BLOCKCHAIN: New market or new tech?

Let’s answer the question straight away: Blockchain is both what is called a “new market” and a new technological instrument at the same time. In order to understand why and how, we’re gonna explore both aspects in two articles, starting with this one.

GOLD RUSH 3.0

The most known face of the Blockchain is the market one, be it speculative or not. It’s called a “new market” even tho it’s not really that new: the first and most famous asset on the Blockchain is Bitcoin, born in August 2008, when the first paper, titled Bitcoin: A Peer-to-Peer Electronic Cash System was released by an unknown individual answering to the name of Satoshi Nakamoto.
Bitcoin was officially born as a new payment system, completely peer to peer and decentralized, living in the Bitcoin Blockchain. What made it (and still does) special is the total absence of a centralized entity controlling emission and distribution of this new kind of value.

That’s where the concept of Blockchain shines: being the system decentralized, to make sure everything is working correctly and ensure the absence of bad actors, Bitcoin transactions are written into a ledger (from here the derivation of the main concept – DLT – Distributed ledger technology) clustered into blocks.

Miners have the role to solve machine-generated cryptographic problems to create the most efficient block, picking the transactions from what is called the Memory Pool. Once a block is solved by a miner, it gets copied by all the nodes in the blockchain, ensuring that there is only one reality, and the system is ready to accept the next block.

Without spending too much time on the tech – it will be explained thoroughly in another post – the fact that anyone can become a miner and actually gain Bitcoin just mining blocks started the gold rush, that itself evolved a lot, up to today where we can see a lot of different blockchains with completely different working mechanisms.

DEEP MARKET

Nowadays, Bitcoin mining is something that only big server farms can profit from due to the highly competitive market. That led the majority of actors in the space to be traders instead of miners.

Once Bitcoin started gaining popularity, it was clear that Bitcoin and all the other cryptocurrencies were about to be treated like regular market assets.

In order to allow this, a new kind of platform arised: Centralized Exchanges (CEX), places where everyone is able to buy and sell different types of cryptocurrencies.

CEXs work like the regular trading platform: once a user deposits FIAT is able to spend them to buy cryptocurrencies, to swap a token for another one, or to sell a token back to FIAT.

Even if it goes against the concept of decentralization, CEXs proved themselves necessary in order to favor adoption, virtualizing the trades of cryptocurrencies in order to make them instantaneous.

DeFi: getting back the decentralization

Everything changed with the introduction of Ethereum, the second biggest cryptocurrency in the market.
Opposed to Bitcoin, Ethereum allows the execution of softwares in the form of Smart Contracts, treating execution of functions the same way that transactions are treated.

This allowed the creation of Swap Protocols and AMMs (Automated Market Makers), creating a new way to trade cryptocurrencies in a completely decentralized way.

Decentralized Finance was born, working completely differently from the regular CEXs people were used to.

Transactions are not executed one by one, but are inserted into blocks in order to be approved: that creates a delay from placing an order to getting it filled, with all the issues that could arise (eg: arbitraging, frontrunning).

In conclusion, there are different ways to enter the Cryptocurrencies market, all of them sharing one key aspect: it could be very rewarding, but at the same time it could also be very dangerous.

Volatility is extremely high in a not-completely regulated market and being it still a far west, the risks associated with it are very high.

To cite a couple of recent events happened, the rise and fall of Luna and UST and the insolvency of FTX (one of the biggest CEX) shows like cryptocurrencies market is still extremely illiquid, and timing the market has been proven to be even harder than the regular stock market.

DISCLAIMER: Nothing written in this article is financial advice. Trading cryptocurrencies (and trading in general) is an extremely risky operations and should be done only once a full comprehension of all the mechanism and risk associated with it has been acquired. Trade at your own risk.

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To get a better understanding, even though a bit more technical, there’s a fantastic article written by Dan Robinson and Georgios Konstantopoulos – Ethereum is a Dark Forest. https://www.paradigm.xyz/2020/08/ethereum-is-a-dark-forest

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