DeFi leads the market, but you haven't gotten into the car yet? Take you hand in hand to squeeze out Compound and Uniswap wool
Editor's Note: This article comes fromZhikuang University (ID: gh_37c9e0eaf00a), reprinted by Odaily with authorization.
Zhikuang University (ID: gh_37c9e0eaf00a)
Zhikuang University (ID: gh_37c9e0eaf00a)
, reprinted by Odaily with authorization.
Figure: Compound’s token COMP rose to a maximum of $372.27
What is Liquidity Mining?
The "success" of Compound has injected new vitality into DeFi. More and more projects have introduced similar "liquidity mining" incentive mechanisms. The total market value of DeFi has also broken through the $7 billion mark. In the middle of the month, the total market value of DeFi was only US$1 billion, which shows how rapid the development of DeFi has been in the past three months.
With the vigorous development of DeFi, more and more DeFi tokens have become ten-fold coins and hundred-fold coins. The huge increase has caused many people to have FOMO emotions. Leave a message or private message to consult the editor about "liquidity mining" There are more and more people. Therefore, the editor decided to write an article to introduce what liquidity mining is, how to participate, and what risks need to be guarded against.
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What is Liquidity Mining?
Cryptocurrency mining started with Bitcoin. For Bitcoin, mining not only maintains network security, but also a means of fairly distributing BTC.
Yield Farming is also a means of distributing tokens, but its main purpose is to increase the liquidity of tokens.
The liquidity mining of many DeFi projects is the process of allowing users to deposit or lend specified encrypted assets as required to provide liquidity for the fund pool of DeFi products to obtain income. Taking Compound as an example, as long as users deposit specific encrypted assets or borrow encrypted assets from the Compound platform, they are participating in Compound's liquidity mining.
Liquidity mining is somewhat similar to the previous FCoin exchange's "borrowing is mining". In addition to increasing the liquidity of tokens, it also helps the cold start of the project.
Currently, DeFi projects that provide liquidity mining include: Compound, Uniswap, Balancer, Curve, Yearn, mStable, Synthetix, etc.
Below, we take Compound and Uniswap as examples to teach you how to participate in liquidity mining.
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Compound is a decentralized lending platform based on the Ethereum blockchain, and it is also the first DeFi product to launch a "liquidity mining" incentive mechanism. On Compound, all lending is done through smart contracts, and the lending rate is automatically adjusted by an algorithm, and Compound charges 15% of the interest as a handling fee.
Compound’s governance token is COMP. Holders of COMP can propose changes to the Compound protocol, or vote on proposals to determine the future development direction of the Compound protocol, and so on.
The total amount of COMP is 10 million, of which 4.23 million are used for "liquidity mining" incentives. The 4.23 million are locked in a smart contract named "Reservoir". Every time a block is dug out of the Ethereum blockchain, 0.5 COMP will be transferred from the smart contract, that is to say, 0.5 COMP will be transferred every day. About 2,880 COMP rewards for liquidity mining will be awarded in about 4 years.
The COMP transferred out every day will be distributed in proportion to the interest generated by each lending pool. 50% of the COMP reward received by each lending pool will be allocated to the encrypted asset provider (Supplier) of the lending pool, and the remaining 50% will be allocated to borrowing People (Borrower).
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Figure: Distribution rules of COMP
Currently, many wallets (such as imToken, Bitpie Wallet, Math Wallet) support access to the Compound protocol. Below, the editor will take the imToken wallet as an example to demonstrate how to participate in Compound's liquidity mining.
1. Open the imToken wallet, in the "Market" column at the bottom, you can see "Compound", click to enter. If it is the first time to use, a confirmation interface for agreeing to access will pop up, just click "Confirm".
3. After submitting, the payment page will pop up. After checking, click "Next", enter the password, and click "Confirm". After the Ethereum blockchain finishes broadcasting, we can see the encrypted assets we supply and their quantity on the Compound page.
4. After completion, the wallet will receive the cToken issued by Compound, and you can earn interest income by holding these cTokens. What I deposited was ETH, so I received cETH, if I deposited stable currency DAI, I received cDAI, and so on.
If the editor wants to redeem his own ETH in the future, he can directly convert cToken into ETH in Compound.
cToken represents the amount of encrypted assets supplied and the accumulated interest. It is particularly ingenious in that it is an ERC-20 token on Ethereum, which means that it can circulate in the entire Ethereum ecosystem, making income like snow Roll like a ball. For example, if you deposit DAI, you will receive cDAI, and cDAI can continue to be recharged to the Uniswap fund pool discussed below to earn related handling fees. In this way, the income includes three parts: the annualized income of DAI lending, the governance token COMP, and the fee income of the Uniswap fund pool.
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How to participate in liquidity mining? Uniswap
Uniswap is a decentralized trading platform on the Ethereum blockchain. It mainly provides liquidity services for ETH and ERC-20 tokens. It is currently the DeFi application with the largest number of users.
The biggest feature of Uniswap is the automated market maker (Automated Market Maker, referred to as AMM), which uses established algorithms to replace manual quotations. Here is a brief introduction to its automated market maker algorithm:
X (token 1) * Y (token 2) = K (constant)
The old miner Xiao Hei wanted to buy BTOP tokens, so he took 6 ETH to exchange. Uniswap's handling fee is fixed at 0.3%, and 0.018ETH needs to be deducted from 6ETH. At this time, the number of ETH in the fund pool becomes 10+5.982 (the Uniswap handling fee has been deducted) = 15.982. The constant K remains unchanged, and the fund pool The number of BTOPs in becomes:
1000 (constant) ÷ 15.982 (ETH) = 62.57 (BTOP)
Therefore, the number of BTOPs that the old miner Xiao Hei can exchange for is: 100-62.57=37.43 pieces.
After the exchange is completed, the Uniswap service fee of 0.018ETH will be injected into the fund pool, and the constant K will be updated to: (15.982ETH + 0.018ETH) * 62.57 (BTOP) = 1001.12. The next transaction exchange will be calculated according to this new K value, and so on.
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Figure: Uniswap's automated market maker algorithm demonstration
It should be noted that the 0.3% handling fee in this example is finally given to the corresponding fund pool of Uniswap. When the old miner Xiaohei pays 6ETH, he also needs to pay the miner's fee to the Ethereum miners. Therefore, participating in Uniswap liquidity mining, the income is the 0.3% handling fee charged by Uniswap.
Currently, many wallets (such as imToken, Bitpie Wallet, Math Wallet) support access to the Uniswap protocol. Below, the editor will still take the imToken wallet as an example, firstly demonstrate how to use Uniswap to purchase encrypted assets, and then demonstrate how to participate in Uniswap's liquidity mining.
1. Open the imToken wallet, find "Uniswap" in the "Browse" interface at the bottom, and click to enter.
2. Below, the editor demonstrates how to exchange ETH for the currently very popular algorithmic stablecoin AMPL. In the "From" list, I entered 0.01, which means I want to exchange with 0.01ETH. Go to the next column, first select the currency "AMPL", and then the left side will automatically calculate the amount of AMPL that can be exchanged for 0.01ETH. After completion, click "Swap", and the wallet will jump to the order confirmation page. After confirmation, click "Confirm Swap", and the payment confirmation page will pop up. After confirmation, click "Next", enter the wallet password to complete the payment.
3. After the completion, the editor's imToken wallet will receive the AMPL tokens just exchanged.
2. After clicking "Approve AMPL", the authorization confirmation interface will pop up, click "Next" to authorize, and "Pending" will appear in the upper right corner of the page, indicating that it is queuing for processing. When "Pending" disappears, the authorization is complete.
Risks of Liquidity Mining
3. After the completion, click "Supply" to jump out of the order confirmation page. After confirming that there is no error, click "Confirm Supply" to jump out of the payment page. After confirmation, click "Next" and enter the password to complete the payment.
4. After completion, you will be able to see the encrypted assets you provide in the fund pool column, and the wallet will also receive a corresponding share of liquidity pool tokens from Uniswap.
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Risks of Liquidity Mining
Although DeFi has developed very rapidly in recent months, and the tokens of some DeFi projects have even seen a ten-fold or a hundred-fold increase, it does not mean that everyone involved can make money.
The current DeFi is actually far from mature enough, the market efficiency is low, and there is still a big gap between it and the traditional centralized financial CeFi. Before participating in DeFi liquidity mining, you need to know the following risks in advance:
1. Smart contract risks
Every year, DeFi projects are hacked due to smart contract vulnerabilities, and this year is no exception: Curve, lendf.me, etc. have stumbled in front of hackers this year.
With the increasing popularity of DeFi and the increasing scale of locked encrypted assets, more hackers will be encouraged to find code loopholes, and most of the DeFi smart contracts have not been audited by professional organizations. So the risk of hacking is very high.
2. Liquidation risk under extreme market conditions
The price of encrypted assets fluctuates violently. When extreme market conditions occur (such as this year’s 3.12 plunge), many mortgage assets on many decentralized lending platforms (such as MakerDAO) will become undercollateralized due to the sharp drop in prices, and will be automatically deleted by the system. liquidation. If the market changes too fast, the efficiency of the liquidation mechanism is not high, and further losses will be caused to investors.
In addition, under extreme market conditions, DeFi products of automated market makers like Uniswap will also cause investors to lose money. Market makers are not sweet pastries that guarantee harvests during droughts and floods.
3. The risk of consensus breakdown (fork)
The community of the DeFi product yearn.finance proposed an additional issuance proposal called "YIP-8", which will halve the weekly additional issuance of each mining pool. However, the proposal was not passed due to the insufficient number of votes that participated in the final participation. Therefore, the community members in favor of the proposal directly initiated a hard fork.
5. The fees of Ethereum are high
epilogue
The popularity of DeFi has directly pushed up the transfer fees on the Ethereum blockchain. In the above two examples, the editor transferred 0.01ETH to Compound, and the miner's fee was 0.02237ETH, and the miner's fee was 0.03253ETH when providing 0.01ETH of liquidity for Uniswap.
