DeFipedia Answers
Our DeFi experts share their knowledge and answer your questions about decentralized finance, covering topics like dApps, DEXs, DAOs, yield farming & staking, DeFi protocols, and more.
Recent Answers
Is Yield Farming Legit?
Yield farming is a DeFi investment strategy in which individuals lend or stake crypto assets to receive rewards. Generating yield farming returns and rewards is the ultimate goal. Benefits of Yield Farming Yield farming offers new strategies for crypto-asset holders to earn handsome returns on their cryptocurrency, much higher than any traditional bank would offer. It also provides high profits compared to most conventional investment channels. Compound yield farming is an open-source protocol designed for developers that utilize algorithmic and autonomous interest rate protocols. This determines the rate at which farmers earn on staked coins. Yield farmers can earn from token rewards, interest, transaction fees, and price appreciation. Some of the other benefits of yield farming include: Regarded as a generally safe practice Allows farmers to earn rewards A fantastic way to earn passive income Risks of Yield Farming While yield farming can be a great way to earn passive income, some risks are also involved. Such as: Impermanent Loss Liquidation Risk Smart Contract Risks Unfairness Scams Gas Rates [1] Bugs in Code [2] Price Risks Some investors may be displeased by the idea of rates and risks and rapid price swings that occur within the market. Is Yield Farming Worth the Risk? Yield farming is high-risk but can also be a high reward strategy, leading to high returns. You get out of yield farming what you put into it. If you have many assets to contribute and are willing to learn the ins and outs of yield farming, it may be a great choice. Due to impermanent loss and volatility, some won't take the risk. Others question whether or not yield farming is a pyramid scheme, and the answer to this question is no. Protocols and decentralized exchanges are generating value and are not a scheme. Resources: 1. https://fullycrypto.com/ethereum-gas-price-moons-as-yield-farming-cripples-network 2. https://thedefiant.io/defi-dev-offers-320k-to-whoever-finds-critical-bug-in-ethereum-dapp/
Asked a year ago
Are Smart Contracts Legally Binding?
Smart contract use has become increasingly widespread, and they've risen in popularity for as long as Ethereum has been a crypto market trend. So, what are smart contracts? Putting it simply, they are a program that has a coded self-executing contract, containing the precise terms of an agreement between a buyer and seller. These contracts are deployed on the Ethereum blockchain, they cannot be deleted, remaining permanently upon the chain. Reasons why blockchain smart contracts have gained popularity include: Speed & accuracy - once the coded condition has been met, the Ethereum contract is automatically executed immediately. Trust - smart contracts will forever remain on the blockchain, and no third party is required to manage them. Increasing transparency and avoiding potential fraud. Safety & security - everything that has been written on the blockchain is there to stay. All transactions on the blockchain, with smart contracts included, are encrypted and are almost impossible to hack & decode. Smart Contracts and the Law Many question the law behind smart contracts - specifically whether or not they're legally binding & enforceable. Although it differs from jurisdiction to jurisdiction, the general rule is that, yes, smart contracts are legally enforceable & can be legally binding if they comply with the contract law under the relevant jurisdiction. The specific term these types of contracts fall under is "smart legal contracts", which are largely automated contracts and can be accepted as legal & lawful under a jurisdiction, without any legal issues. Can You Amend or Terminate Smart Contracts? Once smart contracts have been created, there's no way to alter them, making them unbreakable contracts among their participants - this is generally how smart contracts work in blockchain. Although they have been programmed to be immutable by default, there are some scenarios in which smart contracts require amendments. Let's imagine a situation where both parties believe that it would be beneficial to alter a smart contract; they would go about it like this: Deploy a new version of the smart contract on Ethereum's chain. Migrate the state of the old contract technology to the new one, which could be costly in gas fees. Update the contracts that have interacted with the old contract to use the new one's address. Handle both contracts simultaneously as users slowly migrate to the new one.
Asked a year ago
What’s the Difference Between Automated Market Makers (AMMs) and Dex?
What Are AMMs? AMMs, also known as "automated market makers," are novel decentralized instruments that facilitate the autonomous trading and exchange of cryptocurrencies. AMMs help automate the process of liquidity provision and eliminate the need for intermediaries when exchanging crypto assets. They are created using self-executable smart contracts and help determine the price of tokens and provide liquidity. What Is DEX? A decentralized exchange, or DEX, is a blockchain application that powers a peer-to-peer marketplace for trading cryptocurrencies. DEXs provide their users with full custody over their assets and allow traders to conduct the exchange of crypto assets without any intermediary or centralized entity. DEXs use automated algorithms and smart contracts to connect and match traders. Differences Between AMMs and DEX Both AMMs and DEXs focus on eliminating intermediaries in crypto trading. However, their method of accomplishing this goal is different. AMM pricing is set by algorithms and executed essentially as "peer-to-contract" transactions. Before AMM integration, most swaps on DEXs occurred via order books and peer-to-peer sales. Some of the critical differences between AMMs and DEXs include: AMMs provide liquidity for illiquid markets, exposing traders to rare tokens regardless of liquidity pool or order size. Regular DEXs don't have liquidity pools. Instead, they rely on order books to pair and match willing traders.AMMs utilize mathematical formulas pegged to asset pricing, while DEX is asset-based pricing pegged via peer-to-peer transactional agreements.AMMs are peer-to-contract (P2C) protocols designed to improve current DEX performance and shortcomings. On the other hand, DEX applications utilize peer-to-peer (P2P) trading without intermediaries or oversight. AMMs are generally seen as an improvement over the traditional DEX model, which utilizes order books to match traders and complete crypto transactions. While AMMs offer the advantage of liquidity and efficiency, there is also the risk of slippage for large-scale orders and impermanent loss for the liquidity providers. Regardless of these risks, most DEXs today utilize the AMM model. As technology evolves, solutions to these drawbacks may emerge and allow AMM-based DEXs to become the preferred choice for crypto traders.
Asked a year ago
Yield Farming: How to Avoid Impermanent Loss
Impermanent loss (IL) occurs when price volatility within a trading pair causes a temporary loss of funds for the liquidity provider. You can incur an impermanent loss when you supply liquidity to a liquidity pool and your deposited asset(s) decline in value. Liquidity providers realize impermanent losses only when they withdraw their funds from the pool. However, if the asset price rebounds, liquidity providers are no longer affected. Can Impermanent Loss be Avoided? As long as the crypto market remains volatile and unpredictable, liquidity providers cannot avoid impermanent losses. However, smart investors can take specific measures to control the degree of impermanent loss they experience when locking their assets in a liquidity pool. Some of these strategies for mitigating impermanent losses include: Using Stablecoin Pairs: Providing liquidity in stablecoin pairs like USDT and USDC will help offset impermanent loss since both trading pairs are stable (pegged to a stable asset) and immune to the crypto market's volatility. The downside is that your stablecoins will remain the same value, even if the market is bullish. Using Mirror Assets: If you don't intend to contribute stablecoin pairs, you can reduce impermanent loss by using tokens that follow similar prices. Examples of token pairs like these include sETH/ETH and DAI/USDC. These tokens have minimal price divergence and will not deviate too much when there is volatility. Waiting it out: Impermanent loss, as the name describes, is not a permanent loss unless you withdraw your funds from the pool. Therefore, an ideal strategy to avoid it is to exercise patience, wait out the volatility, and hope the prices rebound before withdrawing from the protocol's pool. Is Impermanent Loss Common? When investing in any DeFi protocol, it is best to look beyond the short-term consequences of impermanent loss because impermanent loss is common and difficult to avoid. As a result, you should expect a good amount of IL, and you should factor it as part of your liquidity pool investment risks. The best strategy is to ensure that the yield you earn from the pool is sufficient to cover all potential yield farming risks.
Asked a year ago
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