I'll be writing a couple of different threads about how you can maximize your cryptocurrency portfolio beyond just holding onto assets. The first part will cover Uniswap, and Compound.
Before we get started let me cover a few important bullet points:
- DYOR (do your own research) with regards to all projects listed below to make sure you adequately understand all the risks and benefits that come with each project
- DeFi doesn't always mean fully decentralized, there will be projects listed that have "super user" capabilities for admins of the projects, allowing them to potentially alter smart contracts in a malicious manner.
- People like to term projects that fall under the aforementioned bullet points as "CeFi" (Centralized Finance)
- Always make sure to backup your private keys in a secure manner, preferably offline
- You will need some sort of "web 3.0" wallet like metamask
- Always make sure the platforms you used have been audited, otherwise there is risk for loss of money due to hackers
Uniswap
Uniswap is possibly the only true DeFi project out there, where the project founders have very little to almost no control of existing exchanges. In uniswap an exchange is a deployed contract that allow you to swap two tokens. For example the ETH-DAI exchange allows you to swap ETH for DAI, or DAI for ETH.
Uniswap exchanges derive liquidity from "liquidity providers", which are people that provide liquidity to the exchange via depositing equal amounts of both tokens that can be swapped. This means if you want to provide $25 of DAI liquidity to the ETH-DAI exchange, you must also provide $25 of ETH, for a total of $50. After providing liquidity you are given "pool tokens" which represent the amount of liquidity you have provided. Removing liquidity from the exchange converts your pool tokens back into their underlying assets. After providing liquidity, anytime someone goes to swap tokens in an exchange, you receive a portion of the swap equal to the amount of liquidity you are providing.
An important note about Uniswap is that you can potentially lose money due to price fluctuations with the assets. However this will largely depend on market conditions and what type of assets you are supplying. If you're just supplying stablecoins, than you can mostly offset your chance of losing money due to price fluctuations.
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Compound
Compound provides a way to supply (loan out) and borrow (loan) different assets for compounded interested, with interest rates being dynamic and adjusted every time a new block is mined on Ethereum. It is more centralized than Uniswap however a recent update enabled the usage of Compound governance tokens for project stake holders to make decisions about changes to the Compound protocol via community participation, however at the present moment in time compound governance token holders are largely those affiliated with the project, or other major DeFi projects.
The cool thing about Compound is that anyone can liquidate accounts that go below their collateralization ratio, for a 5% payment equal to the amount that was liquidated to balance the accounts collateralization ratio. This means that if you borrow assets, and fail to properly balance your collateralization ratio, you can lose money. If this worries you, then just stick to supply assets as the only risk with this is the compound smart contracts getting hacked and you losing your money.
Unlike Uniswap where anyone can create an exchange for two tokens, the only way assets get added to compound is via the governance system. However it has a pretty good selection of assets, including wBTC (wrapped Bitcoin), a few different stable coins, and ethereum tokens.
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Misc Tools
Edited by deadwk (05/18/20 02:57 PM)
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