Terra Ecosystem and Ethereum Standards

Blockchains and Cybersecurity

• Blockchains use consensus mechanisms or consensus algorithms to function.
• Without a consensus mechanism, blockchains cannot function.
• Consensus protocols consist of rules, agreed upon by valid nodes, that govern and maintain the blockchain.
• The protocols help validate transactions.
• Types of consensus protocols include Proof of Work (PoW), Proof of Stake (PoS), Delegated Proof of Stake (DPoS), Proof of Capacity (PoC), Proof of Authority (PoA), and Proof of History (PoH).

Consensus Protocols

• Proof of Work (PoW) is a widely used method for generating consensus, employing computationally intensive problems.

• PoW protects blockchains from Sybil attacks.

• PoW uses substantial energy; Bitcoin's energy consumption is comparable to countries like Ireland or Switzerland.

• Cryptocurrencies using PoW include Bitcoin, Litecoin, Monero, Ethereum Classic, Dash, BCH, BSV, Zcash, and Dogecoin.

• Proof of Stake (PoS) validates transactions through node participation that pledge crypto tokens. Selection of validators often depends on the protocol, with more staked tokens having a higher chance of validation.

• PoS blockchains include Ethereum (as of 2022), Polkadot, Cardano, Flow, and Polygon.

• PoS does not require high energy consumption like PoW.

• Staking crypto tokens for longer periods can increase the chance of earning transaction fees.

• Failure to correctly validate the blockchain can result in losing staked coins.

• Offending validators can be ejected based on their protocol's mechanisms.

Delegated Proof of Stake (DPoS)

• DPoS is similar to PoS with voters selecting delegates to validate transactions.
• Voting for delegates is directly related to their algorithmic reputation.
• DPoS is more power efficient than PoS.
• DPoS is more centralized than other consensus mechanisms.
• Examples of blockchains using DPoS are EOS, Tezos, Steem, Tron, and Lisk.

Proof of Capacity (PoC)

• PoC leverages hard disk capacity to validate transactions and maintain the blockchain.
• Examples of networks using this protocol include Chia BHD (Bitcoin HD), Burst, and Storj.
• PoC benefits from high energy efficiency and low entry to mine (relative to GPU's and ASIC's).
• A disadvantage is lack of developer support and susceptibility to malware.

Proof of Authority (PoA)

• PoA is often used in private blockchains.
• The reputation of participants is at stake, and the protocol chooses a limited number of validators.
• PoA usually requires little computing power, reducing the risks of attacks.
• Projects using PoA's include BNB (utilizing a mix of PoS and PoA called PoSA), Hyperledger projects, and Microsoft Azure in SCM.

Proof of History (PoH)

• PoH is a novel consensus algorithm using an internal synchronization mechanism.
• It eliminates the need for external sources to determine median time across participating nodes.
• Outcomes include faster transaction processing and lower transaction costs.
• Examples of this approach include Solano, which combines PoS and PoH.

Solana (SOL)

• Solana (SOL) uses a PoS and PoH consensus protocol.
• Block creation is 400ms.
• It supports over 700,000 transactions per second (TPS).
• Solana uses RUST for dapps, enabling parallel processing and customization.
• The platform is relatively new but has a growing ecosystem compared to some existing alternatives.
• Solana is considered to be inflationary and deflationary. It rewards token stakers with additional SOL while also burning a portion of fees back into the marketplace.

Directed Acyclic Graphs (DAGs)

• DAGs are a specific type of data structure where nodes represent data, and directed edges represent relationships between nodes.
• DAGs do not form a linear chain unlike blockchains, allowing nodes to reference multiple previous nodes.
• Examples of protocols include IOTA (Tangle) and Hedera (Hashgraph).
• DAGs offer the potential for faster transaction processing and high scalability.

Avalanche (AVAX)

• Avalanche (AVAX) is used to build and run decentralized applications (dapps) on its network using a novel consensus mechanism combining PoS and DAGs.
• It is much faster than other ETH networks.
• Its supply is set to 720 million AVAX with deflationary mechanisms.
• Subnets can support different consensus protocols.
• It competes directly with established blockchain platforms, notably Ethereum (ETH), BNB (BNB), etc.

Bitcoin (BTC) & Satoshi (SATS)

• Bitcoin's smallest unit is Satoshi, often abbreviated as sats.
• Sats are similar to the concept of fils to the Dinar.
• One Bitcoin (BTC) is equal to 100,000,000 Satoshis (SATS).
• The equivalent of one dollar is roughly 4000 satoshis.

Crypto Faucets

• Crypto faucets award small rewards, such as satoshis, for completing tasks like watching ads, completing surveys, or referring friends.
• Some websites may require a minimum withdrawal threshold.
• Be mindful that some faucets might be scams that could result in malware installation on the user's devices.

Mempool

• Mempool is a temporary storage location for unconfirmed transactions waiting to be processed and added to newly minted blocks within the blockchain network's activity.
• Transactions are prioritized and ordered in the mempool.
• Bitcoin nodes maintain their synchronized mempool status with other nodes.

Ethereum Gwei

• The smallest unit of ETH is Wei.
• One Gwei is equivalent to 1 billion Wei (1 Gwei = 1,000,000,000 Wei).
• One ETH is equivalent to 1 billion Gwei (1 ETH = 1,000,000,000 Gwei).

Gas

• Gas measures computation processing in the blockchain, typically paid in ETH or Wei, by smart contracts.
• Each transaction incurs gas fees that reflect the resources needed to execute actions within the network.
• The fee is dependent on execution outcome (success or failure), with base fees plus any priority fees, and the impact of network congestion.

ERC (Ethereum Request for Comment)

• ERC are proposed standards for adding or changing to the Ethereum blockchain.
• The process of reviewing and approving ERC's is handled via Ethereum Improvement Proposals (EIP).
• ERC-20 introduced standards for fungible tokens, and ERC-721 established the foundation for Non-Fungible Tokens (NFTs).
• These standards are intended to ease the understanding and development workload for developers interacting with the blockchain environment.

ERC-721 NFTs

• ERC-721 is a standard for Non-Fungible Tokens (NFTs).
• ERC-721 tokens are unique and cannot be used in Automated Market Makers (AMMs) liquidity pools as they are not fungible.
• They represent real or virtual assets.
• Proof of ownership can be verified on the blockchain.
• Unique value and the ability to trade in NFT-specific P2P marketplaces are core characteristics.

ERC-1155 NFTs

• ERC-1155 allows the minting of multiple tokens using a single smart contract.
• It encompasses both fungible and non-fungible tokens.
• Compared to ERC-721, it is usually less expensive to process and requires less storage, and capable of detecting the token's interface.
• This has implications for various digital token applications including but not limited to: the tokenization of physical assets and accessibility solutions for more users.

ERC-404

• ERC-404 is a standard enabling the merging of Non-Fungible Tokens (NFTs) and Fungibility.
• It enables the burning of original NFTs to create smaller ERC-404 tokens, each representing a fraction of the initial asset.
• This provides opportunities for fractional ownership or diversification of NFT investments.
• Challenges include limitations in scalability and regulation.

NFT Marketplaces

• Various marketplaces, both general and specific, exist for buying and selling NFTs.
• General marketplaces often host unique digital art works.
• Exclusive marketplaces specialize in specific dapps, such as NBA Top Shot or Axie Marketplace, providing access to special NFTs for particular purposes.

OpenSea

• OpenSea is a prominent NFT marketplace known for its volume of trades.
• Transaction fees are typically 2.5%.
• It operates across Ethereum, Solana, and Polygon blockchains.
• It offers a large selection of NFTs and a straightforward minting process.
• Issues include spam and scam activities.

Hype of NFT - Beeple Art Deal

• Beeple's "Everydays: The First 5000 Days" artwork, which involved consistent daily creations, garnered significant attention and set a record for an NFT transaction in 2021.
• The artist sold it for USD 69 million.
• The buyer, Metakovan, also gained the exclusive rights to a virtual museum showcasing all of Beeple's artworks through a unique cryptocurrency token (B.20).

Larva Lab

• Larva Labs is a platform for buying and selling CryptoPunks and Meebits.
• It is based on the Ethereum blockchain and does not charge service fees.
• Its reputation suffered due to the controversy surrounding V1 CryptoPunks, as the platform had to issue new tokens after discovering a significant coding error in the initial NFT creation (V1). The new tokens are referred to as V2.

V1 CryptoPunks Controversy

• Larva Lab issued approximately 10,000 crypto-punks initially.
• A coding error allowed early purchasers to remove their payments, enabling them to acquire an NFT without paying for it.
• In response, Larva Labs discontinued the initial 10,000 NFTs and assigned new tokens for the same collection, known as V2.
• This was contentious as one of the founders sold a significant amount of the original V1 tokens before the issue was publicly acknowledged.

Criticism of NFTs

• Hype and attention surrounding NFTs have been described as "on steroids" relative to comparison markets.
• The unregulated nature of the market opens up potential for fraudulent activities.
• Confusion exists on ownership and intellectual property rights in some instances.
• Existing security concerns involve risks of counterfeit assets and fraud.

Burning Fees

• Burning base fees serves dual purposes: limiting the supply of cryptocurrency and mitigating improper manipulation of the network.
• Higher priority fees provide preferential execution precedence for transactions compared to other transactions.

Are cryptocurrencies decentralized?

• Global company investment in Bitcoin mining and deployments impacts decentralization.
• The controversial 'The DAO' reversal represents issues with crypto decentralization.
• Crypto "whales" (entities controlling substantial amounts of a cryptocurrency) can influence market prices significantly during trading.
• The probability of a single entity mining a Bitcoin block is extremely low.

Crypto Arbitrage

• Arbitrage is profiting from price discrepancies in various crypto markets.
• Usually, automated algorithms conduct crypto arbitrage.
• Significant trading volume is required to realize profits from the often minuscule price disparities between crypto exchanges.
• FTX's early wealth is an example of a company profiting from such activities.

Oracles

• Oracles function outside the blockchain (off-chain) providing data to smart contracts.
• Data input can come from various sources (hardware: NFC, RFID, human expertise, software: stock markets, websites).
• The trusted third-party nature of this data collection method is a frequent topic of debate.
• Issues can be present when relying on a single point of failure Oracle (e.g. Chainlink).

Chainlink (LINK)

• Chainlink aims to decentralize data access for smart contracts by enabling the exchange of data between on- and off-chain environments.
• It utilizes oracles and a specific consensus protocol (PoS).
• The platform's inherent reliance on the security of its oracles is a consistent issue, especially when concerning spam attacks.
• The maximum supply of Chainlink tokens (LINK) is set at 1 billion, and its current circulating supply accounts for approximately half.
• The token is considered non-inflationary, with two main functions encompassing blockchain activity regulation and charging applications requesting data access, respectively.

Bitcoin Problems

• In 2010 during the Bitcoin blockchain's development, a large numerical calculation error resulted in a very high number of bitcoins allocated to some users (92.2 billion each).
• To address this, the cryptocurrency network corrected the error through a soft fork solution, which was implemented without widespread disruption or failure to the blockchain's operation.

Bitcoin Taproot Upgrade

• Bitcoin Taproot is a 2021 soft-fork upgrade.
• It's the first significant upgrade since Bitcoin's inception.
• It enhances and allows smart contract functionality, despite limits in computation power compared to Ethereum's Turing-complete capabilities.
• Efficiency and scalability improvements are present in the format, including features like multiple signatures and time-locked transactions.
• Transaction sizes have been reduced for improved efficiency, but anonymity is not included in the functionality.

Proof of Reserve (PoR)

• PoR (Proof of Reserve) is a regulatory mechanism for verifying and ensuring the balance of assets in cryptocurrency exchanges.
• It enhances the trustworthiness of crypto exchanges by ensuring that deposits match their actual balances.
• Third-party audits play a crucial role in verifying the authenticity and accuracy of PoR.

Financial Modeling for Cryptocurrencies

• Cryptocurrencies, due to volatility, require unique valuation techniques.

• Three-statement modeling (using income statements, balance sheets, and cash flow statements) forms the foundation of valuation in general

• Various extensions of financial modeling techniques exist to assess mergers and acquisitions, IPO valuations, and option pricing in the dynamic cryptocurrency market.

Dead Cryptocurrencies

• Dead cryptocurrencies are those no longer actively maintained and developed, often due to scams, insecurity, lack of funding, and community support issues, or lack of developer efforts.

Merkle Trees

• Merkle trees provide an efficient method of validating and verifying data or file integrity in a decentralized system.
• They leverage hashing to transform unconstrained data to uniformly sized data, making it simpler to detect any alterations or errors.
• The approach relies on the characteristic where any change/modification to the hashed data will result in a different hash calculation, which can then be used to validate data integrity.

Crypto Mixers

• Crypto mixers (also called crypto tumblers) are applications that receive various crypto deposits and provide a cryptographic proof, facilitating the transfer of the funds into an unidentifiable account.
• They are often used for obfuscating transactions and are frequently associated with illicit activities, such as money laundering, making them regulated by monetary institutions.
• Examples include Tornado Cash and Blender, both of which have faced sanctions and are no longer operational.

Flash Loans

• Flash loans are temporary loans facilitated using decentralized exchanges, without collateral.
• They are frequently used for trading arbitrage and in flash loan attacks.
• Pancake Bunny hack is an example of this attack methodology.

Decentralized Exchanges (DEXs)

• DEXs enable direct user interaction with smart contracts within the blockchain, removing intermediaries and preserving assets in user wallets.
• Different types of DEXs exist; including Order book-based DEXs and Automated Market Makers (AMM) DEXs.
• Advantages include potential for higher returns, increased privacy, and censorship resistance along with unrestricted token accessibility.
• Drawbacks include limited liquidity availability, increased complexity for users, and lack of strong regulatory guidelines.

Liquidity Pools (LPs)

• LPs within DEXs provide liquidity for cryptocurrency exchanges and are a DeFi alternative to centralized exchanges.
• Earnings from transaction fees are shared among users that have staked their cryptocurrencies.
• An example is pairing USDT:ETH, which may assist in regulating the price of the two based on trading.

AMM Takeaways

• AMM (Automated Market Makers) algorithms aim for a 50% to 50% cryptocurrency pairing.
• This even-split process should be reflected in the price and amount of crypto in the LP (Liquidity pool).
• The price difference between deposited and received tokens following transactions is a common concern.
• Achieving price equilibrium within the Liquidity Pool (LP) presents a necessary function to avoid destabilizing the system.

DAO: Decentralized Autonomous Organizations

• DAOs are organizations built on smart contracts, utilizing tokenized governance and voting for decision-making.
• Alignment of vested interests is critical for DAO success, requiring transparency and accountability.
• Examples include MakerDAO (using AMMs to peg USD to its token DAI) and Uniswap as a DEX.

DAO Challenges

• Legal ambiguity often restricts or complicates DAO activities.
• Low voting rates can hamper or limit the progress or scope of DAO development.
• Lack of accountability can be an issue.
• DAOs can potentially suffer a loss of effectiveness or efficacy if they remain overly reliant on human input for major decision-making.
• Some well-known examples of DAO issues include failures of projects such as The DAO and OlympusDAO.

Yield Farming

• Yield farming is a cryptocurrency method for passive income generation by locking cryptocurrencies within DeFi protocols.

• It incentivizes decentralization of liquidity provision within the community.

• Liquidity providers are often compensated by earning interest and percentages on trading fees.

• This strategy is susceptible to impermanent loss through DeFi protocol hacks or market volatility. It also requires constant monitoring and understanding of underlying DeFi protocols.

DeFi Protocol Risk – Reentrancy Attack

• Reentrancy attacks are prevalent in Ethereum-based DeFi dapps and can compromise a significant proportion of funds in circulation.
• Various popular platforms have faced these attacks in the past.
• Reentrancy attacks involve exploiting vulnerability in the code allowing malicious smart contract execution. Repeat calls for withdrawal are executed before the victim’s balance is updated and often resulting in substantial loss of funds.

Stable Coins

• A stable coin is a crypto asset pegged to a stable asset, often a fiat currency or precious metal.
• They aim to minimize the volatility present in the cryptocurrency market.
• Fiat-backed, crypto-backed, and algorithmic stablecoin models exist in the market.

Reentrancy Attack

• Reentrancy attack exploits Solidity-based DeFi smart contracts by engaging in repetitive transactions.
• It happens when a malicious smart contract transacts with another smart contract.
• The attacker is capable of withdrawing funds before the target contract can update its internal balance.
• This behavior can deplete the target contract's balance recursively, impacting the security and trust of the system.

Mango Market

• Mango Market is a decentralized finance (DeFi) trading platform built on the Solana network.
• It operates through a DAO (Decentralized Autonomous Organization), without intermediaries, and employs native tokens (MNGO).
• A notable recent security attack exploited vulnerabilities within the platform's design rather than vulnerabilities within the code itself, demonstrating risk through oracle manipulation.

Terra-LUNA-UST Story

• Terra's algorithmic stable coin, UST, is pegged to the price of LUNA, aiming to prevent market volatility of the native currency.
• The unique aspect is that it uses an algorithm instead of fiat currency reserves to control and regulate the value.
• Initial success followed by a dramatic failure led to the devaluation and collapse of the system known as a death spiral.

Terra-LUNA-UST Aftermath

• The failure of Terra-Luna-UST resulted in a massive loss of investor capital
• Exchanged cryptocurrencies were negatively impacted, including but not limited to issues with exchange platforms (CEXs) like BNB and CZ.

Who is behind the attack?

• The identity of the perpetrator(s) behind the Terra-Luna attack remains unknown.
• Speculations include Wall Street banks, FTX, or coordinated efforts by multiple large entities.

Future of Luna?

• Do Kwon launched Luna 2.0 (a hard fork) in an effort to create a continuation of the Luna project.
• Legal actions and scrutiny continue against Do Kwon.

References

(Information based on provided slide content)

Test your knowledge on the Terra ecosystem's LUNA and UST, as well as Ethereum token standards like ERC-721 and ERC-1155. This quiz covers key mechanisms, advantages, and unique features that shape these digital currencies and token protocols. Challenge your understanding of blockchain functionality and market dynamics.