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A final example of a token is a "stablecoin". A stablecoin is a token which is kept by the issuer at a fixed price in terms of a government currency, generally the US dollar. Tether maintains a popular stablecoin known as USDT by keeping reserves matching the supply of the token. Other approaches include that used by MakerDao for its stablecoin Dai, where reserves are decentralized and take the form of tokens or Ethereum. These decentralized stablecoins are referred to as "algorithmic stablecoins". A more unfortunate example is Terra, who's algorithmic stablecoin collapsed to the tune of 60 billion dollars.
Once an ecosystem of tokens developed on the smart contract blockchains, the next step was "Decentralized Finance", or "Defi". Token holders want to do stuff with their tokens, mostly buy, sell and trade them. To a large extent, Defi consists of markets such as Uniswap where Ethereum tokens can be quickly exchanged or converted to Ether/ETH. However other financial (or pseudo-financial?) instruments of varying degrees of sophistication and marketing buzz exist. Various kinds of contracts are referred to as "staking" contracts, "liquidity pooling" is used to back decentralized token markets, and "crypto lending" is its own strange world of token economics. Here I'll endeavor to introduce the various uses of these terms and what actually happens to the crypto invested in them.
A smart contract is a collection of code that runs on a blockchain-based protocol structured to enable code execution. The most popular example is the Ethereum blockchain, but other smart-contract enabled blockchains include Polkadot, Solana, and TRON. The programs that run on a smart contract can contain essentially arbitrary code, like any computer program. There are limitations, however. There are fees associated with any type of data storage and updates. The contract cannot independently communicate with any data that doesn't have an address on its blockchain. Developers get around this latter limitation by running servers that continually update or sync the contract with external data sources, known as oracles.
Staking is a term used to refer to many forms of smart contracts, ranging from core to the crypto ecosystem to mathematically suspect gambling mechanisms. The former type of staking involves running a node (a server on a decentralized network) that processes and validates transactions to a blockchain. The "stake" is a smart contract that holds the node operator's cryptocurrency. If the node successfully and accurately validates transactions, the owner will receive rewards from the protocol based on the amount they have staked. Submitting invalid transactions or any other behavior counter to the network's health results in the stake being "slashed", i.e. the owner of the node loses their crypto. This mechanism of validating transactions, called proof-of-stake, replaces the power-intensive and inefficient mechanism of proof-of-work, where a special hash value must be calculated to successfully process a block of transactions. The Ethereum core developers are working towards a move to proof-of-stake and Algorand has been proof-of-stake from its inception.
The interesting thing is that the interest rates and the amount of collateral required at first don't make sense. The loan to value ratio on AAVE, a crypto lending platform/algorithmic stablecoin, is below 100%. This means that if you deposit $100 worth of ETH as collateral, you are then loaned less than $100 in the borrowed token. Why bother? Because it allows crypto investors and speculators access to leverage. The way AAVE works is this: first, the user borrows a token, usually a stablecoin, in exchange for depositing ETH as collateral. The user then sells that stablecoin for more ETH, and (if the restrictions of the contract allow) repeat the cycle until they have a bunch of ETH in the contract and ETH in their wallet, but none of the stablecoin token they borrowed. If the value of the borrowed token falls relative to ETH, that user will be able to sell their ETH for enough of the token to cover the loan and interest, making more money than they would just by holding ETH.