutual and Cover.  

So you’re telling me I can just press a few buttons and get free money? Well, yes and no.

Yields exist as a function of token price. 

Basically, if number go up, yield go up. If number go down? Yields probably shrink. We say “probably”, because we haven’t really seen a crypto bear market since the existence of yield farming. In fact, most of the biggest DeFi protocols were built quietly during the last bear market. So, any conclusions about what will happen to yields in a bear market are speculation at this point. 

Even so, it’s quite likely that yields will shrink. Why? There are multiple aspects to this assumption.

One is the cost of borrowing money. If the cost to borrow is high, lenders get paid more, and yields are higher. If money is cheap to borrow, lenders get paid less, and part of the foundation for those money lego pieces we talked about earlier also yields less. Naturally, there may be less interest to borrow money during a bear market, which means it would be cheaper to borrow, which means yields would be lower.

Another thing to consider is just the general risk-taking appetite in the market. You see, getting a new token into as many hands as possible is a really difficult task. At the same time, it’s quite important for a decentralized network to achieve longevity.

This is why many protocols adopt yield farming, or liquidity mining, schemes to distribute new tokens. Basically, the more liquidity you supply to a protocol, the more newly minted tokens you get. At the same time, if people think the protocol is going to be valuable, they just buy the token on the secondary market, and its price goes up. This, in turn, encourages more people to provide liquidity and farm, which encourages more people to buy the token, and so on. Schemes like this are usually accompanied by a really aggressive inflation schedule for the token, where the earlier you get involved as a farmer, the more you earn.

However, what if no one wants to buy the token in the midst of a brutal bear market? Farmers are farming and dumping, meanwhile, no one is buying. The token price drifts down and down into the abyss, dragging down the yield for farming the token with it. So the same mechanism that leads to increasing yields in an uptrend results in decreasing yields in a downtrend.

Another simple argument is that yield is coming from fees. Are you providing liquidity to an automated market maker (AMM) like Uniswap or SushiSwap? Here, take a portion of the fees paid to the protocol by traders. But what if there’s little interest to trade? Less volume = less fees = less yield.

Something you’ll need to consider when providing liquidity in DeFi is impermanent loss. 

We won’t get into it in much detail here, but the bottom line is that if you’re providing liquidity to a pool that has multiple assets in it, and the prices of those assets change a lot in relation to each other, you’re probably exposed to impermanent loss.

This means that you could end up worse in terms of USD value compared to just holding the assets. If you’d like a more technical overview of this phenomenon, check out pintail’s article about it. Also, here’s a neat impermanent loss calculator.

Yield farming may sound like the empty buzzword of the day, but there’s actually real substance behind it. Earning yield is a significant part of traditional finance, and a complex ecosystem around generating yield in this permissionless environment can bring a lot of benefits.

Besides that, yield farming made crypto infinitely more fun. Now, magic internet money isn’t just a jumble of alphanumeric characters in your wallet (although some can appreciate the a e s t h e t i c s of that as well), but it’s collecting vegetables, increasing your army of digital pets, and getting your hands on precious NFTs. 

It’s quite likely that these types of money games will be wildly popular in the future ― especially once the user experience gets to a level where it’s easy to onboard masses of people who don’t even know they’re interacting with crypto.

Find out about the basics of yield farming, how it works and some of the potential pitfalls surrounding it.

A Quick Introduction to Yield Farming

Uniswap has revolutionized on-chain trading. It’s a liquidity protocol on Ethereum that pioneered the automated market maker (AMM) model. With Uniswap, anyone can become a market maker and instantly create a market for any token.

Whereas centralized exchange (CEX) listings have been all the rage in the past, these days, most tokens get listed on DEXes first. Why? It’s much easier to bootstrap liquidity, it doesn’t require any costly partnerships, and can be done relatively quickly.

But what are some of the best practices when it comes to flipping coins on Uniswap? We’ll go through them here.

First, you’ll, of course, need an Ethereum wallet. Since Uniswap lets you trade ERC-20 tokens, you’ll need a wallet that both supports ERC-20 tokens and can talk to Uniswap. The most popular choice is MetaMask. The great thing about it is that you can hook it up to your hardware wallets like Trezor or Ledger. In such a case, your private keys never leave your wallet.

Why is this important? There have been some nasty exploits where hackers could access users’ private keys through MetaMask. So if you want to be on the safe side, connecting a hardware wallet to MetaMask may be among the best options.

How to check your activity in a block explorer

The Uniswap website is basically a frontend for the Uniswap smart contracts. The machinations that happen in the background are, well, in the background. If you want to check what’s happening under the hood, you’ll need to know how to use a block explorer. The most popular one is etherscan.

Etherscan is one of the most useful tools on your Ethereum shitcoin flipper belt. You can track what big holders are doing or what activity is happening with your token. It may take a lot of time to dig through all the information, but it’s there, and it can provide you an edge over other traders. But back to your Uniswap trades.

All you need to do is look up your address on etherscan, and you’ll be able to see your trades. This is especially handy when it comes to unconfirmed transactions. During times of increased activity, you may need to increase your gas bid to get them through. Oh, by the way, let’s talk about gas optimization.

If you’ve been around the crypto space for a while, you know that Ethereum fees can get pretty outrageous sometimes, especially if you want to transact with smaller amounts.

So how do you make sure you pay the smallest fees possible? You have tools like EThGasStation, etherscan's gas tracker, and GasNow. These will tell you the most optimal gas to pay at any given moment. You can also monitor the times when gas is the cheapest.

On most wallets, you can manually enter the gas price you want to pay – they usually tend to get their estimations wrong. Just be very careful not to accidentally fat-finger an outrageously high gas price. Due to the way the gas bidding system works, miners will be more than happy to process your transaction for a big premium. You probably don’t want to be the poor soul who paid almost 25 ETH just to approve USDC on Uniswap!

But sir, how can I do technical analysis (TA) on the latest scam coin? There are a few options out there that take the data from Uniswap and print it on a candlestick chart.

Some examples are ChartEX, DEXTools, and DEX.Vision. This isn’t an exhaustive list – there are many other sites like these, but these can already get you pretty far.

You can also check out Uniswap Info, which is maintained by the Uniswap team. It provides you all sorts of data on how the protocol is doing in terms of value locked, volume, tokens, and token pairs.

As you may already know, the Uniswap protocol is permissionless. This means that there’s no listing process as there would be on a CEX. Any ERC-20 token can be launched as long as someone provides liquidity for an underlying token pair. How can this affect you?

Well, you could think of a CEX as a relatively safe space (the key word here is “relatively”). Sure, bad projects are listed on CEXs all the time, but you can be somewhat sure that even if the coin can dump pretty hard, it probably won’t go to zero from one minute to the next. That’s not the case when it comes to Uniswap.

Remember how we said that anyone could create a market by adding tokens into a pool? They can just as well remove that liquidity. If they do that, there’s a good chance that there’s no market left for your coin anymore, as the liquidity provider just ran away with all the funds in the pool. In other words, you’ve been pwned. Rekt. Rugpulled.

So what can you do to protect yourself against this? Well, a bit of a non-answer is, DYOR. The majority of ERC-20 tokens that exist will go to zero, and it’s up to you how much risk you take on. The fact that the protocol is permissionless has done a lot to democratize access to trading, but it also means the responsibility is in your hands.

On a more practical level, though, you can make sure that you’re interacting with the right token. Let’s say some amazing new token launched that you think is going to change the world. However, while it’s launching on Uniswap, scammers create fake tokens with the same ticker. Are you searching for the token by looking up the name? Well, as it turns out, you may have bought a fake token that’s completely worthless.

There are two simple things you can do to avoid this. The first is Token Lists. If you import a token list that was curated by a trusted entity, such as Uniswap, CoinGecko, DeFiPulse, or many others, you can avoid buying fake tokens.

Another neat feature is also provided by CoinGecko. If the token you want to ape into is listed on CoinGecko, just copy the token contract address and paste it into Uniswap, and you can be sure that you’re buying the real thing. Many projects that first list on a DEX will also provide you the contract address on their website or social media accounts – that’s also a good place to start.

So, these are some basic guidelines for using Uniswap. Now you’re better equipped to trade, will pay less fees, and hopefully will get rugpulled less. Happy trading!

Read this if you're new to decentralized trading platforms such as Uniswap and want a fighting chance.

Tips for Trading on Uniswap

Decentralized exchanges like Uniswap and Sushi have seen an explosion of activity in the last year. These protocols do a great deal to democratize market making and enable anyone to provide liquidity for traders.

If you’ve been involved with DeFi, you’ve most likely heard about impermanent loss. It happens when you deposit funds into an automated market maker (AMM) and the price of your tokens changes relative to each other. The bigger this change is, the larger the impermanent loss.

You need to know about this phenomenon if you want to provide liquidity in DeFi. The high APYs can be attractive, but in most cases, providing liquidity isn’t as simple as just depositing and forgetting about it. Why? You can lose a lot, and it can be very much permanent.

Even so, providing liquidity can be profitable if you know what you’re doing. This is why we’ll go through some key concepts you need to know about before depositing funds into an AMM.

Impermanent loss comes from an inherent design characteristic of current AMMs. It happens when you provide liquidity to an AMM and the price ratio between your deposited tokens changes since your deposit. When we’re talking about a loss, we mean a loss in dollar value compared to simply HODLing the tokens.

While we say it comes from an inherent design characteristic of AMMs, it isn’t necessarily true for all of them. Different AMMs work in different ways. It depends on the individual design, but in most cases, you’re exposed to impermanent loss. As a general rule, if the AMM has a similar design as Uniswap under the hood (and many of them do), you’re likely exposed to impermanent loss.

But wait, why do so many LPs provide liquidity if they’re exposed to this risk? Well, it still may be worth it for them – they can earn trading fees from trades happening in the pool. For example, the Uniswap protocol charges traders 0.3% for each trade, all of which goes to LPs. If the trading volume is very high, even that can be enough to mitigate the effects of impermanent loss. But the really high rewards tend to come from other forms of incentives.

For example, a newly launched protocol may want to incentivize LPs to provide liquidity for its token, so they may drop additional rewards to LPs. Due to the way AMMs work, the more liquidity there is in the pool, the less slippage trades may incur. This is why it’s important to have as much liquidity in the pool as possible from the start, and it’s also the reason why new projects often drop additional rewards to LPs to incentivize providing liquidity.

Let’s see how impermanent loss happens in practice.

We deposit 1 ETH and 1,000 USDC in the ETH/USDC pool on Uniswap. Since the token pair needs to be of equivalent value, this means that the price of ETH is now 1,000 USDC. So, the dollar value of our deposit is 2,000 USD.

Let’s also assume that there’s a total of 10 ETH and 10,000 USDC in the pool. The total liquidity in the pool is 20,000, and we have a 10% share of it.

Let’s say that the price of ETH increases to 4,000 USDC. Arbitrage traders will keep removing ETH from the pool and adding USDC to it until the ratio of the assets in the pool reflects that price. Remember, an AMM has no order book, so it has no idea about the “correct” price. What determines the price of assets in the pool is the ratio between them in the pool. Meanwhile, the liquidity in the pool has to remain constant.

If 1 ETH is now worth 4,000 USDC, the ratio between the ETH and the USDC in the pool has changed. There is in fact 5 ETH and 20,000 USDC in the pool now.

So, what happens if we want to withdraw? As we know, we have a 10% share of the liquidity in the pool. This means that, right now, we can withdraw 0.5 ETH and 2,000 USDC. That’s 4,000 USD, and we made some nice profits from our 2,000 USD deposit, right? Not quite. If we simply hold our original deposit of 1 ETH and 1,000 USDC, we’d now have assets worth 5,000 USD.

So this is how a loss in dollar value looks like as a result of impermanent loss. With that said, we’ve completely disregarded trading fees and other incentives, which could mitigate this loss. But now you understand how this can happen.

What can you do to mitigate this effect? Well, an obvious solution is simply not to deposit into pools where you are exposed to impermanent loss. What are your options?

You can look for pools and AMMs where impermanent loss is small or non-existent. For example, Curve Finance is a good place to provide liquidity without a big risk of IL. Pools that contain assets that remain in a relatively narrow price range are less exposed to impermanent loss. Remember how we said that IL comes from a change in the price ratio of assets in the pool? If this change is small, the risk of impermanent loss will also be tiny.

For example, Curve has a pool for different wrapped versions of BTC. We know that WBTC, renBTC, and sBTC should remain in a relatively small price range compared to each other since they all follow the price of the same asset – Bitcoin. This is why there’s a smaller chance of impermanent loss to liquidity providers.

Another thing you can do is provide liquidity to single-sided pools. In this case, you only deposit one token, and as a result, you’re not exposed to impermanent loss. However, usually, when this happens, the protocol is paying you from token inflation for locking up (and not selling) the token. Whether it’s worth taking that risk is up to your own preference.

Other risks of providing liquidity to an AMM

Impermanent loss is a pretty misleading name. It’s called impermanent because it’s unrealized until you withdraw your funds. If the price ratio of the deposited tokens returns to the ratio at the time of your deposit, the effects of IL are mitigated. Even so, the losses can be very much permanent.

As we’ve mentioned earlier, some liquidity pools are much more exposed to impermanent loss than others. As a simple rule, the more volatile the assets are in the pool, the more likely it is that you can get rekt by impermanent loss. Maybe it’s worth starting with a smaller deposit to see how your funds react to market movements, and then you can be more confident about how this all works.

But what other risks are you exposed to? Well, it depends on the AMM you use, the assets you hold, or even the blockchain you are using. If you’re using wrapped tokens, you’re likely exposed to counterparty risk, as someone has to be trusted with custodying the assets that back the wrapped tokens.

Another thing is, of course, smart contract risk. This technology has only existed for a handful of years, and bugs and exploits are commonplace. Sure, some of the older protocols like Uniswap can be trusted more than a newly launched one, but it’s something to be wary of.

Another risk is rug pulls. If you’re providing liquidity to ETH and some obscure token, there can be a number of things that go wrong. For example, the developers may be able to mint an infinite number of tokens, crash the price, and, as a result, completely demolish your deposit through impermanent loss. They can also pull a considerable portion of funds from the liquidity pool. In both of these cases, you’ll seriously suffer as an LP. Naturally, this risk is largely non-existent with pools containing established tokens, like ETH/USDC.

Impermanent loss is one of the core concepts you should know about when providing liquidity to DeFi protocols. The APYs can be extremely high, but you should be wary of the risks.

Impermanent Loss and the Risks of Being an LP

Scaling has been a turbulent topic in the crypto space. While blockchain technology has brought some unique properties to the table, the performance leaves a lot to be desired.

If you’ve ever used Uniswap during a time of congestion, you know that fees can skyrocket, transactions can take ages to complete, and the experience is just inferior to what we’re used to in the centralized parts of the Internet.

The good news is that quite a lot of brilliant people are working on solving this problem! In this article, we’ll discuss what layer 1 and layer 2 scaling is, and compare their pros and cons.

A layer 1 (L1) is the main blockchain architecture. You could think of Bitcoin or Ethereum as layer 1 blockchains.

Examples of layer 1 scaling solutions are SegWit in Bitcoin and sharding in Ethereum. SegWit is a clever way to include more transactions in a block, while sharding is a database partitioning technique where the blockchain is divided into different segments called shards. In both cases, the transaction throughput is increased by changing some characteristic of the base protocol.

The L1 space has been quite a crowded and competitive sector in the blockchain industry. Many projects are trying to capture this market, as a platform to build applications on top of will undoubtedly remain a piece of core infrastructure. Some examples include Polkadot, Cosmos, Solana, Algorand, Avalanche, Near, Cardano, EOS, and Tezos.

However, it isn’t a huge stretch to say that building a dominant layer 1 blockchain is a massive undertaking. Shuffling between scaling it to be able to handle the economic activity of billions of people while maintaining a high level of security and a healthy degree of decentralization is an extremely challenging task.

To add to that, this isn’t purely a technological challenge. A successful L1 also needs an ecosystem of developers, tooling, and some argue even its own identity, culture, and values.

A layer 2 (L2) solution is a secondary protocol built on top of the underlying blockchain (i.e., the layer 1). A simple way to think about this is by imagining a stack where the “main” blockchain is on the bottom, and the L2 is on top of it, keeping the main architecture intact.

Some examples of layer 2 scaling solutions are the Bitcoin Lightning Network, Ethereum rollups such as Optimistic rollups or zk rollups, sidechains, and payment channels. As you’d expect, different L2 scaling solutions have very different implications in terms of security, trust, and decentralization.

In all of them, however, the idea is that transactions can happen independently of the main chain, freeing up precious block space as a result. Since some of the load is taken off of the L1, the throughput is increased.

While different L2s all use unique solutions to tackle this challenge, generally, the idea is that they get the security guarantees from the main chain. This brings the best of both worlds – the immutability and censorship-resistance of a blockchain and the transaction throughput needed to process a large amount of economic activity.

Generally, there are two camps when it comes to blockchain scaling. One believes that the main blockchain (L1) should be the one to scale. The other camp thinks that most of the computation should be done off-chain, on L2s.

The reality of how it’ll end up will probably be a bit messier and a combination of both. The biggest and most successful L1s tend to each have a unique approach when it comes to the main architecture. As such, the choice between L1 and L2 scaling is heavily dependent on what specific blockchain we’re talking about.

For example, Solana can process a lot of transactions-per-second (TPS) on L1, so there’s less reason to think about L2 solutions. However, on Ethereum, the focus has been shifted to L2 scaling over time since the L1 isn’t able to handle the incoming demand, and L1 scaling takes a long time to deploy.

Then, we have solutions like Polkadot, where applications can spin up their own app-specific blockchains called parachains. These parachains are connected to the central chain of Polkadot called the relay chain, which provides security to all the connected parachains. In some sense, this is a hybrid approach between the two. Different applications aren’t competing for the same L1 block space and can create custom blockchains that functionally act similarly to L2s.

If you think about it, it makes sense that different applications have specific requirements for their individual use cases. A token swap on an automated market maker (AMM) in DeFi isn’t the same type of on-chain action as minting an NFT or sending funds from one address to the other. Some actions require more computation (gas) but are less time-sensitive, while others are relatively simple but require sub-second execution. This is why the hybrid approach might work best when it comes to all of these platforms.

As a side note, some people have referred to Polkadot or Ethereum after sharding is implemented as ‘layer 0’. The idea here is that the Polkadot relay chain or the Ethereum beacon chain could act as the main hub for other layer 1 blockchains to plug into. While the idea may seem a bit far-fetched now, it’s difficult to predict how the different L1s will interoperate in the future. So, while the chance of an ecosystem like this is relatively slim, it isn’t zero.

Layer 1 and layer 2 scaling both aim to increase the transaction throughput of blockchains while trying to give up as little as possible from network security and decentralization.

With the impending launch of various types of rollups on Ethereum, the fee problems in DeFi may soon be mitigated. In the meantime, other L1s are also gaining increasing traction, as it makes economic sense for many users to migrate some of their on-chain activity

Layer 1 and Layer 2 scalability solutions aim to increase the transaction throughput of blockchains like Bitcoin and Ethereum.

Layer 1 vs. Layer 2 Blockchain Scaling

Crypto offers some life-changing opportunities. Some traders think we won’t have another moment like this in our lifetime where we can create wealth and be part of such a large-scale financial revolution.

But even if the opportunity is there, you still need to be able to take advantage of it. So, what are simple dos and don’ts that could help you do that? We’ve collected some in this article.

This is a fairly simple point that you’ve probably heard explained by OG crypto traders, but it’s a crucially important one. If you take away only one piece of advice from this article, it should be this one. 

In crypto, the most important thing you need to do is survive. This technology is likely a harbinger of a multi-decade macro shift in finance, economics, organizing people, and whatever other use cases we’ll figure out for it. You’ll have plenty of time to take advantage of the opportunities. That is if you’re still there to take advantage of them. Survival is key. 

If you use unreasonably high leverage or bet the house on each trade, you’ll get wiped out. Not trying to make it all at once does require patience, but it’ll also make sure that your account survives another day. Managing to stay in this market is half the battle. 

This also applies to separating your trading account from your basic expenses. If your entire portfolio went to zero tomorrow, how long could you live comfortably with your savings? Months, years, decades? If you’re in a tight spot financially, trying to stay afloat by trading is generally a bad idea. Naturally, it will also have a detrimental effect on your ability to survive in this market.

This may be a bit of an underappreciated point, but common sense can be a powerful tool when it comes to trading. 

It’s easy to get lost in long sessions of fundamental analysis, on-chain metrics, thousands of technical indicators, strategies, trading bots. You have so many options regarding how to express your views of the markets. But if you don’t try to consider larger contexts, your analysis may be useless.

Is the middle of a brutal bear market the best time to take on copious amounts of risk and ape into high-leverage longs? Probably not since the direction of the wind isn’t blowing in your way, and the general risk-taking appetite in the market is low. 

Triple divergence on the RSI on the 1-minute chart after the United Nations has announced that they are making Bitcoin the de facto unit of account on planet Earth? Probably not the time to all-in short.

While markets are complex, sometimes simple ideas can prevent you from making unnecessary mistakes that can chip away at your portfolio.

Do you know what kind of trader are you? Are you a scalper, swing trader, fundamental investor, quant, DeFi degen? It’s important to know what you’re good at, and what hasn’t been working. Once you do, you can play to your strengths much better.

For example, it’s a common mistake to enter what starts out as a day trade, and “turn” it into a swing trade when the market goes in the other direction. If you enter a position based on some analysis, and that analysis turns out to be wrong, it’s better to take the loss than ride it out and hope it’ll come back to your entry. Maybe you’ll get lucky and it works out a few times, but if you do this regularly, it will certainly backfire on you.

You need to have a plan, and you need to stick to it. Does that mean that you need to be extremely rigid with the plan itself? Absolutely not. If the plan isn’t working, change it, iterate on it, learn from your experiences – seek constant improvement. But, if you don’t have a plan at all or you have one but don’t stick to it, it can be quite difficult to maintain consistency in your trading performance.

4. Don’t: Blindly buy something because someone told you to

Look, one of the best things about this space is the free flow of information. The so-called alpha is there, you just need to find it. What’s more, there are many incredibly helpful people who are genuinely trying to help you get a bigger piece of the pie. 

This is actually a stark contrast with the traditional financial markets, where most traders with a solid edge keep it under close guard. Otherwise, their specific knowledge would become common knowledge, and it would lose its efficacy. Even so, while some people in crypto will help you improve, the most profitable strategies you’ll still need to find yourself.

But what is it that most beginners do instead? “Bob on Twitter just said that he’s in this coin so I’m buying in!” Well, it may work out or it may not. There are so many unknown details here. What was their entry? Are they already up 10x? Have they been paid by the project team with a free allocation? When are they going to exit? Are you their exit liquidity? What is their incentive to share this pick with you? You need to carefully consider the context of the situation.

Does this mean you shouldn’t trust anyone? Of course not. It’s probably a good idea to keep a close group of friends around who also trade and whom you fully trust, and then you can use your collective wisdom to find that edge.

“Elon Musk just tweeted about Dogecoin! Actually, it was 32 minutes ago, and DOGE is already up 30% since then, but it will surely keep going up, let me just buy in with my entire account!” And suddenly, this turns into the story of how you’re getting rekt buying the top.

FOMO (Fear of Missing Out) is a powerful emotion to deal with. Not even the most experienced, successful traders are immune to it. It feels like everyone around you is making it, and you’re not, so you absolutely must buy in. 

However, FOMO-ing into a trade typically ends in tears. Once a coin has already experienced a face-melting pump that makes you feel serious FOMO, it’s probably not the right time to build a position. The best times to buy tend to be when it’s difficult to get yourself to pull the trigger. When you’re FOMO-ing in, you’re adding to the top level of a house of cards that may soon come crashing down.

Crypto trading is the wild west of finance, so we’ve collected some simple advice that you can follow to improve your performance and avoid obvious mistakes.

Dos and Don’ts of Crypto Trading

Centralized exchanges (CEX) still make up the vast majority of trading activity in the cryptocurrency markets. But what’s actually going on in the background?

We’ve collected the most fundamental building blocks that make up a centralized exchange that you need to know about before you start trading.

Also sometimes referred to as the order matching system, the matching engine is essentially the brain of the exchange. This system matches buy and sell orders with each other. In other words, it ensures that buyers and sellers can meet in the market and execute their trades.

Traditionally, on the stock markets and CEXs in crypto, this is done using a central server that belongs to the exchange. Ideally, this system should also ensure that whenever traders put on an order, they should get the best execution available in the given market. The internal systems of the exchange should also make sure that the assets are settled after a trade is executed, i.e., the balances of the buyer and seller are updated to reflect the new values.

A performant matching engine is key for an exchange’s robustness and efficiency. If it isn’t able to handle the required throughput, the market essentially falls apart. This can lead to large deficits in the system, many traders getting wrongly liquidated, or even trading being halted for prolonged periods. 

When it comes to traditional markets, high-frequency trading firms are competing on sub-millisecond timescales. We’re talking about one-thousandth of a second. A small advantage for one firm over the others could mean billions of dollars of difference. The matching engine needs to be able to cater to this demand. 

That being said, the cryptocurrency markets aren’t at this level of efficiency yet. Even so, just a few seconds of outage can lead to hundreds of millions of dollars of losses that otherwise wouldn’t happen. Latency and resolution are key, and matching engines need to keep up with a never-ending arms race for quicker execution.

As a side note, have you ever come across those old photos of traders shouting on the trading floor? That’s called the open outcry system, and it’s what was replaced by electronic matching engines starting from the 1980s.

The central limit order book (CLOB) is a collection of the currently open orders on the exchange. The matching engine uses the order book to match orders, and this is the dominant way of facilitating electronic exchange.  

Remember the public outcry system from above? An order book is quite similar in concept, but instead of shouting, you’re telling the order book your desired transaction details. For example, if you send a market order, you’re saying: “I’d like to buy or sell right now, give me the best execution price”.

The “top” of the order book is the lowest ask (sell order) and the highest bid (buy order), and that’s where buyers and sellers meet. The difference between the lowest ask and the highest bid is called the bid-ask spread. Naturally, the smaller this spread is, the more liquid and efficient the market may be, and the better execution you may get (though there are other factors).

As we’re only dealing with numbers, the order book is transparent, and openly available for everyone to see – though there are some exchanges that allow for hidden orders. There also exist special kinds of markets called dark pools that operate with hidden order books.

It’s worth noting that automated market makers (AMM) like Uniswap, Sushi, and PancakeSwap don’t use a CLOB. Instead, they use an algorithm to determine pricing.

Centralized exchanges have to hold and custody user funds. Users deposit their crypto to the exchange, and the exchange’s internal systems ensure that each individual user’s balance is correct. Naturally, this creates counterparty risk, as you have to trust the exchange not to lose your funds. It also creates a giant bullseye on the exchange, as their systems have to securely hold billions of dollars of their customers’ funds.

Most exchanges are quite secretive about how they store customer funds – and for good reason. Due to the significant risks involved, many of them also involve third-party custodians to minimize the chance of a loss of user funds. But generally, they tend to have funds separated into hot wallets and cold storage. 

Hot wallets are typically a small portion of the entire capital pool, and they are used to ensure that there are funds available when a customer makes a withdrawal request. Cold storage funds are safely tucked away in separate wallets that can’t be accessed at all times, only when a customer wants to make a large withdrawal. 

Even so, it’s crucial for you to use a safe email address, turn on two-factor authentication (2FA), and possibly use hardware authentication devices such as a YubiKey.

Not all CEXs offer this functionality, but the biggest ones tend to provide a way to move between crypto and the fiat world. You can use your debit card, connect your bank account, or use a peer-to-peer (P2P) marketplace to move funds between the two financial systems.

With the widespread adoption of stablecoins like USDC and USDT, dealing with the bridges between these two worlds is less of an issue than it used to be even just a few years ago. Back then, it was a challenge for a cryptocurrency exchange to obtain the necessary licenses to offer trading in fiat currencies. This is why one of the primary uses of stablecoins for exchanges was a form of regulatory arbitrage. Customers still wanted to have the option to park their assets denominated in fiat at times, and stablecoins were a great way to do that without the exchange having to deal with fiat money.

Now, however, the biggest CEXs all allow for ways to convert between fiat and crypto.

If we’re talking about an exchange that also offers margin trading or futures, there needs to be a robust system that handles liquidations. You see, liquidations are a difficult thing to deal with. If the matching engine isn’t able to handle everything that’s going on in a turbulent market, it can lead to large losses to many traders, but also, in the absolute worst case, could even bankrupt the entire exchange. 

If the liquidation engine isn’t able to properly liquidate traders, there may be a huge deficit in the system, i.e., a negative balance. And someone has to pay for it! In some cases, this is the exchange itself, in others, it’s handled by socialized losses. This means that the most profitable traders get chipped away from their profits to cover the deficit in the system. This used to happen in the cryptocurrency space more than you might think, and it shows why a robust liquidation system is crucial for an exchange’s good performance.

So far, we’ve talked about the infrastructure components of a CEX. While these are all required to kickstart an exchange business, there’s a crucial element that’s also needed – liquidity.

You see, you can build the greatest technology, but if liquidity is low, you won’t attract many traders. Many newly launched exchanges fall into this death spiral of sorts. No one trades on their exchange, because.. no one trades on their exchange.

It’s crucial for CEXs to make good connections with market making firms that provide liquidity to their books. As a result, it’s quite common to see exchanges offering fee discounts for market makers.

But what exactly is a market maker? It’s a firm (or an individual) that specializes in quoting prices for both the buy and the sell side, hoping to make a profit on the bid-ask spread. In other words, the market maker is willing to buy and sell large amounts of the asset at the same time, effectively making the order books more liquid for traders.

Market making strategies can be quite complex and are usually safely kept under wraps. It’s a highly competitive industry. The bottom line, is though, that the exchange benefits from the liquidity market makers provide, and they make a profit through applying their strategy to the market.

So, these are some of the basic components of an exchange. There can be others including margin systems, borrow-lending, integrations with DeFi, but these are the core concepts you need to understand.

Here’s all you need to know about the different components that make up a cryptocurrency centralized exchange (CEX).

How Does a Centralized Cryptocurrency Exchange Work?

How Not To Lose All Your Crypto in a Sim-Swapping Attack

Cryptocurrencies are a criminal’s wet dream. Highly liquid, highly portable, and accessible to anyone armed with an Internet connection, assets like Bitcoin have become the Holy Grail for blackmailers, scammers and hackers around the world. 

A cybercriminal will do anything to part you from your hard-earned Dogecoins – whether that means impersonating Elon Musk under his tweets or threatening you with personal details obtained in the data breach of a certain wallet manufacturer.

Your SIM card is a little passport for your phone: it contains information that ties you to your mobile network. Without one, you can’t send/receive messages and calls, or trade with 125x leverage on a 4G connection. 

Just like a passport, your SIM card comes with a unique number. People use it to reach you. If you upgrade your device, you can simply pop the SIM card into your new one to keep that same number.

So wonderful, in fact, that you can use that number as an additional layer of security (alongside your username and password) when logging into online accounts. Or, in some cases, you can even reset your password by receiving an SMS

And so can criminals! All it takes is a phone call to the mobile provider saying “hey! This is [your name], I lost my phone and would like my number [your number] ported to a new SIM card.”

If the criminal can convince the provider that they’re you (and a good social engineer will convince them), your SIM card stops working. All your messages are still sent to your number, but they belong to the criminal now. If that number is tied to your e-mail and exchange accounts, then there’s a good chance they can now gain access to them. It can happen to the CEOs of Twitter or Transform Group, so it can absolutely happen to you. Let’s talk about how you can protect yourself.

What do Santa Claus, the Tooth Fairy and SMS 2-factor authentication have in common? 

They’re all things that grown adults should stop believing in. Seriously. Using your phone number as an additional layer of security just introduces additional vulnerabilities. Mobile network employees can be malicious. They can be bribed. Blackmailed. Phished.

Where possible, you should make the switch to Time-based One-Time Passwords (TOTP). Apps like Google Authenticator (or, better still, FOSS alternatives like Aegis) use a shared secret between you and the service to generate disposable codes based on the current time. 

The only way for an attacker to get the shared secret (allowing them to compromise your account) is by physically accessing your phone.

A lot of services (looking at you, almost every single bank in existence) are allergic to features like TOTP-based 2FA. In this case, you don’t have a choice. You should start thinking about compartmentalization, which is good privacy practice anyway.

Compartmentalization refers to the segregation of the data in your digital life. For example, you may use one email account/phone number/username for Twitter, another set of information for your car insurance website, and another entirely for each crypto exchange login. The principle is simple: minimize the amount of information that any single party can collect about you.

Remember that, for a SIM swap attack to be worthwhile, the attacker must already know some information about you: what websites you use, which email address you sign in with, and, of course, your phone number.

This information is normally collected via phishing, or by buying information from data breaches. For example, if you fill in a form for a chance to win 500 BTC and provide your data, that flags you as a potential victim. Similarly, if your number is visible on Telegram and you belong to dozens of cryptocurrency communities, you make yourself a target.

Something else to consider: if Exchange #1 is hacked and its user data exposed, criminals know that there’s a possibility that you use those same details on Exchange #2. Setting up pay-as-you-go SIMs and new email addresses can be a time-consuming activity, but spending a day doing so will pay dividends for your online security for years to come.

New to crypto? Welcome! Your priority after buying your first digital currency should be to learn about cold storage.

Seasoned crypto user? If you don’t keep at least some funds in cold storage, you’re doing it wrong and you, too, should make this your utmost priority. 

Cryptocurrency exchanges are goldmines. If bad actors can get past their security, they can escape with billions of dollars in value. That’s a risk inherent to every service that exists on the Internet, and you’re powerless to prevent it if the exchange owner fails.

Which is why many users store their crypto totally offline. By using something like a hardware wallet, you retain full custody of your funds, and ensure that no hacker can reach them as the private keys stay away from Internet.

Of course, that means that you can’t trade, stake or earn interest on your holdings. You should only keep what you deem to be strictly necessary for such activities on a third-party platform.

That’s different for everyone, so there isn’t a correct answer to the proportion of funds that should be kept in cold storage vs. exchanges. A good starting point, though, might be to ask yourself the following question: just how fucked am I if this platform gets hacked tomorrow.

Protect your hard-earned crypto by following these steps.

is the leading smart contract platform and will likely stay at the top for the foreseeable future. At the same time, it’s becoming increasingly obvious that we’re going to live in a multi-chain world where many different ‘layer 1’ blockchains complement each other’s unique capabilities. But which ones are most likely to succeed?

Before we go further, it’s worth mentioning that you’ll notice we’ll talk a lot about validators in this article. Validators may not look like the most interesting topic at first glance, but they are one of the most important aspects of a blockchain. In essence, the nodes (computers) that validate truth on the blockchain control the blockchain. Code can be forked, but a set of decentralized validators can’t.

In addition, we won’t talk about ‘layer 2’ solutions like rollups or sidechains. There are also other layer 1 blockchains in various stages of development we’ve omitted such as Algorand, EOS, Tezos, NEO, Tron. If you’d like to file a complaint with the content department for leaving out your favorite blockchain, send us a furious message on Twitter.

Binance Smart Chain was the first non-Ethereum chain to kickstart the multi-chain wars with an explosive move over the last few months. CZ’s relentless, unstoppable marketing machine and an easy onboarding experience for one of the largest user bases in crypto quickly gave BSC a giant advantage over other Ethereum competitors. Not too surprisingly, the ability to withdraw to BSC from a Binance account and instantly get access to the BSC ecosystem is a pretty large convenience.

So why isn’t everyone moving over to BSC? Well, BSC is basically a clone of Ethereum with a few key differences – the most significant being the smaller validator set. BSC runs on only 21 validators, most of which likely belong to Binance. 

While acts of censorship haven’t happened yet, the trade-off BSC makes to achieve lower fees and faster transactions is undoubtedly taking away from its decentralization, which may become an issue over the long term. Even so, BSC is thriving, and with much of the activity on it subsidized by Binance’s war chest, the UX is among the best when it comes to DeFi. 

BSC’s success stems from the realization that many users don’t seem to care about decentralization and just want to participate in yield farming. It’s worth noting, though, that users follow developer activity, and developers tend to be more ideologically aligned with the base layers they develop for.

Some of the biggest dapps on BSC are PancakeSwap, Venus, Beefy, and Autofarm. If you’d like to check out more, go to defistation.io for a more comprehensive list or read our article about BSC tools.

Solana promotes itself as one of the most performant blockchains out there. According to its creators, it can process around 50,000 transactions per second (TPS). If you try it out yourself, you’ll realize that it’s, indeed, really fast.

While many unlaunched blockchains throw around similar numbers, Solana is already up and running and proving that its technology is far from vaporware. With such impressive throughput numbers, it shouldn’t come as a surprise then that Solana has pretty high hardware requirements for validators. 

The biggest apps on Solana are the Serum DEX, the automated market maker (AMM) Raydium, the Bonfida DEX, an on-chain margin trading platform called Mango, and another AMM called Orca. 

The ecosystem is rapidly growing, however, and with the backing of Sam Bankman-Fried and potential future CEX integrations thanks to the connection with FTX, Solana is easily one of the primary Ethereum competitors.

Polkadot’s main value proposition comes from its unique architecture and an already large ecosystem of products, even though the chain hasn’t launched yet. 

The architecture of Polkadot is similar to how you would imagine Ethereum once sharding is implemented in ETH 2.0. In short, there’s a ‘main’ chain called a relay chain that other blockchains in the Polkadot ecosystem called parachains connect to. This, in theory, should lead to a lot of scalability and strong security guarantees.

So, what’s a parachain? Unlike Ethereum or Solana, applications can spin up their own app-specific chains with customized parameters. This allows them to do much more than you could potentially ever do on other chains. Good luck trying to change basic parameters of the Ethereum protocol as an application developer. 

Polkadot allows developers to create custom blockchains tailored to the specific use cases they are targeting with their product. Since each of these parachains is connected to the relay chain, they inherit the high security guarantees shared by the entire Polkadot ecosystem.

With the impending launch of Polkadot in 2021, we’ll have to see if it lives up to the high expectations.

Cosmos is a decentralized network of independent blockchains. It isn’t necessarily a blockchain, it’s more of a protocol to create blockchains, each powered by a consensus protocol called Tendermint. These different blockchains in the Cosmos ecosystem also have a way to talk to each other through something called the inter-blockchain communication protocol (IBC).

The idea is that the Cosmos ecosystem doesn’t have a shared validator set like basically all others in this article. If someone wants to develop a blockchain based on Cosmos, they’ll need to ensure their chain’s security by spinning up their own validators – it’s not like there’s a main Cosmos chain they can plug into for security. This should allow for added flexibility both for infrastructure projects and the application stack.

Much has already been built using Cosmos, such as the programmable stablecoin platform Terra, Binance Chain (the chain that powers Binance DEX), and cross-chain liquidity protocol THORChain.

We’ve collected some of the strongest Ethereum competitors who each want to take their piece of the pie in the smart contract space.

All Learnings

A Quick Introduction to Yield Farming

Tips for Trading on Uniswap

Impermanent Loss and the Risks of Being an LP

Layer 1 vs. Layer 2 Blockchain Scaling

Dos and Don’ts of Crypto Trading

How Does a Centralized Cryptocurrency Exchange Work?

How Not To Lose All Your Crypto in a Sim-Swapping Attack

Top 7 Ethereum Competitors

7 Binance Smart Chain (BSC) Trading Tools You Should Know About

How Not To Lose All Your Crypto in a Rug Pull

The Importance of Narratives in Crypto

The Idiot’s Guide to Solana

An Introduction to Ethereum 2.0

Crypto’s Most Controversial Projects

NFT Use Cases Beyond Digital Art & Collectibles

John McAfee: Life in The Fast Lane

From a Sex Tape to a Human Arm: The Most Absurd NFTs

How to Trade for Cheaper using DEX Aggregators

CryptoPunks Explained

Crypto's Most Controversial Exchanges

Crypto Glossary: Acronyms, Abbreviations & Initialisms

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