Do you want to farm SushiSwap? It is no news that decentralized finance (DeFi) is growing and quickly becoming an inclusive financial system.
Blockchain technology and cryptocurrencies are taking the financial system by storm. More innovative products and methods, such as yield farming, are developed to help investors generate profitable investment returns.
If you want to trade crypto on the decentralized exchange (DEX) system, there are various tokens you can begin with, making it increasingly difficult to know where to start.
This guide will explain SushiSwap, its benefits, and how you can start farming SUSHI.
SushiSwap is a decentralized exchange (DEX) that runs on the Ethereum blockchain and allows users to buy, sell, lend, borrow, swap, and stake crypto assets.
Users can swap SUSHI for any token and earn interest on the SushiSwap platform. Liquidity providers will earn 0.25% from each transaction.
One of the benefits of SushiSwap is that it allows users to earn passive income from their investments. Also, the platform gives liquidity providers voting rights, leaving the governance to the community.
Users can become liquidity providers, stake SUSHI with SushiBar, and lend and borrow crypto with Kashi on the platform.
What Is SushiSwap?
SushiSwap is a software that runs on the Ethereum blockchain and allows users can buy, sell, swap, and stake crypto tokens.
As a decentralized exchange (DEX) and an automated market maker (AAM) with no central authority that manages trade, it is community-driven with a governance structure that makes it fully decentralized.
Trades on the platform are run via smart contracts and processes defined on the blockchain. As a clone of Uniswap, it has several unique attributes, such as liquidity mining and governance through its SUSHI token.
SUSHI token serves two purposes: it gives stakeholders governance privileges unique to the platform and represents a share of the protocol’s payment users’ control.
It supports a range of blockchains, such as Polygon and the Ethereum Mainnet. Governance privileges, one of the platform’s main features, are awarded to token holders. Also, SUSHI holders who stake their assets may get a reward on all transactions made across all liquidity pools.
SushiSwap has four products operated via their liquidity pools, making it a fully-fledged DeFi platform.
A decentralized exchange where you can swap one crypto token for another.
Kashi is a decentralized lending market that allows users to lend or borrow tokens.
Yield instruments that allow users to provide liquidity to the exchange.
SushiBar staking allows stakeholders to convert SUSHI tokens into xSushi and earn rewards.
How Does SushiSwap Work?
The way SushiSwap works is simple. It has different assets, like the ETH and USDT pairs, that enable users to buy, sell or swap crypto.
If you own a particular amount of Ethereum and don’t want it sitting around in your wallet, you can swap it for DAI or USDT and add both cryptos to the DAI-ETH or ETH-USDT liquidity pool on the platform.
SushiSwap pays 0.25% of each trade to liquidity providers, which might not seem to be much with a small pool, but in a larger pool worth millions of dollars, liquidity providers can make a lot from transaction fees.
Of course, the total amount you make from the transaction fee depends on your shares. If there is $200,000 worth of SushiSwap trading volume in the DAI-ETH pool and you have a 50% share, your fee will be $250 based on the 0.25% payout.
Since the amount of SUSHI reward you get depends on the value of your assets in US dollars, your earnings are affected by the performance of the crypto market. If the market is doing well, so will your return on investment (ROI), but if it is not, it will decrease significantly.
That is why it is highly recommended you watch the market closely and invest according to its performance.
Many liquidity pools on the platform offer the option to farm SUSHI. The yield from this farming varies from the standard annual percentage yield (APY). The annual percentage yielding is the interest you earn based on the total amount you invested.
For example, if you invested $2000 and the APY is 40% after one year, you will earn $800 in SUSHI tokens if the amount remains the same.
What Can You Do On SushiSwap?
SushiSwap has grown into a fully decentralized platform, offering various features and tools for users to invest in since it was launched as a DEX. Aside from that, it offers the SushiSwap exchange, which enables users to swap any ERC-20 token.
Kashi is a feature of SushiSwap that lets users borrow crypto for various purposes, while SushiBar is another that lets users stake their tokens.
Become a liquidity provider
One of the things you can do on SushiSwap is to become a liquidity provider (LP). As a liquidity provider, you will give tokens to liquidity pools so the AAM can execute trades and get rewarded by receiving a percentage of the trading fee.
While staking assets in the liquidity pool might seem complex, the smart contract responsible for the pool will do most of the work for you.
2. You can stake SUSHI with SushiBar
SushiSwap has widened its menu and offers new DeFi products like SushiBar, which lets users receive staking rewards in the form of xSUSHI. You get rewarded for swapping fees, gaining access to the SushiSwap governance system, and keeping your voting right.
3. Lend and borrow cryptocurrency with Kashi
It offers a variable reward to lend crypto in exchange for the asset deposited. Kashi requires a certain amount of collateral to be deposited to borrow crypto and will charge you an annual percentage rate based on the variable rate. DeFi lending reward comes from a borrower, so it is important to know the risk involved.
What Are the Benefits of SushiSwap?
The SushiSwap platform allows anyone to swap tokens and add liquidity to the pool whenever they want. To make it easier, it provides its users with many ways to earn a passive income with little risk. Users can stake SLP tokens, gain SUSHI, and later stake SUSHI for xSUSHI and earn more rewards.
This is the first AMM to send rewards back to the community that maintains it. One of the benefits of SushiSwap is the fee you get back from users. If you are a liquidity provider on the platform, you will receive rewards for your investment.
SushiSwap provides a governance mechanism that allows users to vote on all vital upgrades and changes made to the platform. Since a percentage of all newly issued SUSHI is set aside for the project’s future development, the community will vote to determine what project should be developed.
SushiSwap fees are more affordable than exchanges like Coinbase. Users pay a 0.3% fee when they join the liquidity pool and are paid a 0.25% fee for each trade.
Staking and Farming
DeFi users can access SushiSwap features such as staking and farming. New users prefer to stake instead of trade because it is less labor-intensive and provides more ROI. And the good thing about it is that the farming protocol doesn’t require you to be a liquidity provider to earn rewards.
Buying SushiSwap (SUSHI)
You can buy SUSHI from an exchange platform.
Kraken – this exchange platform was founded in 2022 and is a popular name in the industry. Kraken offers trading access to more than 190 countries, making it a recommended platform for buying SUSHI.
Bitstamp – this is one of the oldest and most trusted exchanges you can buy SushiSwap.
Uphold – if you are a UK or United States resident, Uphold is one of the top exchanges you can use to buy SushiSwap and other cryptocurrencies.
Binance – this is another popular crypto trading platform you can use to purchase SUSHI. While users in the USA are prohibited from purchasing most tokens, people in most parts of the world can use this platform.
KuCoin – this exchange offers crypto trading of over 300 tokens, including SUSHI.
How Do I Farm SUSHI on SushiSwap?
Now that you have an idea of SushiSwap and its benefits, you want to know how to start farming SUSHI. The five steps below outline how users can begin farming cryptocurrency on the platform.
Select a Liquidity Pool
Before choosing a liquidity pool, you must do all the necessary research by weighing the risk you are willing to take based on your current financial situation. You can establish liquidity pools with popular assets like DAI, USDT, or ETH. Also, Stablecoin pools are less risky because they are more invulnerable to crypto market volatility.
If you don’t have a cryptocurrency asset, you can buy some from popular platforms like Binance, Kraken, or Coinbase. The platform you choose will depend on your location and payment preference. After buying the needed crypto assets (you should at least purchase some Ethereum since you will be using it for transaction fees), you can send them to MetaMask.
Install and Set Up MetaMask
MetaMask was developed to enable you to interact with the Ethereum blockchain. To start using it, you have to download and install the extension. Once the installation is complete, a new tab will open in your browser.
To proceed, click the “get started” button and, after, the “create wallet” button. The next phase is to create your password. Ensure you type a secure password that you will remember because MetaMask doesn’t offer the “forget password” option.
Then, to ensure you backed up your phrase, you must arrange your secret phrase in the right order. After, click the “confirm” button, and you are done.
Invest in the Liquidity Pool
To invest in the liquidity pool, open app.sushi.com, find any LP you want to join on the Yield page, and click “add liquidity.” You can later enter the amount of DAI (or any other asset) you want to inject into the LP. Next, click the “approve” button and confirm the transaction on MetaMask.
Stake Liquidity Tokens
When you stake your assets in the liquidity pool, you will receive SLP tokens representing your share. Staking your SLP tokens is how you farm SUSHI.
If you join the DAI-ETH pool, you will own a certain amount of DAI-ETH SLP tokens that the system will use to return the correct amount of underlying assets when you withdraw your stake.
After successfully investing in a SushiSwap pool, you can stake your SLP tokens and start farming SUSHI tokens.
SushiSwap is a great way for stakeholders to invest in crypto tokens and earn rewards from interest. Despite being a clone of Uniswap, its added features, like community governance, give users control and make them decide the platform’s future.
It has overtaken many DeFi projects and will continue to grow in popularity and traction. Besides, it allows users to stake tokens and earn rewards from other users.
Video for the article
Frequently Asked Questions
What Is SushiSwap and How Does It Work?
SushiSwap is a decentralized exchange (DEX) that allows you to buy, sell, lend, borrow and swap one cryptocurrency token for another. Also, users on the SushiSwap platform can become liquidity providers and earn from exchange fees.
What Does Liquidity Farming Mean?
Liquidity farming, also known as yield farming, is a way to make more crypto with your cryptocurrency. It allows you to earn passive interest on your cryptocurrency holding at higher rates than traditional savings. Users can lend funds to others through smart contracts and earn interest in return.
How Can I Earn from SushiSwap?
You can earn from the platform by buying and holding SUSHI and withdrawing your earnings when the price rises. Also, you can stake or lend SUSHI tokens and earn interest.
Is SushiSwap Worth Buying?
SushiSwap provides an excellent investment opportunity for users that want to trade in decentralized finance and AAMs. Also, it provides an attractive investment opportunity for DeFi investors to stake and lend SUSHI tokens and earn from their investment.
Is SushiSwap a Good Crypto?
Yes, SushiSwap is a good investment opportunity for anyone that wants to trade crypto. Trading SUSHI tokens gives you the opportunity for growth because of their volatility, enabling you to earn when the price rises.
Crypto enthusiasts, particularly those interested in passively earning from decentralized finance (DeFi), should know about Curve Finance.
DeFi presents various ways of earning passively which include liquidity provision, staking, yield farming, lending and borrowing. One of the most popular protocols that showcase the majority of these attributes is Curve Finance.
Curve Finance is an Automated Market Maker (AMM) protocol that offers an efficient way of exchanging tokens at low fees and minimum slippage by accommodating liquidity pools consisting of tokens that show similar features. This protocol incentivizes liquidity providers by not only integrating with external DeFi platforms but also issuing rewards in the form of CRV tokens and other interests.
This guide explores the Curve Finance protocol, how it works, and what makes it an interesting choice for users.
What is Curve Finance?
Curve is an AMM platform that shows similar features to Uniswap and Balancer, but is quite different because it accommodates liquidity pools with tokens that have similar behavior. These tokens are either stablecoins or wrapped versions of other crypto assets such as WBTC or WETH.
By accommodating liquidity pools with similar tokens, Curve is able to use more efficient algorithms and has the lowest level of fees, slippage, and impermanent loss among decentralized exchanges (DEx) on the Ethereum network. Unlike Uniswap where tokens can be swapped provided there is liquidity, Curve focuses mainly on stable assets such as DAI, USDT, USDC, and TUSD.
The amount of liquidity Curve provides makes room for other DeFi applications to use the platform’s pool as part of their ecosystem. Applications such as Yearn Finance and Compound often use Curve as a farming solution.
The Curve Token
After Curve Finance launched its decentralized autonomous organization (DAO) in August 2020, its native token CRV was also launched to control the Curve DAO ecosystem. The token can be either bought or earned through yield farming.
Yield farming is a process where an investor deposits assets into a liquidity pool and earns tokens as a reward. For instance, if the DAI stablecoin is deposited into the Curve liquidity pool, there will be a chance to earn CRV tokens in addition to fees and interest. By farming the CRV token, investors can be incentivized to become a Curve liquidity provider, allowing them to gain ownership of a strong DeFi protocol.
Investors who own a minimum number of vote-locked CRV tokens can propose and make updates to the protocol such as changing fees, creating new liquidity protocols, adjusting yield farming rewards, etc.
By choosing stability and composability over volatility and speculation, Curve has grown to become one of the most popular DeFi platforms.
Curve’s Automated Market Maker (AMM) Model
Curve’s AMM allows digital assets to be traded “permissionlessly” and automatically through the use of its liquidity pool which is composed of stablecoins and wrapped tokens. Investors supply tokens to Curve’s liquidity pool, and the token prices in the pool are determined by a mathematical formula.
When the mathematical formula is altered, the liquidity can be optimized to fit several purposes. Investors who have access to the internet and own some ERC-20 tokens can supply tokens to Curve’s liquidity pool. The liquidity providers could earn some fees which are paid by traders who interact with the liquidity pool, as well as some CRV tokens that serve as incentives.
Curve’s Stablecoin Liquidity Pool
When Curve was launched, it had a target of creating an AMM exchange with low fees and yield generation for liquidity providers. To mitigate against volatility, Curve focuses on stablecoins, giving investors room to earn high-interest rates from lending protocols. Curve’s model, when compared with other AMM protocols, is quite conservative as it not only works against volatility but also prevents speculation.
With Curve’s AMM, liquidity pools constantly try to “buy low” and “sell high.” Consider this rebalancing with USDC (a dollar-pegged stablecoin) and DAI (an algorithmic stablecoin). If an investor sells DAI on Curve, a series of events outlined below will be triggered.
More DAI will be added to the pool.
An unbalance will be triggered as DAI becomes more dominant than USDC.
The pool moves to incentivize the balance by selling DAI at a slightly discounted price.
The pool rebalances the DAI and USDC ratio.
When DAI is sold at a discounted price, the pool attempts to restore itself to its original state. Trading assets on Curve occurs with minimum volatility because assets in the pool are similar to each other in price. A common feature of Curve is that the platform limits the pools and the types of assets in each pool to minimize impermanent loss. Impermanent loss is a phenomenon where liquidity providers encounter a loss in the value of their token in relation to the market value of the token due to volatility in the liquidity pool.
By embracing DeFi composability, Curve attracts liquidity providers. This gives investors the opportunity to use what they have invested on the platform to earn rewards elsewhere in the DeFi ecosystem. Curve does not always keep the value of different assets equal to each other. This ensures the platform keeps liquidity concentration near the ideal price for stablecoins (1:1) to have the liquidity where it is much needed. As such, Curve has a higher liquidity utilization than can be achieved with stablecoins.
What Products Does Curve Offer?
Just like other decentralized protocols, Curve Finance covers a range of services. These services comprise swap, liquidity provision, gauge system, staking, and vote-escrowed CRV (veCRV) tokens. Each of these products has some features which many crypto investors find interesting.
Curve Finance offers swapping services that involve converting one stablecoin for another. Some of the features of this product include:
Low fees and slippage as its liquidity pools have high total value locked (TVL) and trading pairs with nearly similar prices.
Trading fees are around 0.04% and are usually determined by the Curve DAO.
Curve Finance focuses on stablecoins and assets that have similar behavior (ETH and stETH). The protocol’s liquidity provision service allows investors to deposit crypto assets such as stablecoins and wrapped tokens in its liquidity pools in order to earn rewards (typically CRV tokens) and fees paid by traders. Curve’s liquidity pools are classified into two:
Base: Also called Vanilla pools, represents the most popular pools on Curve liquidity pools and contains three of the largest stablecoins – USDT, USDC, and DAI.
Meta: also known as single tokens are pooled with other base pools (i.e GUSD-3pool). GUSD-3pool allows traders to swap between GUSD and one of the 3pool stablecoins. This act prevents the liquidity providers from removing liquidity from 3pool and to a specific GUSD-stablecoin pool which would have less liquidity.
The Gauge System
This particular product works in a way that when users stake their liquidity providers (LP) tokens to receive liquidity mining rewards, the rewards are distributed according to the weight of each gauge. For instance, 30% of all CRV rewards are allocated to the 3pool (USDT, USDC, and DAI).
The gauge weights determine the share of CRV inflation a pool receives. Other features include:
VeCRV holders can channel their voting power to pools where they want to receive CRV rewards.
The more gauge weight a liquidity pool has, the more CRV inflation it receives.
Even though gauge weights are typically updated weekly, voters can change their voting weight only once every 10 days.
Staking on Curve
Curve’s staking feature mainly allows users to stake CRV tokens for veCRV which can be used for governance voting. The time frame for which CRV tokens are staked determines the amount of veCRV an investor receives. This means the longer a CRV token is staked, the more veCRV tokens users receive. The minimum staking time is one week, while the maximum staking time is four years.
Additionally, CRV ‘stakers’ can earn up to 50% of the platform trading fees. These fees are often used to buy 3pool LP tokens and redistributed to “stakers.” When investors lock their CRV, they will be able to boost their rewards for pools to which they provide liquidity. Depending on how long CRV tokens are locked, rewards can be boosted by as much as 2.5 times the regular incentives.
The voter-escrowed CRV (veCRV) tokens are used for governance voting in the Curve Finance ecosystem. Some of the features of this product are outlined below.
veCRV tokens are used for governance proposals.
With any number of veCRV tokens, an investor automatically has voting rights.
Investors that own over 2,500 veCRV tokens can move to create new proposals.
As time progresses, the weight of veCRV decreases as the lock expiration date approaches.
Why Investors Choose Curve Finance
There are several reasons why crypto enthusiasts choose Curve Finance and they include:
Low risk: Curve focuses on stablecoins and other assets that have similar features to minimize volatility and the risk of impermanent loss. In addition, the platform is a decentralized protocol that is less prone to security breaches.
DeFi composability: These features allow investors to use the tokens they earn on Curve in various applications in the DeFi space
Minimal slippage: Because Curve focuses on assets with similar features, there is absolutely little to no room for slippage to occur when trading.
CRV staking: Investors who stake CRV have the opportunity to earn veCRV tokens which can be used for voting purposes. Those who choose to lock their tokens for longer periods can have their rewards boosted by 2.5 times.
Liquidity removal: Because Curve uses an AMM protocol, investors can take out their liquidity at any time.
Frequently Asked Questions (FAQs)
What is the future road map of Curve Finance?
Curve Finance has made a significant impact in developing AMM-decentralized exchange with numerous features. The Curve DAO helps in deciding future pool parameter changes and gauging weight to determine how much CRV is allotted for each pool.
Curve recently added cross-chain support on Fantom. There are also plans to integrate Curve on Polkadot.
Where can investors buy Curve tokens?
While the CRV tokens are earned as rewards when investors provide liquidity, they are also popular and are traded on several crypto exchanges.
What is a DAO?
A DAO is a structured entity that is not controlled by a central authority. It can be considered as a group of people with similar interests whose rules and regulations are bound by a smart contract and no member is more powerful than another.
The concept of impermanent loss, though new, is not strange to investors in the decentralized finance (DeFi) ecosystem.
DeFi presents an opportunity to earn passively, with liquidity provision being one of the major ways. Liquidity provision involves depositing capital (liquidity) into a liquidity pool of a cryptocurrency protocol to earn interest.
A similar problem liquidity providers encounter is impermanent loss which affects the underlying value of assets they deposit in the pool.
With Uniswap being among the most popular Automated Market Maker (AMM) protocols, it is imperative that investors who provide assets into its multi-asset liquidity pool will face impermanent loss.
The ability to track impermanent loss while on a quest to earn passively is important. This guide explores how to track impermanent loss on Uniswap V3.
What is Impermanent Loss?
Impermanent loss is a phenomenon where the price of an investor’s token changes compared to the price at the initial point of deposit into the liquidity pool. Impermanent losses are often associated with AMM-based exchanges. AMMs are decentralized exchanges that pool liquidity from users and set the prices of the assets in the pool using specific algorithms.
In simple terms, when investors deposit tokens into liquidity pools and encounter a loss at the time of withdrawal, the investors are said to suffer impermanent losses. This usually occurs due to the volatile nature of cryptocurrencies. There are instances where investors do not have to lose money for impermanent loss to occur. It could be that such investors’ gains may be way smaller than would have been achieved with the “buy and hold” strategy.
For instance, if a liquidity provider (LP) decides to add liquidity to a liquidity pool of 50:50 ETH/DAI, it means they would have to provide an equal value of both tokens to the pool.
If at the time of deposit, ETH is exchanging hands at $1500, and it suddenly goes up to $1700 on an external exchange, the difference between the price of the ETH in the pool and an external exchange gives room for arbitrage traders to make a profit. They simply buy the cheaper ETH from the liquidity pool and then sell it at a higher price on the external exchange.
The ratio of assets in a liquidity pool is often kept constant, all thanks to the AMM feature. This means as the ETH is being bought, the price will increase against the DAI, pushing the price of ETH in the investor’s trading pair to drop. While this is done to maintain equilibrium, the amount of DAI will rise till it reaches a new equilibrium where the value of ETH and DAI become equal.
It is worth mentioning that impermanent loss is not permanent. This is because volatility is not always about the sharp decrease in price, but also the increase in asset price. Consider the previous scenario where ETH was valued at $1,500 at the time of deposit. If the price steeply drops to $1,350, an impermanent loss is said to occur.
But to show that impermanent loss is not permanent, the price of ETH can suddenly bounce back to $1,500 and continue to soar.
What is Uniswap V3?
Uniswap remains one of the most popular AMM-based decentralized exchanges that showcase several interesting features. Version 3 of the protocol is not any different.
The Uniswap V3 introduces new features that facilitate capital efficiency and focus on more active market makers than passive ones. The protocol features concentrated liquidity which offers individual liquidity providers (LP) control over what price ranges their capital is allocated to. This way, individual positions can be combined in a single pool to give a combined curve that investors can trade against.
Uniswap V3 also features multiple fee tiers that allow liquidity providers to be adequately compensated for the varying degree of risks they take.
The Uniswap V3 protocol is more flexible and efficient than other AMM-based protocols in the DeFi ecosystem. Some features that make this possible are outlined below.
Liquidity providers swap one asset for another by adding liquidity to a price range that is entirely above or below the market price, approximating a fee-earning limit order that executes a smooth curve.
Liquidity providers can add liquidity with up to 4000x capital efficiency; earning potentially more returns compared to Uniswap V2.
Liquidity providers can be exposed to more preferred assets and reduced levels of downside risks.
Capital efficiency allows for the execution of low-slippage trades that exceed those of centralized exchanges and stablecoin-based AMMs.
The oracles are faster and easier to integrate, providing time-weight average prices (TWAP) on demand for periods within nine days.
Compared to V2, gas fees of Uniswap V3 swap on Ethereum mainnet are quite cheaper, prompting slightly cheaper transactions.
How the Uniswap V3 Concentrated Liquidity Works
In Uniswap V2, liquidity is distributed evenly along an x * y = k price curve, with prices between 0 and infinity. Liquidity providers in V2 only earn fees on a small portion of their capital, preventing them from being adequately compensated for the impermanent losses they may encounter. With liquidity being spread across thin prices, traders in V2 are often subjected to a high degree of slippage.
With Uniswap V3, liquidity providers can concentrate their capital within custom price ranges. This means they can provide more significant amounts of liquidity at desired prices. To concentrate liquidity, liquidity providers construct individual price curves that showcase their preferences.
Liquidity providers can merge any number of distinct concentrated positions within a single pool. For example, a liquidity provider in the YLD/USDT pool can allocate $150 to the price range of $1,000 – $2,000 and an additional $50 to the range of $1,500 -$1,700. This means liquidity providers change the shape of any automated market maker or active book. It also means users can trade against the combined liquidity of individual curves with no increase in gas cost per liquidity provider. The liquidity providers collect trading fees at a given price range and are split based on the amount of liquidity they contributed at that range.
Factors that Trigger Impermanent Loss on Uniswap V3
There are several factors that contribute to impermanent loss on Uniswap V3. They include:
Extreme Volatility: Volatility simply refers to the degree at which the price of an asset increases or decreases. Crypto assets are extremely volatile as their prices rapidly change in the blink of an eye. These rapid price changes often trigger impermanent losses which are to the detriment of liquidity providers.
Price divergence: Should the price of two assets in a liquidity pool diverge from each other, there will be an increased chance for impermanent loss to occur.
Concentrated Liquidity: Uniswap V3 embraces concentrated liquidity – provision of liquidity in a fixed price range – which can increase the impact of impermanent loss in tight position ranges.
Since liquidity is provided in fixed price ranges, high fees are generated and the impact of impermanent loss increases.
How to Track Impermanent Loss on Uniswap V3
There are various mathematical explanations investors can use to calculate impermanent losses. Because these may be complex, there is a derivation formula that Uniswap V3 users can run with.
Considering a market with liquidity L and x and y amounts of assets labeled X and Y respectively; liquidity will be:
If the initial price P of asset X in terms of Y is y/x and then a price movement to P’ = Pk (and k . 0), it means that:
V_0 = Value of initial holding in terms of Y; V_1 = Value of holding if kept in the pool (where x,y moves with price); V_held = value of holding if kept outside the pool (where x,y is constant).
By using the derivation formula for x, y, assuming the price of Y in terms of Y is 1 and the price of X in terms of Y is P, it can be said that
The formula above works only on L and P. If the price changes, it can be used to calculate the price of future holdings in the same pool.
If we consider the value of a position that was held using the original quantities of x and y with new prices 1 and P’ = pk:
To calculate the impermanent loss, the percentage loss of V_1 in comparison to V_held is also calculated.
The crypto market changes rapidly, hence would take a lot of time for investors to keep up with these complex calculations for every price change.
To simplify the process of trading impermanent loss on Uniswap V3, a number of Data analytics platforms now have algorithms with a user dashboard that can be used to track impermanent loss. Some of them include:
Merlin, VALK’s DeFi portfolio tracker is able to analyze all transactions related to DeFi protocols including liquidity provision on a DEX such as Uniswap V3. Key information related to PNL, total liquidity, fees earned and impermanent loss are all shown
By viewing recent transactions on Merlin, we can view recent positions (distinguishable open positions are marked by the green circle while closed positions are marked by the gray circle). Merlin can filter out information by protocol and transaction (e.g., added liquidity, exchange, deposit, borrow and more).
Let’s take a look at this wallet’s most recent transactions. This time stamped record (most recent first) shows all actions done on these protocols, i.e., the still-yielding deposit of ETH in a Compound pool, or the addition of liquidity to a UNI/WETH pool. This particular action has yielded in a PNL of $184.23 or 12.48% so far.
Let’s zoom in further on this particular action. We can see further details related to the LP’s position, total liquidity $6,000.31) from when the first action (deposit) was taken, as well as the Uniswap V3 NFT given to the LP as a representation of their position. Impermanent loss (currently at -$32.12) is also calculated. The transactional history is laid out clearly to show the inner parts of the LP position, and as can be shown, the position is still open and thus generating yield.
Regarding the fee structure, it is displayed in two parts: claimed (at $30.60) and unclaimed fees (also at $30.60). Merlin will soon have a function that allows the investor to claim fees directly from the interface, without having to enter the DEX in question. Additionally, Merlin can identify if the position is in range or not.
Finally, Merlin gives the investor an overview of the general UNI/WETH pool. The investor’s share as a percentage of the total liquidity is shown, as well as the level of slippage for these particular assets, and the APR and APY can be compared against other pools, not only on Uniswap V3 but also other global pools (for premium subscribers only).
Frequently Asked Questions (FAQs)
What are the major features of Uniswap V3?
Two major features that make Uniswap V3 stand out are its flexibility and efficiency which helps liquidity providers to swap more crypto assets, add more liquidity, and earn more interest to compensate users for the risk of impermanent loss.
What is the simplest way of avoiding impermanent loss?
Impermanent losses are often triggered by unequal prices of assets and one of the simplest ways of avoiding them is providing capital to liquidity pools that are composed of only stablecoins and wrapped tokens such as USDC, USDT, GUSD, and DAI.
What kind of data is needed to calculate profit and loss in liquidity provision?
The data needed to calculate profit and loss in liquidity provision include the price of each token at the time of deposit, the amount of each token deposited, the date of deposit, reward for the liquidity pool, estimated price of each token at the point of withdrawal, date of withdrawal, and liquidity provider token yield farming strategies.
Decentralized finance (DeFi) is one of the fastest-growing sectors of the blockchain industry that uses tools which are also available in traditional finance, making them available to everyone. These tools include unlimited remittance, lending, and borrowing services.
The mechanism behind lending and borrowing in DeFi allows holders of specific assets to lend them to others and earn interest on the loans. Similarly, borrowers of such loans must deposit some form of collateral that is above the value of the loans to protect against price fluctuations.
A major feature of DeFi loans is its anonymity which allows just anyone to take out loans without disclosing their identities to third parties or even passing checks that are similar to what traditional banks have.
This guide explores DeFi loans in their entirety and how they work.
What are DeFi Loans?
When crypto users interact with DeFi protocols to deposit collaterals and borrow digital coins, the borrowed assets are referred to as DeFi loans.
DeFi lending works such that users can access loans without the influence of any intermediary. Lending platforms often allow users to enlist their crypto tokens for lending purposes. With P2p methods, borrowers can access loans from decentralized platforms.
DeFi lending has seen steady growth since its inception due to the underlying technology which is the blockchain. This technology not only eliminates the need for external parties but also ensures that transactions are facilitated seamlessly without any form of obstruction.
Accessing loans on DeFi protocols is pretty easy and involves three basic steps – creating an account in a DeFi platform, creating a crypto wallet, and opening smart contracts. Unlike traditional banks that issue loans to a selected few, DeFi loans can be accessed by almost everyone. This is because DeFi has the main aim of “democratizing” finance, giving the unbanked population unlimited access to financial services.
Borrowers and lenders often benefit from DeFi lending as they have access to margin trading options and long-term investors can lend their assets and stand a chance to earn higher interest rates.
How Do DeFi Loans Work?
When investors store crypto assets in their wallets, they do not accrue any form of interest; the underlying value may only increase or decrease. This forms a reason why DeFi loans were developed.
DeFi loans work in a similar way to traditional finance systems. Investors will have to deposit their tokens into a liquidity pool which often exists in trading pairs such as ETH/USDT, ETH/USDC, or ETH/DAI. And to access loans, borrowers will have to deposit collateral (in the form of tokens) that is above the amount they plan to borrow. This excess amount often covers excessive price fluctuations.
Meanwhile, investors who loan their assets often generate interest on them. The entire lending and borrowing is process now being adopted because:
Investors can earn interest when they lend out crypto assets.
DeFi is anonymous and decentralized since it is built on the blockchain.
Lending pools remain one of the common ways to generate interest on crypto assets.
By over-collateralizing their loans, borrowers can protect their collateral against sudden price drops.
To understand how DeFi loans work, assume an investor plans to borrow ETH from a liquidity pool that contains ETH/DAI trading pairs. This means to access one ETH, the borrower will deposit some DAI that is slightly above the value of one ETH via a smart contract.
At the point of repayment, the borrower reclaims the original value of DAI deposited in the pool. But if the value of the ETH drops before it is repaid or the borrower defaults, the collateral can be liquidated by a certain percentage.
Types of DeFi Loans
There are four types of crypto loans and they include:
Collateralized loans: These are the most common types of loans and work such that deposited cryptocurrency is used as collateral for the loan. In some protocols, over-collateralization is required so that borrowers can access only a specific percentage of the deposited collateral, usually below 90% of the loan-to-value.
Uncollateralized loans: Though not popular, uncollateralized loans operate the same way as personal loans. To qualify, borrowers must fill out a loan application form, verify their identity and complete their creditworthiness review. These loans pose a great risk to lending institutions because the borrowers do not provide collateral that can be liquidated if the borrower defaults.
Crypto line of credit: Some crypto platforms now offer a cryptocurrency line of credit, rather than following the traditional loan pathway. The crypto line of credit is a collateralized loan where users borrow up to a certain percentage of deposited collateral. These loans come with a set of repayment terms and users only pay interest on funds withdrawn.
Flash loans: Flash loans are common in most cryptocurrency exchanges because these loans are borrowed and repaid in the same transaction. These loans are extremely risky and often used to take advantage of arbitrage opportunities in the market, such that a user can buy crypto at a lower price in one market and instantly sell at a higher price in another.
What Do Borrowers Use DeFi Loans for?
Just like traditional banks, borrowers have the right to use their loan proceeds however they deem fit. The same goes for DeFi. When a borrower borrows against crypto, the lender will fund the borrower’s wallet with the loan. However, there are specific use cases for crypto loans and they include:
Buying more crypto: When users borrow against their crypto, they get more cash that can be used to buy more crypto assets. This way, investors can “buy the dip” without using their personal funds to add to their crypto portfolio. Even if the crypto market suddenly falls, the coins that investors have added to their portfolios will be used to meet margin calls in the lending platform.
Crypto real estate mortgage: Investors can use borrowed crypto assets to acquire real estate or other rental properties, allowing them to retain their crypto assets and also enjoy the proceeds of their real estate investment. This also allows the borrower to maintain diverse investment portfolios such as real estate and crypto.
What are the Requirements to Access DeFi Loans?
Besides having some tokens which can be used as collateral, there are other requirements borrowers must meet to access DeFi Loans. These requirements are briefly explained below.
To access crypto loans, it is essential to set aside a specific number of tokens that will serve as a form of collateral. The collateral is what determines the amount of coins a borrower can access. Unlike traditional banking where the credit score of borrowers is considered, DeFi uses the collateral deposited to determine the amount of loan the borrower gets. This entire process makes underwriting quick and simple.
Benefits and Risks of Crypto Loans.
Crypto loans come with their own risks and benefits, indicating that while DeFi has some unique advantages that help it thrive in the crypto industry, it may just not be best proved by crypto lending.
Benefits of Crypto Loans
The benefits of crypto loans are far-reaching and include:
Rapid origination: Unlike traditional finance, crypto loans are swift and accessible by all. There are rarely credit checks or credit histories. DeFi lenders often offer flexible terms and low fees compared to what is obtainable in traditional finance.
More credit access: Borrowers do not need to have traditional bank accounts to have access to crypto loans. Since one-third of the world’s population remains unbanked, DeFi makes it easier for the unbanked to have access to crypto loans.
Retention of crypto assets: When borrowers gain access to crypto loans, they necessarily do not have to sell their crypto. They can get back their coins as soon as the loan is repaid.
Varying loan terms: Crypto loan terms vary between seven days to 12 months.
Diverse use case: Crypto loans have various use cases. They can be used to purchase more crypto or acquire real estate properties.
Risks of Crypto Loans
While crypto loans have so many advantages, certain risks apply. They include
Margin calls: When a borrower’s collateral assets decline rapidly, there is a tendency for the loan to reach a liquidation threshold. This is why borrowers are also required to deposit more collateral.
Cyber attacks: The crypto industry can be prone to security breaches and this can be a major setback to borrowers whose crypto custody has been temporarily transferred to the platform. Borrowers face the risk of losing their tokens should a hack occur.
Top DeFi Lending and Borrowing Protocols
There are a lot of DeFi lending and borrowing platforms in the cryptocurrency ecosystem. Some of them include Aave, MakerDAO, Compound, etc.
Aave is an open-source decentralized protocol that offers users access to liquidity pools where they can lend their tokens to others in return for interest. This platform offers varying interest rates for different yields and interest rates vary for each token.
The interest rates paid to lenders often range around 1% and 3%. While interest rates change regularly, some tokens are associated with much higher yields.
Some reasons to choose Aave include:
Flexible interest options as the rates can be fixed or floating.
Borrowing can somewhat be flexible as Aave also offers flash loans.
Aave offers a risk framework (A+ to D-) that displays the rating for various assets on the platform.
Nexus Mutual offers loan insurance on Aave.
Interest rate: Fixed or variable
Loan types: Custom repayment schedules.
Supported collateralized assets: BTC, ETH, MKR, USDC, etc.
Supported borrower assets: WBTC, USDC, MKR, etc.
Loan to value range: 35 to 80%
Compound is another DeFi protocol with liquidity pools for different assets. When a user lends tokens, they go into the liquidity pools and are merged with other users’ tokens. Borrowers then assess the liquidity pools and later pay what was borrowed with interest rates.
Compound allows users to earn interest in the same token they provide to the lending pool. With interest rates being fixed or variable, earnings differ with tokens.
Below are some features of Compound:
Lenders earn interest in the same token that was offered to the liquidity pool.
Loans can be insured using Nexus Mutual.
Interest rate: Variable
Loan types: Principal plus interest.
Supported collateralized assets: WBTC, ETH, DAI, etc.
Supported borrower assets: WBTC, ETH, YFI, etc.
Loan to value range: 65 to 85%
With MakerDAO, borrowers and lenders combine to generate DAI, a stablecoin that is pegged to the U.S. dollar. The protocols network is built on the Ethereum network and offers users flexible interest rates that range from 0% to 8.75%.
Below are some reasons why lenders choose MakeDAO.
In the event of volatility, users can use asset management tools such as DeFi Saver to ensure vaults are sufficiently collateralized.
MakerDAO vaults can be easily tracked because they are integrated into other asset management tools.
Decentralized Governance: a community of MKR token holders governs the Maker Protocol
Interest rate: Variable
Loan types: Principal plus interest, flash loans.
Supported collateralized assets: BTC, ETH, MATIC, etc.
Supported borrower assets: DAI
Loan to value range: 54 to 99%
Frequently Asked Questions (FAQs)
What do people use crypto loans for?
When borrowers gain access to crypto loans, they use them for several purposes such as arbitrage trading, purchasing more crypto, and diversifying their investment portfolio by investing in crypto mortgages.
Why do crypto borrowing interest rates change?
Interest rates often change in response to the utilization of underlying capital pools. Assuming a vast number of tokens have been earmarked for borrowing, the lending and borrowing rate in relation to the crypto will be quite low. The interest rate becomes popular when the pool gains popularity.
Are there minimum or maximum loan amounts for crypto?
Yes, each lending and borrowing platform has its own minimum and maximum borrowing amount. While minimum loan amounts may be as low as $1,000, maximum amounts may be as high as millions.
Uniswap is categorized as one of the biggest decentralized cryptocurrency trading protocols with applaudable features. Although its setup does not permit the buying and selling of digital currencies, users can efficiently push through with token swaps without the need to create an account.
In 2021, the protocol’s newest protocol for governance smart contracts, Uniswap V3, was released putting the company at the top of other popular automated market maker-based protocols and maintaining relevance.
Uniswap of Uniswap Labs is a decentralized-based exchange built by a developer named Hayden Adams on the 2nd of November 2018. In 2020, the staking and swapping solutions were upgraded to version 2 to support the interchange between ERC-20 tokens on the Ethereum chain. Its version 3 upgrade was announced in May 2021.
Changes and upgrades carried out on the protocol are often agreed upon when investors who hold the native UNI token participate in voting exercises. The UNI token had originally been allocated amongst the earliest users of the exchange. Prior to September 1st 2020, all Ethereum addresses associated with Uniswap were entitled to 400 UNI token claims which are currently valued at $1,400.
The protocol was ranked the fourth biggest by daily exchange flows in October 2020. Estimates made in February 2022 placed the market capitalization of the protocol’s native token UNI at $6.6 billion.
Some of the company’s investors include crypto-based ParaFi Capital, VC company Paradigm, New York-based capital market firm Union Square Ventures, and Andreessen Horowitz.
The UNI token
UNI is the native token of the Uniswap ecosystem which was launched in September 2020. Having shown dedication and support for decentralization, Uniswap made a move to launch its native token to improve community participation and management. The token utilized an “airdrop” pattern of allocation, awarding all Uniswap-associated Ethereum wallets with 400 UNI tokens. So far, airdrop has been used as a means of compensating users and investors.
Uniswap Pros and Cons Explained
Exposure to newer tokens: Before coins and tokens can be listed on exchanges, they must undergo a rigorous vetting process in order to minimize the risk of investing in dubious tokens. This means investors will have access to tokens that are still in the rollout phase.
However, the case is different with Uniswap. Coins and tokens are not subjected to lengthy vetting and new projects can be listed directly on Uniswap. This way, investors can swap to newer tokens even before they are listed on centralized exchanges.
KYC is not required: Uniswap is a decentralized protocol and does not require its users to comply with Know Your Customer (KYC) verification to access its services. Because users do not have to go through lengthy verification, onboarding on Uniswap is much easier. This also promotes anonymity.
Opportunity to earn rewards: Uniswap V3 gives users the opportunity to provide liquidity to its concentrated liquidity pools and adequate rewards in return. Due to its flexibility and efficiency which allows for multiple tier fees, Uniswp V3 has some competitive sides over V2. The liquidity pools are what facilitate trades, enabling users to convert one or more tokens for another.
Uniswap is communo-centric: Uniswap is one of the most unique protocols because it focuses on its community governance system, giving UNI token holders an opportunity to vote on public proposals in a system that is relatively non-complex. All changes to the Uniswap protocol are mostly done on-chain. This enhances immunity as all upgrades made can never change.
Uniswap Cons Explained
Safety risks: With Uniswap, the vetting period for new coins and tokens are not lengthy, paving a way for scam tokens to make it to the exchange. This poses a serious risk for investors who may likely swap their tokens for fake ones.
Fiat currency cannot be moved on or off the protocol: Because Uniswap is decentralized, fiats cannot be moved on or off the platform. The only platforms that support the movement of fiats are centralized exchanges.
Extremely high gas fees: Uniswap runs on the Ethereum network, and this means transaction costs are highly dependent on gas fees. Higher cost of transactions, especially when the network is congested, can be a turn-off for users.
Technical difficulty: Interacting with decentralized exchanges such as Uniswap can be extremely technical, making them a turn-off for new and intermediate investors. In addition, tracking liquidity provision on decentralized exchanges is technically tricky and may require the use of third-party data analytics tools.
Features of Uniswap
Uniswap has some features that are ear-catchy to investors. These features include:
Token swap: Uniswap’s swap feature allows for ERC-20 tokens to be exchanged among themselves using Ethereum gas fees. The UNI native token can also be purchased on the platform.
Collective governance: Uniswap’s governance policy allows for collective control and decision-making. No singular entity has power over another.
Liquidity pools: Uniswap V3 has concentrated liquidity pools where users who plan to earn passively can add liquidity and earn rewards.
Self-custody: Unlike centralized exchanges where users transfer the custody of their private keys to a platform, Uniswap is non-custodial, giving users total control of their private keys. This ensures the users remain protected if a hack or bankruptcy occurs.
Access to various tokens: Uniswap is home to both new and existing tokens, giving investors access to diverse coins to choose from.
How Secure is Uniswap?
Uniswap trading platform is highly secure and safe. It is a decentralized exchange with its liquidity reserve set up on Ethereum. Its decentralized features keep it away from third-party interference, which makes it less susceptible to hacks targeted at a central regulatory server. All tokens offered to the trading platform’s liquidity reserves are sealed by a crypto contract and designed free from alterations. Hackers may need details of your account to flexibly access tokens in the reserve.
The major possible risk that you can face when utilizing Uniswap trade is the risk related to user mistakes. This is because all crypto contracts and codes have been run through critical examinations and are confirmed to be safe.
Nonetheless, tokens offered to the liquidity reserves are at risk of being lost on Uniswap, as it is with diverse liquidity reserve exchanges.
Assets Available on Uniswap
There are over a billion assets that can be traded on Uniswap effortlessly, as it is compatible with Ethereum-based assets. Here is a list of some of the well-known coins that can be purchased on Uniswap:
Ethereum-based Basic Attention Token (BAT)
Native token Uniswap (UNI)
Wrapped Bitcoin (WBTC)
Dollar-pegged DAI (DAI)
Wrapped Ethereum (WETH)
How to Efficiently Utilize Uniswap
The process involved in using Uniswap is quite clear and easy to understand. First, an Ethereum wallet like Portis, Metamask or Coinbase is required alongside a tiny portion of ETH to cover the charges of gas needed. Thereafter, you can access the Uniswap official website through the browser set up on your preferred wallet and commence swapping.
Cost of Transactions on Uniswap
The protocol only requires 0.3% charge for token switch activities, and contrary to how it operates in a third-party supported protocol, these charges are not taken by Uniswap. The realized funds are used to compensate liquidity providers as the fee for their contribution.
Customers who need to explore a protocol that offers a variety of token choices, reserves, and a comparable low trading cost -intensified in its V3- may consider Uniswap a more flexible option. Of course, there seem to be a few vulnerabilities attached to some of its flexibility but this does not seem to count much given its high ranking amongst other exchanges.
With that stated, it is necessary to underline that only Ethereum-supported tokens can work with the existing version of Uniswap.
Given the global limitations that tend to hinder certain protocols in the digital space, it is commendable that Uniswap has continued to be on top of the game. The decentralized protocol has gained its stand in offering premium decentralized services to users. Nonetheless, its development does not stop at this stage as creators are committed to building on the enhancement of customers’ experience.
Frequently Asked Questions (FAQs)
How do investors earn passively on Uniswap?
There are several ways investors earn passively on Uniswap and they include liquidity provision, yield farming, and airdrops.
Is Uniswap the best place for investors?
Uniswap is ideal for experienced and tech-savvy investors who want to make extra income. The wide range of assets the platform supports and the concentrated liquidity pools make it a top choice for crypto investors.
Does Uniswap require KYC?
Uniswap is a decentralized protocol and does not require users to complete KYC verification.