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Golden Observation丨A breakdown of DeFi risks and techniques, be careful not to burn yourself



Golden Finance Blockchain, September 2 News Recently, there has been a burst of "food" seals in the decentralized finance (DeFi) industry. Pasta (PASTA), shrimp (SHRIMP), tacos (TACO), DeFi wealth games such as Sushiswap are becoming more and more popular. So what is the mystery of these "food" decentralized financial projects, and what is the risk level that players are most concerned about? Let us uncover its mysteries one by one.

First of all, we need to know how the "food" DeFi wealth game appeared. All this stems from Yearn Finance launched last month, which may be the most important thing in the DeFi industry in 2020. The Yearn Finance project is so innovative that their entire token supply is allocated to users in order to provide liquidity to all pools associated with the protocol. Since then, Yearn's startup framework has become a "copy template" for many similar projects. These projects have followed suit after seeing the great success of Yearn. At the same time, some projects have forked from Yearn Finance, such as SHRIMP, PASTA, BASED, Projects such as YFII, YFL, YAM, etc. came into being.

Golden Morning News | Coinbase is suspected of short-term downtime. The Huobi public chain code has been open sourced on Github: 1. Deng Jianpeng, a professor at the Central University of Finance and Economics: Blockchain supervision legislation may wish to "govern the chain with the chain".

2. Coinbase is suspected to have a short-term downtime, and the price of Coinbase Bitcoin has been broken down to $4,200. Perhaps affected by this, the Deribit perpetual contract fell 15% to $7,200.

3. Libra co-founder: Libra is a supplement to the existing legal currency system and will not replace the legal currency system.

4. Bloomberg: Cryptocurrency futures trading volume reaches 50% of spot trading volume.

5. The DAI and ETH locked in DeFi hit a record high, and the total value locked in DeFi is currently about 616 million US dollars. .

6. The Huobi public chain code has been open sourced on Github.

7. On October 31st, the 11th anniversary of the release of the Bitcoin white paper, as of today, BTC is about 195 days away from halving in 2020. .

8. The central bank's rediscount fast-track project will be launched in mid-November.

9. ETC's Agharta hard fork upgrade is expected to take place on January 15, 2020.

10. Samsung released the blockchain platform SDK, currently only supports ETH. [2019/11/1]

Of course, on top of the basic components of "cooperative farming" provided by Yearn, many DeFi projects will also add other economic elements to their basic assets in order to be more sticky and more attractive to users, and these "economic elements" include: PASTA Token deflation model adopted; Rebase mechanism (this mechanism makes the calculation of income more complicated and tricky); social-based mechanism (daily or weekly rewards for top-ranked mortgage token holders); building a community (rather than enabling anyone to create advanced liquidity pools such as Shrimp, which in turn provides incentives through SHRIMP tokens).

Golden Morning News | Ant Blockchain launches supply chain collaboration network "Ant Dual Chain Link" Ethereum plans to reduce mining energy consumption by 99%: 1. Ethereum developers temporarily agree to new codes to prevent ASIC mining.

2. The Constantinople hard fork is expected to start on January 16.

3. Wang Yongli, the former vice president of the Bank of China: It is necessary to jump out of the "Bitcoin" paradigm to see the development of the blockchain.

4. Ant Blockchain officially released the online supply chain collaboration network "Ant Dual Chain Link".

5. The Chilean Ministry of Finance launched a blockchain platform to process public payments.

6. Indian Prime Minister Modi talked about the importance of blockchain for the fourth time.

7. BCHSV dug out the largest block of 103MB.

8. Satoshi Nakamoto was rated as the most influential figure in the financial world and ranked 44th.

9. Ethereum plans to reduce mining energy consumption by 99%. [2019/1/5]

In order to let everyone understand the basic business model of the "food" DeFi project, let's assume a "WINE" project, and the fictitious token used in it is called "WINE". So now we allow users to farm "WIN" by locking other DeFi tokens in the first week, and then build a WINE/ETH liquidity pool to provide long-term incentives. For more fun and stickiness, let’s design a strategy like this: If the person who holds the most “WIN” has a 20% chance of getting a hangover every day, then he may spend 20% of his “WIN” "Randomly donate to 100 daily active-ethexc addresses; each "WIN" transaction has a 1% chance to transfer 50% of the value to the reward contract, aiming to increase incentives for "farming farmers". These strategies above will allow you to easily understand those seemingly complex DeFi concepts. Not only that, but these strategies can actually be implemented very quickly due to forked code blocks (such as the staking contract) from the standard (such as the Synthetix staking contract).

Jinse Finance live report on Naked Technologies CEO: Blockchain can change the mortgage industry: Jinse Finance front reporter reported in real time, at the 2nd Global Financial Technology and Blockchain China Summit 2018 held on April 12, Naked Technologies CEO Marco Robinson At the meeting, he gave a speech on the theme of "What Marco thinks the world needs". Or housing loan services, changing the situation that traditional loan services are not open to the homeless, blockchain will play an important role in this field. [2018/4/12]

So, what risks will arise in each scenario of farming a liquidity pool type? Let's do the next evaluation.

The first is level 1 risk at a low risk level. Such risks mostly appear in the ERC 20 token liquidity pool. You can bet a DeFi token in exchange for "food" DeFI tokens, such as YAM. If you want to minimize your risk, you can compare the stake code with the existing code to make sure there are no problems. Since you are only staking instead of providing liquidity, you will not take any economic risk, as long as you ensure the security of the protocol, then your yield farming capital will not be threatened. After the safety of funds is confirmed, the main risk you need to take at this time is: as time goes by, the value of the DeFi tokens you cultivated may become worthless. So what you need to do at this time is to choose the most reasonable project to avoid falling into the "death spiral".

Jinse Finance Exclusive Live Report|David Tang, Managing Partner of Draper Dragon Fund: Blockchain is an international technology and an upgrade of Internet technology: At the 2018 Global Blockchain Investment Summit in Silicon Valley, David Tang, managing partner of Draper Dragon Fund, said : "The blockchain is an international technology. Compared with 10 years ago, in 2018, many people came to Silicon Valley to start a business, and they could find many engineers of different nationalities. At the same time, the blockchain is ubiquitous. It is an upgrade of Internet technology, which can enable more Users benefit. But the current blockchain industry is still in its infancy, and as time goes by, the technical resilience of the blockchain will become very large in the long run.” [2018/3/31]

The second is the level 2 risk at a high risk level, which mostly appears in the 98%/2% liquidity pool. Such so-called "98%/2%" liquidity pools are usually "cunning". After all, they mainly provide liquidity for decentralized exchanges, so they will naturally prefer to choose tokens with good reputation, such as 98% YFLink/2% YFL liquidity pool. Here, players may face a new type of risk: Interim Loss (IL). When the two assets in the specified liquidity pool move rapidly in opposite directions in the price direction, the temporary loss will reach the highest point. Although the 98%/2% liquidity pool is not completely immune to temporary losses, it is relatively safer.

Golden Finance News: Bitcoin Cash will usher in a hard fork upgrade on November 13. [2017/10/24]

Finally, there is the risk known as the catastrophe level, which mostly appears in the dumping pool. This type of liquidity pool is too risky and the most dangerous. The PASTA yyCRV / PASTA Uniswap pool is a good example. As soon as the PASTA incentive pool was launched, a large number of PASTA farmers began to dump, and everyone wanted to exchange for more precious yyCRV tokens. The result was obvious, and the price of PASTA tokens dropped from $1 to $0.04 in an instant, allowing those who placed their trust in the PASTA liquidity pool Those with high hopes were all dumbfounded.

In addition to the above risks, there is another very important point, that is the gas cost! Because when farming those "food" DeFi tokens, you are usually required to mortgage ETH, no matter whether you place an order or withdraw, you may be charged a handling fee for each transaction. Depending on the liquidity pool you are farming, you sometimes have to go to decentralized exchanges to add liquidity, which will make the position more complicated and costly.

So what are the key features of these dumping pools, and how to identify their differences and avoid putting more valuable DeFi tokens into these pools?

You have to keep in mind that dumping pools usually don't dump all at once, but over a period of time, after all you need to spend days for farmers to accumulate liquidity. Secondly, the liquidity ratio of dumping pool tokens is usually 50/50, half of which are shitcoins, and the other half are relatively high-quality assets, such as ETH, wETH, or yyCRV. The last point is that dumping pools usually provide high budget incentives, because these liquidity pools have no real value, and they have no other means to attract liquidity providers except to use this high-yield incentive. Of course, once these dumping pools collapse, liquidity providers will lose most of their funds, and the income of those "food" DeFi tokens will also enter a "death spiral", unable to obtain good returns.

Summarizing the risks and practical skills of so many "food" DeFi wealth game fields, everyone should understand one thing: no value is created in the encryption market, but a complex "3-4 layer" value transfer mechanism. And buying "food" DeFi tokens requires taking huge risks, because you may need to fight against a large group of "farmers" who cultivate income, and they will dump these tokens anytime and anywhere. Not only that, but those who share this "food" game with you are all "old gun traders" with many years of experience in the encryption industry. If you do not have enough confidence in your industry experience, then it is best to advise you to stay away from them, because Any decision may have unforeseen consequences.

Part of this article is compiled from Yahoo Finance


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