Howdy, fellow DailyCoiners,In today’s newsletter, we're going to clear up some things you've probably heard of but might not completely understand.

Without further ado, let’s uncover what they mean.

• Understanding Yield Farming

• A Quick Guide to Stablecoin Types

• What are Wrapped Tokens?

Understanding Yield Farming in Decentralized Finance

Yield farming is a practice in decentralized finance (DeFi) that involves staking or lending crypto assets to generate high returns or rewards as additional cryptocurrency.

Incentivizing liquidity providers (LPs) to stake their assets in smart contract-based liquidity pools, these protocols offer annual percentage yields (APY) returns.

Liquidity mining rewards participants with tokens in addition to interest and fees.These “governance” tokens can be traded on both centralized and decentralized exchanges, such as Binance and Uniswap.

As more investors contribute to liquidity pools, the value of issued returns decreases, illustrating yield farming's dynamic and volatile nature.Despite the risks, yield farming has significantly contributed to DeFi's rapid growth and adoption.

A Quick Guide to Stablecoin Types

Stablecoins are commonplace in the cryptosphere now, but what’s the difference between them?

Fiat-Backed Stablecoins:

• Fiat-backed stablecoins are cryptocurrencies pegged to real-world currencies, typically in a one-to-one ratio. 

• The issuer maintains stability by holding fiat currency as collateral in a financial institution. Common examples include Tether (USDT) and USD Coin (USDC).

Commodity-Backed Stablecoins:

• These stablecoins use commodities like gold, real estate, or metals as collateral. 

• Gold is often preferred, with examples like Paxos Gold (PAXG) and Tether Gold (xAUT). 

• Commodity-backed stablecoins enable holders to participate in the commodity market without the challenges of physical ownership.

Crypto-Backed Stablecoins:

• Crypto-backed stablecoins use one or more cryptocurrencies as collateral, employing smart contracts to lock in reserves rather than relying on central financial institutions. 

• Buyers lock their original cryptocurrency in a smart contract to receive an equivalent amount in stablecoins, with DAI and DJED being popular examples.

Algorithmic Stablecoins:

• These stablecoins use algorithms to control supply and circulation, achieving stability without collateral. 

• New tokens are issued to increase supply and reduce the price when the price exceeds the target or the tracked fiat currency. 

• Conversely, token issuance ceases when the price falls below the target, raising the price by limiting supply.

Wrapped Tokens: Unlocking Cross-Chain Functionality

Wrapped tokens are digital assets that represent the value of an original cryptocurrency from a different blockchain or follow a different token standard.

They enable users to utilize assets from one chain on another, such as Wrapped Bitcoin (WBTC) and Wrapped Ether (WETH).

For example, to use Bitcoin (BTC) on Ethereum's blockchain, users can deposit BTC into the Wrapped Bitcoin Network and receive WBTC, an ERC-20 token, in their Ethereum wallet. 

This wrapped token represents the original value of the deposited BTC and can be used across Ethereum-based decentralized applications supporting WBTC transactions.

Wrapped tokens are created by minting a new token, deriving its value from an underlying digital asset. 

The process involves three types of entities:

1. Merchants: Lock BTC to mint new WBTC on Ethereum or burn WBTC to release locked BTC.

2. Custodians: Secure BTC reserves on the Bitcoin network.

3. Wrapped Tokens DAO: A decentralized autonomous organization (DAO) consisting of multiple organizations that collectively decide on custodians and merchants for the WBTC Network. They use a multi-signature wallet to make these decisions.

In summary, wrapped tokens facilitate cross-chain functionality, allowing users to benefit from the features of various blockchains while maintaining the value of their original cryptocurrency.

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