The markets are cooling and live to fight another day. As the dust settles down and the consolidation phase begins, It is time to work on passive assets.
For the small investor, liquidity providing has been troublesome in the past since gas fees for smart contract execution were outrageous. With the release and growing popularity of layer 2 protocols such as Polygon, Ethereum can become frictionless.
A recent newsletter covered one of the new ways to explore the DeFi sector with cheap gas fees. Check out our how-to for setting up the polygon network found here.
If you are already onboarded on the Polygon network, checking out Curve Finance, Sushiswap, Quickswap, AAVE, DFYN exchange, and Pool Together for their liquidity pools can be pretty lucrative. While there are risks to be cautious of, liquidity providing when markets are less volatile can reduce the risk of impermanent loss.
Impermanent loss can happen when you provide assets to a liquidity pool. Picture a balanced scale; on each side of the plate, your weighted assets equal each other when you enter the contract, and you now own a percentage of the pool.
As traders exchange the currencies you are providing; it becomes weighted differently. If the price of one asset increases against the other, traders using your liquidity will be paying with the lower demand asset. If you withdraw your funds while the ratios are imbalanced, you will get more of the less demanded asset. The more considerable a change in percentage, the more you are exposed to impermanent loss. In this case, the loss could mean less dollar value at the time of withdrawal than at the time of deposit, but the asset ratio will be the same.
Many exchanges provide bonus yield to incentivize participation, referred to as yield farming, to combat this issue. While you are earning fees for liquidity providing, the transactional volume must stay consistently high to offset the potential losses from impermanence. Newer exchanges try to incentivize LP (liquidity providers) to transfer tokens referred to as a vampire attack. These attacks siphon liquidity by any means necessary; as more assets are provided to the exchange, the better prices traders can execute.
Finding these incentives on a secure project is tough; making sure you are using audited contracts to prevent loss of funds is of the utmost importance. One resource I have found immensely helpful for validating DeFi smart contracts is Rugdoc.io. They cover Polygon, ETH, Binance smart chain DeFi protocols and see if any vulnerabilities are known and the risk of participation.
Throughout this market cycle, there will be ebbs and flows. Knowing when to hold and increase passive revenue through consolidation phases can continue the growth of your assets. Increasing stablecoin exposure can allow for possible lower entries during significant parabolic moves as the price returns to the norm.
There are two ways to go about increasing stablecoin holdings for lending and farming:
1️⃣ Establish a definite target. If $200,000 of assets gives you independence and transforms your life, why wouldn’t you reduce exposure as you approach that number? That means the closer you get to your target, the less crypto you hold and the more stablecoins you have.
2️⃣ Reduce your asset exposure every month. The market has a cyclical nature, and we won’t be running with the bulls forever. Instead of using a rigid price, we assume that the likelihood of the bull market ending increases every month. This reasoning allows us to increase stablecoin exposure and reduce crypto exposure naturally over time. You can use your stablecoins for lending or liquidity provision.
The more assets you accumulate, the more the magic of compound interest can do its’ “thang.” Any source of passive income allows for less monetary stress in your life. So, let the money do the work for you and go down the Defi rabbit hole.
Well, the last time I purchased bitcoin was the first Microstrategy purchase in November. Today a country just legalized BTC.
Does Bitcoin’s Desirability Go Up When Its Price Increases?
The price of Bitcoin can rise and fall by thousands of dollars in as little as an hour. For smaller projects, that can happen in a matter of seconds. But despite cryptocurrency’s notorious volatility, the desirability of digital money moves more slowly.
While there is a rich and diverse corner of crypto specializing in predicting price, there is a considerably smaller group of people looking at Bitcoin from a behavioral economics perspective. In particular, sentiment around Bitcoin when the price goes up.
When Bitcoin’s price surges, does the demand follow suit? And more importantly, when the price of Bitcoin goes down, does its allure fade with it? In this week’s article, we’ll be exploring whether Bitcoin has become what economists call a Veblen or a Giffen Good. Read More.
A Blockchain Project Just Bought $704k in Digital Real Estate To Build a Virtual Mall
In an attempt to connect real-world shopping with the virtual world of games, Boson Protocol bought a plot of land for $704,000 on the Web3 game Decentraland.
Decentraland is a web browser-based game that lets you explore and build like Minecraft and socialize like Second Life. But unlike those other games, Decentraland is a game of the Web3, allowing true ownership of virtual land and in-game items thanks to blockchain technology.
The company will build a mall for global brands to open up shop on the piece of digital real estate.
Boson, a blockchain protocol, provides decentralized infrastructure for trading tokenized real-world items, and it also wants to entice its neighbors on Decentraland to adopt its technology. Read more.
El Salvador Passes Law to Make Bitcoin Legal Tender
With 62 favorable votes, the Legislative Assembly of El Salvador has approved a bill proposed by President Nayib Bukele to recognize Bitcoin as legal tender in the country.
At approximately 8pm local time, President Nayib Bukele announced via his Twitter account that he had introduced the “Bitcoin Law” to his legislature. The new law not only gives Bitcoin the status of legal tender but compels merchants throughout El Salvador to accept it as a payment option.
Just two hours after the announcement, the country’s Legislative Assembly was already debating the proposal, and it was passed shortly thereafter. Read more.
SEC’s Peirce Warns Against Stifling Crypto Innovation
Hester Peirce, one of five commissioners on the U.S. Securities and Exchange Commissioner, said in an interview in the Financial Times that overzealous regulation of cryptocurrency in the U.S. could hinder innovation.
“I am concerned that the initial reaction of a regulator is always to say ‘I want to grab hold of this and make it like the markets I already regulate’,” Peirce told the FT. “I am not sure that’s going to be great for innovation.”
Peirce has been a longtime advocate of a calibrated approach in regulating crypto. During CoinDesk’s Consensus21 last month, she said custody rules in the U.S. should be updated to accommodate digital assets. Read more.
That’s all for the free weekly Crypto Crier. If you enjoyed this article, please like and share. If you have any questions, please leave a comment, and I can answer your questions further. As with all of my writing, this is not financial advice and is my opinion. I cannot stress enough how important it is to do your research on all financial endeavors. I hope that these newsletters can help investors realize the current financial systems’ downfalls and usher in a more equitable system without middlemen.
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