How Not to Lose $$$ Being a Liquidity Provider (Uniswap, Cream, Curve)
DeFi is a new and rapidly growing trend in global finance
Many projects bring millions of dollars to their founders
It is not yet clear if we are dealing with a revolution, or another bubble
International consortium of news organizations developing transparency standards.
By discovering crypto news, you can lose track of headlines that contain either the term DeFiDecentralized Finance (DeFi) is a financial services built on blockchain technology that offer users access to an open, efficient and … More … Let’s take a look at what decentralized finance is, in order, and what is the best way to present it so that there is no indigestion of your digital asset portfolio. Let’s start the analysis together with CryptoDiplomat.
DeFi is our everything
Despite the fact that the number of searches for “DeFi” began to go off-scale only in recent months, it is worth mentioning that decentralized finance is a cryptocurrency “in a vacuum”. That is, it is finance that is outside the authority of corporations and government agencies. Thus, according to the precepts of Satoshi Nakamoto In 2009, someone (one person or a group of developers), hiding under the pseudonym Satoshi Nakamoto (Satoshi Nakamoto), revolutionized the digital … More, Bitcoin and subsequent cryptocurrencies should have become. That is, both Bitcoin and Ether (Ethereum) are decentralized finance in the broadest sense of this phrase..
The terminology base evolves along with the IT ecosystem, and now DeFi is a generic term for a category of instruments created using Ethereum algorithms.. Cryptocurrencies, on the other hand, are cash, not financial instruments for creating decentralized digital assets. Their main function is to allow any user to make financial transactions, borrow, lend to someone without intermediaries. Why DeFi has taken such a strong position in the cryptocurrency niche?
One of the main strengths of DeFi is the lack of regulatory censorship. Any user with the knowledge and capabilities to write a smart contract (protocols that allow transactions to be made without the participation of third parties) is already a potential developer of an application for decentralized finance. The availability of technology is always a powerful motivator for development. There is the Internet – there is access to digital assets from any geographic location. And the possibility of using decentralized applications (Dapps) opens up a whole new level of financial opportunities for the general population..
In order to better understand the reason for the popularity of decentralized finance, it is necessary to disassemble, by specific functions, those Ethereum tools that bring the maximum profit to DeFi companies:
- Lending protocols (open only)
- Blockchain platform for creating and issuing tokens
- Predictive software
- DeFi escrow
One of the most trending open source Ethereum funding tools. P2P protocols with stablecoins create a serious hype around open lending. And it’s all to blame for the dignity of such protocols compared to conventional loans in banks and other financial institutions:
- Instant settlement
- Lack of credit checks and creditworthiness
- Process automation using bots and algorithms
One of the most famous decentralized lending protocols is MakerDAO. Due to its growing popularity in 2019, it was decided to increase the stability fee.
After MakerDAO, other platforms appeared: Fulcrum, Aave, etc. These projects create pools that help get a loan or loan in digital currencies.
Blockchain platform for creating and issuing tokens
Platforms such as Polymath and Harbor provide full functionality for businesses wishing to create their own securities in tokens based on blockchain algorithms. These service providers provide a full package of services, including customization of compliance options, broker integration, payouts, voting, etc..
Decentralized prediction markets are a topic of thought as blockchain tools can be used to build software to predict any outcome, not just hedging risks on the exchange. So, the Augur platform has every chance to take the leading position in the segment: an original idea with adequate functioning mechanics is bearing fruit. In addition, at the end of July, the developers of the predictor successfully launched the second version of the software, which now runs without installation and works in browser mode. The REP coin, which ensures the work of the project, has a stable price and positive growth dynamics.
Exchangers and exchanges
Open funding is in demand in the protocols of decentralized exchanges and exchangers. This tool is popular because there is no intermediary in the exchange process, which means that the transaction time and costs for its implementation are reduced. The DEX market is in the making, so many users are scared off by the lack of an understandable interface and complex terms (like atomic swaps) that have not yet taken root in the crypto community.
Decentralized exchanges Cryptocurrencies continue to march across the planet, becoming increasingly mainstream and finding new areas of use. People buy bitcoin, … More differ from classic ones in that they do not store any user data or funds on their blockchain. It is simply a platform where buy / sell bids are matched. The most modern model used by DEX platforms excludes KYC from the buying / selling algorithm.
Until recently, IDEX was one of the most popular decentralized exchanges, followed by EtherDelta. Now they are pushed aside by new DeFi projects, for example, Uniswap, Bancor, Kyber, etc..
One of the most famous DeFi projects in the escrow segment is Arwen. With its help, a trader can carry out activities on crypto-exchanges without placing his own funds on their capacities. This allows you to minimize the risk of hacker attacks and hacking of an intra-exchange wallet.
Key benefits of DeFi
- Complete decentralization. DeFi systems exist using rules that are written in smart contracts with the appropriate code. Human intervention tends to zero.
- Total transparency. All codes are open so that any user can find system bugs or receive an explanation of the functionality of a particular part of the software. As in other blockchain systems, in DeFi, transactions are public, which allows us to talk about transparency.
- No boundaries. All applications and services in the DeFi segment are available to every user with the ability to connect to the Internet.
- General availability. All users interact with the system using wallets. No need for a bureaucratic approach, filling out complex forms and involvement of third parties.
- The possibility of customization. Smart contracts can be customized for yourself, create custom solutions with their own interfaces. It is enough to know the basics of using smart contracts and their encoding. DeFi platforms are like a designer, in which you can create your own model that will meet the requirements.
Objective flaws and problems of DeFi
- Systemic risks, which are based on lending and liquidity risks, as well as volatility. Cryptocurrencies can lose capitalization overnight. If the platform is not secured against the negative consequences of a sharp drop in price, there is a risk of collapse. An alternative solution is to use excess assets to secure loans, but this solution is not always applicable.
- Hacker attacks on smart contracts. The code can be tampered with or hacked, even if there is no third party involved in the transfer of transactions.
- Small amounts that can be obtained in the DeFi system. So far, this resembles microfinance and is largely inferior to banking services of this kind in scale..
- No clear responsibility. There is not a single really responsible department that will be responsible for the chaos or order within the system. The logic of “crowd wisdom” can fail if we move away from ideal visionary work: not all users are interested in collective prosperity. In theory, participants should actively develop the ecosystem, but this is not always the case..
- Decreasing productivity. Any project needs to be scaled to meet ever-growing needs. But the rapid rise in popularity of DeFi platforms does not allow developers to quickly respond to changes in the ecosystem..
- Randomness of proposals. The market is oversaturated and it is extremely difficult to distinguish scam projects from really worthwhile implementations (if there is no obvious deception in the form of colossal percent of income).
Yearn.Finance – new farming format
Yield farming (aka profitable farmingCryptocurrencies, as an alternative financial instrument, open up additional earning opportunities for users. Participants of the decentralized finance (DeFi) market decided to take advantage of this feature …. More) – receiving tokens for interacting with DeFi protocols. Basically, this is a bounty program in which users are rewarded for providing liquidity to platforms, actively participating in the life of the community, obtaining a loan, etc. An ideal society would allow each participant to earn income and enjoy, but in reality, the system resembles an ICO bubble. A prime example is token As the use of cryptocurrencies grows, new types of tokens appear. They can represent value or something intangible like voices. Two … More YFI, the price of which has grown from $ 35 to $ 38,000 within a month and a half.
But there are also more trustworthy examples from the community:
- Synthetix issues SNX tokens for providing collateral for platform resources.
- Compound issues COMP tokens for loan collateral.
- Balancer issues BAL tokens to liquidity pool creators.
Good reputation with mStable, Ampleforth and Curve projects. These projects are actively developing, and the value of their assets is growing exponentially. Thus, profitable farming is one of the ways of passive income for participation in the life of the crypto community, which can spur new users to connect to the global ecosystem..
The Uniswap Phenomenon: What Happened?
In order to understand how the system of automated market makers works, let’s imagine a situation: a programmer creates a bot that has the functions of a market specialist. This bot names the most favorable price in the market using the formula X * Y = K. This is how Uniswap works, which appeared on the market completely unexpectedly and impressed with its rapid growth. Uniswap is the largest player in the DEX market in terms of capitalization and realizable volume of assets: the simplicity of the platform’s code allows it to service more than 100,000 transactions in 24 hours.
Automated market makers have the ability to completely take over the DeFi market and there are several reasons for Uniswap’s success:
- Uniswap is extremely easy to implement. This is essentially a calculator with the ability to make transactions and transactions within the cryptocurrency community.
- Uniswap is completely decentralized. The simplicity of the code used in the project allows you to quickly find bugs and gaps, and therefore increase the stability of the system. Large systems cannot boast this speed of security decision making.
- Pools are very easy to create on Uniswap: the initiator issues tokens to each (or a specific category) liquidity provider.
- Ease of creating stimulated pools. The pool creator distributes tokens to liquidity providers, in parallel increasing their income. Certain pools on Uniswap are powered by airdrops, which has shown an unprecedented return on investment, as the craving for free bonuses has not gone anywhere.
Tokens with the names of Japanese and Korean dishes turned out to be in trend, they are also forks of the popular Uniswap: SUSHI and KIMCHI. In less than a week, these tokens have attracted about a billion in liquidity, and prices have already increased by several hundred percent. Projects allow you to earn from volumes on other exchanges, that is, by trading on Uniswap, you receive tokens immediately to the account of another exchange.
According to the data from the project website, KIMCHI launched yesterday managed to raise more than $ 250,000,000. In the first hours of operation, the protocol offered an annual yield of over 120,000% for the KIMCHI / TEND pool and over 70,000% for other KIMCHI pools. At the moment, the profitability ranges from 20,000% to 30,000%.
But there are also problem areas in it that do not correlate in any way with the promised profit. It turned out that KIMCHI is not a fork In the cryptocurrency world, a fork is, in fact, a change in the blockchain protocol. Since cryptocurrencies operate on decentralized networks, all parties … More Sushiswap, as the team said, is forked from its Yuno Finance fork. According to Yuno, the code was copied so carelessly that they forgot to remove the captions at the bottom and some of the tags. And the real volumes are not $ 250 million, but only $ 5-8 million. In addition, the developer Roman Semyonov published evidence showing that there is a function in the smart contract that transfers some of the tokens directly to the developer’s address.
It is also worth understanding that the boom of decentralized exchanges has already spawned hundreds of projects with the SWAP root in the name. The Uniswap phenomenon itself allows for absolutely incredible results for newcomers to the market. Thus, a startup Bella Protocol from Beijing raised $ 4,000,000 per day of pre-sale.
User-friendly solution in the form of “In-One-Click” service enables users to receive income through replenishment of a deposit / storage. The idea received a response, so that in the next month and a half, the developers promise to release an MVP, and the system will fully start functioning in the first quarter of 2021.
The TRON ecosystem has become the basis for a huge number of such proposals: two weeks ago, the new DEX platform JustSwap was successfully launched, which uses JUST and USDJ cryptocurrencies. In the first week of DeFi on the TRON ecosystem, it received more funds from trading than all projects before it in the same period.
JustSwap recorded $ 10 million in total trading volume in the first 24 hours after starting on August 18. After that, the capitalization increased several times, new tokens based on TRC20 were added.
And one more project that can be mentioned: Spaghetti Money received $ 200,000,000 in 12 hours. And at the same time, none of the community knows the functions of the Pasta token.
Useful links to keep abreast of everything that happens in the DeFi segment
- defipulse.com – Digital Funds Blocked in DeFi Ecosystems
- defimarketcap.io – monitoring the capitalization of DeFi tokens
- defiscore.io – expert assessment of the risks of using DeFi-protocols
- dappradar.com – database of decentralized applications
Instead of a conclusion
The DeFi market has just begun to expand across the global economy. However, he was paid attention to by such bigwigs of crypto exchanges as Arthur Hayes. He believes that the most interesting projects at the moment are the Yearn Finance (YFI), Aave (LEND) and Polkadot (DOT) projects. Bitcoin, in his opinion, will take off only by the end of the year (which is already quite soon). One way or another, decentralized finance has become the main trend of the season, and autumn will show whether they are a new “bubble” or a round of evolution of blockchain ecosystems. It remains to wait and see – the time will be interesting.
The author of the article is the founder of the boutique consulting agency CryptoDiplomat.ch Georgy Paliani.
This material reflects the point of view of the author, which may not coincide with the opinion of the editorial board of BeInCrypto
All information contained on our website is published in good faith and objectivity, and for informational purposes only. The reader is solely responsible for any actions he takes based on the information received on our website..
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