Gain & Loss in DeFi!

I. Gain

1. Token purchase offerings from new projects.

2. Automatic Market Maker & Liquidity Provider

  • MEOW is a new token in the market. If the project owner wants to create liquidity for investors, he will set up a liquidity pool on the Trader Joe’s exchange.
  • He then provides liquidity at this ratio: 1,000,000 MEOW for 1000 USDC. This step immediately determines the value of the MEOW token: 1,000,000 MEOW is now equal to 1000 USD, meaning 1 MEOW costs 0.001 USDC, which is roughly 0.001 USD.
  • John is an investor who wants to exchange 100 USDC for the same number of MEOWs and believes he is the only one in the market who can do so. After transacting, AMM provides John with 100,000 MEOW. At this time, the liquidity pool will contain 900000 MEOW and 1100 USDC. MEOW’s price is then = 1100/90000 = 0.0012 USDC a token.
  • When another investor, such as Rose, who already owns MEOW prior to the private sale, wishes to exchange 900000 MEOW for USDC, the process is similar.
  • Slippage: Because both John’s and Rose’s buying/selling actions affect the value of MEOW (an increase of 20% in value in John’s case), John should have received fewer tokens than he would in the above example. Slippage occurs when a large volume of buying/selling occurs, causing the liquidity pool to skew the number of tokens in the pair, hence affecting their value.
  • Transaction fees: For most DEXs today, buyers and sellers must deduct a percentage of total trading volume (typically 0.3 percent) to pay the exchange and liquidity providers. John, for example, would lose some USDC, whereas Rose would lose some MEOW.
  • The value of the MEOW-USDC liquidity pool is currently 2000 USD, with 1000 USDC and 1000000 MEOW.
  • An investor adds an additional 1000 USDC and 1000000 MEOW to the pool, whose value rises to 4000 USD. He will then be holding 50% of the pool shares worth a total of 2000 USD.
  • If the trading volume of this MEOW/USDC pair reaches 1,000,000 USD in a single day, the LP will receive a total commission of: 1.000.000 x (0.3% — 0.05%) x 50% = 1250 USD per day.

3. Staking, Farming & Airdrop

4. Profit from your peers

II. Loss

1. Scam

2. Front-running

3. Impermanent loss

4. Inflation

5. Hacking, payday loans, and exploit

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