DEV Community: ZILD

Understanding Uniswap: A Guide

ZILD — Mon, 23 Nov 2020 19:20:45 +0000

DeFi projects — projects and protocols for decentralized finance — became one of the most popular trends in the cryptocurrency industry, which changed the ICO era. The basis of the DeFi concept is a decentralized opportunity for exchange, investment and lending, freely in practice and absolutely democratic in structure, with full control of their funds, which are entrusted not to specific persons, but to smart contracts and algorithms.

Today we’ll talk about one of the most interesting projects in this area — Uniswap, a protocol for decentralized exchange of tokens.

Interestingly, the development of Uniswap was facilitated by Vitalik Buterin’s idea for a decentralized exchange (DEX), which would involve an automated market maker. Actually, the developer of the protocol, Hayden Adams, at first just wanted to practice developing on Solidity, and after a while this hobby brought him several grants and $100,000 from the Ethereum fund.

Now the project has gone far beyond just entertainment and has become one of the most important components of the entire DeFi industry. And this glory has a downside — during the last tests of the market for strength, alas, the algorithms of the majority of the participants gave up before the collapse of the market sentiment and skillful loners who used the vulnerabilities and borderline nuances of the functioning of complex financial systems to enrich themselves.

What is Uniswap?

Uniswap is an exchange-like protocol that allows users to securely exchange ERC20 tokens without having to use the traditional exchange-order model. Uniswap bundles tokens into special smart contracts, creating pools of liquidity within which other participants can trade. Anyone can exchange tokens, add tokens to the pool to receive a commission, or create a new trading pair.

This guide is intended to help beginners understand how Uniswap works and what goes on behind the scenes. Despite the fact that the interface may seem simple, a lot still remains behind the scenes.

ERC20 tokens

ERC20 tokens on Ethereum are the most popular and fungible tokens, which means there is no distinction between the same tokens of this standard. For example, if I have in my hand 100 metal balls of the same size and color, it doesn’t matter which one I give you. Likewise, if I have 100 of the same ERC20 tokens, it doesn’t matter which one I send you. In turn, NFT tokens of the ERC721 standard are non-fungible, you may have heard about them from the Cryptokitties collectible game.
ERC20 can be thought of as the simplest unit of account for a variety of use cases including currency, loyalty points, lending, interest bearing bonds, and more. They support almost unlimited division and can be sent in fractional parts. Since tokens of this type are very popular, it is important to develop an easy way to exchange between them.

Uniswap smart contracts overview

When browsing the Uniswap website, it is important to remember that it is much more than just an interface. With a suite of smart contracts, Uniswap standardizes the ERC20 token exchange mechanism. Anyone can create an interface that connects to these contracts and immediately exchange with anyone using Uniswap.

There are two different types of contracts that make up Uniswap. The first is known as an Exchange Contract. Exchange contracts contain a pool of a specific token and Ether that users can exchange with. The second type of contract is the Factory, which is responsible for creating new exchange contracts and linking the ERC20 token address to its personal exchange contract.

There is no charge for listing a new instrument on Uniswap. Anyone can call a function in the Factory contract to register a new token. The figure below shows an example of adding DAI to Uniswap. Someone first called the createExchange function in the Factory contract with the DAI contract address. Factory then checks the registry to see if an Exchange contract was previously created for this token. If not already, Factory creates an Exchange contract and writes its address to the registry.

Liquidity providers

When an Exchange contract is first created for a token, both pools (token and ether) are empty. The first person to make a deposit to the contract determines the ratio between token and ether. If they bring in a ratio different from the current market rate, then an arbitrage opportunity is presented. If liquidity is added to an already existing pool, it is necessary to add a proportional amount of both ETH and token.

If this is not done, the liquidity in the pool is exposed to arbitrage risk.

In addition, large pools of liquidity are beneficial to users as they allow for large trades without deviating the token-to-ETH ratio too far along the curve. Uniswap encourages users to add liquidity to pools by rewarding providers with the fees the protocol charges. A fee of 0.3% is charged for the exchange between ether and token, and about 0.6% when exchanging tokens for tokens.

Finally, special tokens known as liquidity tokens are generated at the provider’s address in proportion to how much liquidity has been poured into the pool. Liquidity tokens are burned when a user wants to receive the liquidity provided to them plus the fees that were accumulated while their funds were locked.

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Ethereum 2.0 explained by ZILD

ZILD — Thu, 12 Nov 2020 19:12:27 +0000

Ethereum 2.0 is an upgrade to the Ethereum network that is expected to take place during 2020.

Once launched, Ethereum 2.0 will be primarily a testnet for testing the Proof-of-Stake consensus algorithm system. Most of the economic activity and smart contracts will continue to function on the original Ethereum network, which will continue to be a parallel system to Ethereum 2.0. The developers implement the possibility of transition of Eth1 to Eth2, but the opposite will be impossible.

What are the phases of Ethereum 2.0 deployment?

Phase 0: Beacon Chain

It only includes testing the new Proof-of-Stake mechanism, so the network will be predominantly test-driven, although it will use real Ethereum tokens. Within this phase, the following aspects of PoS should become functional:

Management of the set of stakers;
Stakeholder funds management;
A random number generator that helps you select block producers and staking curators;
Stakeholders vote for block size proposals;
Distribution of awards and fines for stakers.

Phase 1: Sharding

An experimental network with 64 shards will initially be deployed. While phase 0 aims to test the basic PoS infrastructure, in the absence of significant economic activity, then phase 1 aims to test the basic sharding model.

During this phase, 65 blockchains will operate in parallel — the Beacon Chain, which existed at stage 0, and 64 new shards. There will also be a two-way communication and link mechanism between the Beacon Chain and all 64 shards.

Phase 2: Implementation of the new operating mode

It is assumed that at this stage smart contracts will start working on the network and economic activity will begin. Shards will no longer be stores of raw data, but will begin to resemble virtual machines and Ethereum 1.0 smart contracts. Specifications for Phase 2 are under development.

Unilateral fixation

After the launch of Ethereum 2.0, two networks will operate in parallel — Eth1 and Eth2. It will initially be possible to convert Eth1 coins to Eth2 coins, but not vice versa, so in theory Eth2 coins should trade at a price less than or equal to the value of Eth1 coins. However, in the early stages of the transition, Eth2 coins are unlikely to be priced or supported by exchanges at all, as their only use would be staking. Even basic transactions will not be possible.
To transfer Eth1 to Eth2, you will need to use the Eth1 escrow agreement. This agreement destroys coins on Eth1, and then the destruction can be used as confirmation to issue new Eth2 coins. Coins are burned permanently, although coin recovery can be realized thanks to a protocol change as a result of a hard fork.

Coins transferred to Eth2 automatically go to the validator pool.

Proof-of-Stake, finally

According to the proof of stake concept, the “weight” of the vote and the amount of the validator’s reward are determined by the value of the coins in the stake. Eth2 specifications stipulate that each validator must have 32 ETH. If more than 32 ETH is received in the contract, then the staker does not receive a reward from these additional coins. If there are less than 32 ETH coins, the staker will not be activated. Therefore, you will need to transfer ETH to Eth2 in portions of 32 coins. Each portion of 32 ETH can be a separate staker.
How will the issue of coins look like?

Ethereum will continue to operate on a Proof-of-Work basis, while Eth2 will operate on a Proof-of-Stake basis.

During this period, both groups of validators, miners, and stakers will receive rewards, so the Ethereum inflation rate will rise — at least until the two systems merge.
The emission level of Eth2 will depend on the number of tokens involved in the staking process. The annual emission level will be based on an algorithm in which Eth2 is the number of Ethereum tokens involved in the Proof-of-Stake validation pool.

Inflation rate in Ethereum 2.0

The rate of issue determines the amount of remuneration. The award aims to motivate users to move coins to Eth2 and to steak. The reward will decrease in proportion to the number of coins being moved, as Eth2’s success will reduce the need for them. Such a model can ensure that the number of coins moved is sufficient to significantly increase the size of the network; at the same time, the emission will not become too high if Eth2

How will the blockchain merger take place?

In the future, Eth1 and Eth2 may merge back into one system in a few years. In fact, Eth1 will become a shard inside Eth2, which will allow Ethereum to move between shards in both directions, and the two coins will merge into one. Presumably, most of the economic activity currently taking place on Eth1 will continue to take place inside the Eth2 shard.

The next step could be the merging of consensus systems. The Eth1 shard can gradually move to Proof-of-Stake.

Proof-of-Work can continue working, but after a given number of blocks — for example, after every 100 blocks — the block’s consensus will determine the Proof-of-Stake. In the end, it will be possible to completely abandon Proof-of-Work: the rewards for the Proof-of-Work block will become unnecessary. This will give Ethereum users and investors more certainty regarding the inflation timeline.

What are the prospects for Ethereum 2.0?

Ethereum holders tend to experiment with sophisticated new systems — DAO, Maker, DeFi.

Some members of the Ethereum community are concerned that Ethereum technology has been around for five years, but still lags behind, so they think new technologies are needed.
Ethereum 2.0 satisfies the community’s demand for new ideas, and it is possible to look forward to a significant influx of funds and staking rewards (possibly billions of dollars in ETH).

Synthetic Assets in DeFi: A Comprehensive Guide

ZILD — Thu, 05 Nov 2020 19:34:08 +0000

The market of crypto-synthetic assets has been steadily gaining traction. According to the latest available estimates, there is more than $69 million locked in synthetic derivative contracts. To understand this growing importance of synthetic assets, we have to take a step back and find out what synthetic assets are and how they are relevant to the world of crypto.

Synthetic Assets

In the traditional world of finance, the term synthetic assets refer to a combination of assets that bear the same value as another asset. Generally, the assets that are combined belong to the derivative asset class. These derivative products can be options, futures, or swaps. The combination of these derivative products follows the value of an altogether different asset class. These underlying assets can be stocks, bonds, commodities, indexes, currencies, or interest rates.

Let’s try to understand this phenomenon with a real-life example. Suppose a trading firm has not directly purchased a stock. Instead, what it has done is, it has purchased a call option on the stock and then sold a put option on the same stock. Through this strategy, although the investment firm is following the value of the stock, it is diversifying the risk associated with stock among two different assets.

Synthetic Assets in the World of Cryptocurrency

Crypto synthetic assets follow the philosophy and deploy the same strategy. Crypto-synthetic assets offer investors exposure to other types of assets without actually holding them. These other types of assets can be instruments of traditional finance such as currency or commodities or index funds. They can be other types of digital assets as well.

The holders of crypto-synthetic assets hold these assets in a tokenized form. What it means is that the investors hold tokens whose value follows the value of assets belonging to a different class. This helps investors to expand their investment avenues without having to leave the domain of cryptocurrency. Moreover, crypto-synthetic assets also enjoy all the benefits associated with a decentralized financial system. These benefits include the deployment of smart contracts, a secure environment of a decentralized system, and the facilities that come with the distributed ledger technology.

Synthetics in DeFi: Use Cases and Key Players

Crypto-synthetic assets have found a wide range of applications. Here, we will try to look at some of the most prominent use cases.

Abra

Here, fiat currencies are converted into crypto assets. In other words, the price of the crypto asset is pegged with a different asset class, the fiat currency in this case. Let us try to understand this with an example.

Suppose, an Abra user has deposited $1000 in his wallet. Upon receiving this fund, Abra will immediately convert the fiat currency into a cryptocurrency of equivalent worth. The cryptocurrency is bitcoin in this case. If the price of bitcoin at the time of depositing the fund was $10,000 per coin, the thousand dollar worth of funds would become 0.1 BTC in the wallet. The price of the BTC will now follow the value of USD. Therefore, the user is taking a short position on bitcoin and a long position on the USD. Abra is taking the reverse position. A long position on bitcoin and a short position on the currency.

MakerDAO

MakerDAO is somewhat similar to Abra in its approach. In the case of MakerDAO, investors use Ethereum as collateral. In exchange for keeping Ethereum as collateral, Maker DAO offers an opportunity to mint a synthetic asset named Dai. The value of this synthetic asset follows the value of US dollars. In effect, the holders of crypto assets, which is Ethereum in this case, get exposure to the price fluctuations of USD.

UMA

UMA creates provision for a two-party agreement where one goes short and the other goes long on the same asset. Suppose X and Y have agreed on the expected price of an asset. X believes the value of the asset will go down and therefore goes short on it. Y believes that the value of the asset will go up and therefore goes long on it. Both parties create a smart contract to agree on this. It is called a UMA smart contract. Both parties also deposit the agreed percentage of the margin requirement. After the duration of the agreement, if both parties have correctly followed the margin-terms mentioned on the smart contract, the contract is settled immediately.
In UMA, Ethereum is thus used to trade on a variety of other types of assets.

Market Protocol

Market Protocol helps create position tokens for crypto investors who can not trade in high-value assets. By depositing collateral, any investor can mint position tokens from Market Protocol. The collateral remains intact on the blockchain for the duration of the trade. Once the investor gets hold of the position tokens, she can use them on any exchange or application. The investor can exit the trade by trading it with another user or she can wait for the position to expire. Trading in the market protocol involves no margin calls. It is always solvent and offers safe leverage.

Rainbow Network

It offers an off-chain non-custodial exchange as well as a payment network that supports any liquid asset. A user can trade, lend, borrow, send, and receive any liquid asset through a singular on-chain payment channel. The on-chain payment channel uses a single asset as collateral. All the transactions happen off-chain.

The project is called the Rainbow network because it is comprised of Rainbow channels, a variant of payment channels. In the Rainbow channels, the computation of the settlement balances is based on the prices of the other assets.
The advantage of a Rainbow channel is that it supports both long and short positions on any asset as long as the participants agree on a price oracle.

Synthetix

One of the most popular projects in the world of crypto-synthetic assets is Synthetix. Synthetix is a combination of an issuance platform, a collateral type, and an exchange. It offers users the facility to mint synthetic assets. The users put up collaterals to mint one. These minted synthetic assets can then be exchanged for another type of synthetic asset. This exchange is moderated by a price oracle. The uniqueness of Synthetix is that there is no counterparty to this exchange. Instead, what the user does is repricing the collateral as per the price oracle.

The Advantages of Synthetic Assets

Now that we have got an overview of how crypto-synthetic assets are put to use, let us try to understand why these assets are gaining ground so quickly. Crypto-synthetic assets help the world of DeFi to chain real-world assets in a way that is credible and trustworthy.

The world of DeFi lacks financial instruments. Investors in the traditional world of finance enjoy a lot of financial instruments. Resultingly, they can deploy a variety of strategies with different combinations of these instruments. Synthetic assets in the DeFi environment help extend the availability of financial instruments and investment strategies. This results in better risk management and an increased volume of trading. Increased trading volume improves liquidity.

Synthetic assets also help to mitigate challenges associated with weak cross-chain communication protocols. The DeFi environment still suffers from these issues. But, with the help of synthetic assets, users can trade in assets without having to own them.

The popularity of crypto trading has still been restricted to crypto enthusiasts and within the group of people who are well-aware of the DeFi environment. Synthetic assets help to overcome this limitation. People who have traditional fiat currencies to invest in or people who want to participate in the traditional market can now do so without having to leave the blockchain environment. This facility helps to expand the user base for cryptocurrency overall.

Conclusion

Crypto synthetic assets are only going to get bigger in market value in the days to come. The opportunities to mitigate risks by deploying a wide range of investment strategies on a diverse set of assets is going to prove useful. It will encourage existing crypto-investors to trade in increased volume and pull in traditional investors to the world of decentralized finance.
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What is Binance Smart Chain?

ZILD — Mon, 02 Nov 2020 15:51:54 +0000

Binance Holdings Ltd not only operates a leading cryptocurrency exchange, but is also developing other promising distributed ledger technologies. One of the most popular functions is an algorithm for automatically fulfilling the terms of a commercial transaction, or, speaking about another, a smart contract. Until now, the Ethereum project was in the lead in this area and all other blockchains working with smart contracts lagged behind it. But after Changpeng Zhao’s team launched the modified blockchain on Ethereum, a very serious competitor emerged. In this review, we will tell you about the features and main advantages of the new service.

The difference between Binance Chain and Binance Smart Chain

The Binance Chain launched last spring to issue and exchange tokens. The digital fuel of the chain is the BNB cryptocurrency. Binance Chain has high bandwidth but is not suitable for dApps development. Therefore, Binance specialists launched a new Binance Smart Chain network. It works in parallel with the main blockchain, is completely autonomous and compatible with the Ethereum virtual machine. In contrast to the core network, a full-fledged working environment is available here for the release of decentralized applications, while maintaining high throughput and reliability. The time to create a block in a new network is approximately 5 seconds, which ensures efficient trading for users.

Programmers can migrate their already released apps from the Ethereum blockchain. Even if all projects do this at the same time, they will not be able to significantly slow down the ecosystem, which is very important when performing financial transactions. Thanks to cross-chain compatibility, the new network allows for the transfer of assets between chains. The internal Smart Chain BNB token is used to pay fees when launching smart contracts and dApps.

How Binance Smart Chain Works

BNB will work for BSC in the same way that ETH works for Ethereum, so it will remain a “native token” for both BSC and BC. Clients can use internal BNBs to:

• Fees for deploying smart contracts on BSC;
• Bets on selected validators;
• Performing cross-chain operations.

When a new branch was launched, a certain amount of BNB was burned on BC and then minted on BSC. This is how a start-up fund was created to support the network. Assets are used to pay transaction fees to reallocate BNB between BC and BSC networks using a cross-chain mechanism.

BSC uses the Proof of Staked Authority consensus algorithm. Validators place bets in BNB tokens to participate in block creation. The protocol does not provide for block subsidies of BNB, that is, when creating new blocks, trusted nodes do not receive a dime, being content only with transaction processing fees. To prevent inflation, the Binance team regularly buys and burns coins.

BSC can work with the Ethereum blockchain, and ERC20 tokens, which are designated BEP2E in the new Binance network. BSC and BC work synchronously so that one token can be used in both formats. BEP2 tokens will be expanded to accommodate a new attribute to link the token to the BSC BEP2E contract. Issuers can either create BEP2 first or BEP2E and they can be linked later. All issuers are encouraged to set the peg immediately upon release.

Binance Chain has piebald tokens backed by cryptoassets BTC, LTC, ETH, EOS or Ripple. The extensive functionality of Binance Smart Chain allows not only exchanging crypto coins, but also investing them in DeFi projects or using them when voting.

Conclusion

Binance Smart Chain will drive the evolution of decentralized financial services. DeFi interoperability will be improved through cross-chain mechanisms.
Users will be able to earn income through staking BNB cryptocurrency, or participating in DeFi projects. The money earned can be withdrawn to the Binance exchange or converted through the Panama service.

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Risk Management in DeFi: Yield Farming

ZILD — Sun, 25 Oct 2020 13:55:05 +0000

Yield farming, also known as liquidity mining, is gaining popularity in the cryptocurrency industry. It includes receiving reward tokens in exchange for blocking or placing cryptocurrency. The concept of growing crops came from the decentralized finance (DeFi) space. As the DeFi space began to gain traction, the concept of growing crops is gaining attention in the cryptocurrency industry.

The growing popularity has led to the emergence of various projects offering the return of rewards in the form of new cryptocurrency tokens by growing crops. However, while there are certain benefits to rewards, farming carries risks and dangers. In this article, we explore the basics of growing a crop and the risks it poses for crypto farmers.

How is that related to DeFi?

Decentralized finance includes an ecosystem of blockchain applications in the banking and financial sector. One of the DeFi applications is lending and asset borrowing. Using a profitable farm, users can lend their crypto assets to various DeFi projects and in return receive rewards in the form of their own cryptocurrency tokens.

A crypto farmer can invest their cryptocurrencies such as Ethereum in DeFi projects and receive interest, rewards or bonuses. However, while the concept seems simple, it carries a fair amount of risk later on. Moreover, if the farmer growing the crop is not careful, he could subsequently lose his crypto assets.

Liquidation Risks

Cryptocurrency assets are inherently volatile. Massive and sudden drops in crypto asset prices are common in the industry. Borrowing secured assets from different platforms such as Compound or Aave could void your collateral. Due to the volatility of cryptocurrencies, your assets can be liquidated in case they no longer cover your loan.

Alternatively, even if your loan amount increases, it could lead to the liquidation of the cryptocurrency asset that you have held as collateral in exchange for borrowing.
To avoid liquidation risks in relation to farm yields, borrow or supply assets with lower volatility. Stablecoins like Tether carry less risk even if liquidated.

Impermanent Loss

In liquidity mining, farmers provide liquidity to pools like Uniswap and in turn receive income from decentralized exchange fees. Hence, liquidity providers provide liquidity in the form of crypto assets to the DeFi protocols in exchange for a return.

However, in some cases, the farmer growing the crop may lose money compared to owning the asset. Uniswap also considers this to be a volatile loss due to the divergence of prices for cryptocurrency assets.

Smart contract risks

Another danger of farming is the risk of exploitation in the code of smart contracts. Crop farming involves the provision of your funds in the form of a smart contract that automatically works in accordance with predetermined factors. However, if a DeFi protocol smart contract is hacked or used, an attacker can manipulate the project. This can lead to the loss of your cryptocurrency asset.

According to a recent survey, almost 40% of DeFi users fail to understand smart contracts used in protocols. The unaudited smart contract code has even led to attacks on various DeFi projects. One recent example of such an attack is Yam Finance.
While the project raised nearly $400 million in DeFi tokens, the value of its own token dropped to zero when a major flaw was discovered in its smart contract code. Such security threats and unaudited smart contract code carry risks when growing crops.

Conclusion

While there is no doubt that there are potential benefits from productive agriculture, there are a number of challenges that remain to be addressed. One of the challenges in this area is the scalability of the Ethereum blockchain. Since most DeFi apps are built on Ethereum, this has resulted in transaction clogging and gas charges.

The field of profitable farming and decentralized finance is relatively new. It certainly fosters innovation in the financial ecosystem with a variety of applications. However, it may take testing and time before it is optimized for the best use.

That’s why it is of high importance to rely on securely designed, incentive-tailoved and transparent protocols, as Zild Finance. Check out our website.