While NFT has been the talk of the crypto space lately, the DeFi sector is still experiencing strong growth. Here are 5 things all DeFi enthusiasts should know.
Here we look at five important aspects of DeFi that every investor and contributor should know:
1. Intermittent loss
A non-permanent loss is a loss incurred when the price of an asset in a liquidity pool differs from the price of the same asset in the open market.
In an automated market maker (AMM) such as Uniswap (UNI), the prices of cryptoassets in liquidity pools (LP) are not linked to their respective prices on centralized exchanges (CEX).
When a liquidity provider places a cryptoasset in one of these pools, it does so with a given ratio between the two cryptoassets and receives a pool requirement based on the size of its investment.
If the dollar value of one of these assets changes, LP relies on arbitrationto change this ratio to match the dollar prices of cryptoassets.
If this ratio does not return to the state at the time of the investment, the staker will lose forever. However, since it is always possible, the loss is described as inconstant.
2. Transactions may fail in DeFi
Yes, and you will lose all commissions paid. On a decentralized exchange (DEX), all transactions take place at the chain level through smart contracts. Users pay a commission to complete each transaction.
DEX users can set their own fees (although they can use the default options). If the amount is too small and the transaction includes several transactions, if the amount ends, the transactions are returned to their "original state".
There are many more reasons why this might be happening! Look here for more information.
3. Uniswap is not the only DEX
Although UNI is by far the largest and it is not the only one in its existence. Only on Ethereum can you find the UNI-fork SushiSwap (SUSHI), one of UNI's biggest competitors.
SushiSwap has many forks from SakeSwap to Kimchi Finance. And there are other completely different DEX platforms out there. Take the Solana ecosystem (SOL) for example. It contains Project Serum (SRM), a DEX built on the SOL protocol.
Or Binance Smart Chain (BSC). There you can find PancakeSwap (CAKE) and Binance's own DEX, appropriately named Binance DEX.
4. IFOs are the new IDOs
By now, every DeFi user has heard the term “Initial DEX Offering.” IDO is a project native token that runs on a DEX like SushiSwap.
Users can then usually exchange other cryptocurrencies for this new token. However, a recently popular type of launch has emerged - the "Initial Farm Offer" or IFO.
IFO is launching a new token in the liquidity pool (LP) where liquidity providers can bet on cryptocurrencies and earn a new token as part of the LP percentage reward.
Several new tokens have been launched on the Binance Launchpool using this method, including Reef Finance.
5. Code in DeFi is never complete
Finally, the prevailing philosophy in the DeFi space is “in-product testing.” Simply put, most DeFi projects are fully experimental but open to public use.
As a DeFi enthusiast, it is important to be aware that you are part of an ongoing experiment and something could go wrong even if you do a top-notch audit.
Indeed, the hallmark of a successful project is how well it identifies and fixes problems. Most, if not all, returned stronger.