Breakdown time: Olga Ortega, the co-founder and CPO of real-time DeFi Explorer AnalytEx by HashEx explains some of the concepts in decentralized protocols.
There are countless decentralized protocols and ways to use them. At AnalytEx we know that more than a thousand smart contracts signed by MasterChef, usually called farms, are created monthly. In addition to farms, many people know about the existence of pools. There are several well-known types of pools, like liquidity pools, syrup pools, or staking pools, but how do they really differ?
Even experienced investors find it difficult to understand the terminology used in protocols as it varies. Let’s take a closer look at the details using TVL’s best decentralized protocols like Pancakeswap, Apeswap, Uniswap, and Sushiswap, according to AnalytEx.
What is a liquidity pool?
A liquidity pool is a trading pair of tokens with locked funds from liquidity providers. When investors put two tokens into a liquidity pool, they create an LP token and receive income from all swaps made between these two tokens according to a specific protocol. The only risk they agree to by creating an LP token is what is known as “impermanent loss”.
What is temporary loss?
The crypto market is known for its volatility. When the price of tokens changes its value. In this regard, if two tokens in the liquidity pool move differently in price (a negative correlation), liquidity providers may suffer a temporary loss, which subsequently results in a change in the ratio of tokens in the pool. This is done to stabilize the overall value of the pool.
For example, an investor deposits 310 BUSD and 1 BNB into the liquidity pool by creating an LP token. Besides this investor, there are 9 other investors who contributed the same amount to the same pool. It turns out that the total value of the pool is 10 BNB and 3100 BUSD for a total of $6200. So each investor owns 10% of the pool and all would get back 1 BNB and 310 BUSD upon withdrawal.
But what happens when the price of BNB goes down? The pool will have more BNB but less BUSD. So investors still have 10% of the pool, but now in USD. This amount will be less than the original amount because BNB has fallen in price compared to BUSD. This is called impermanent loss.
It is volatile as it is only implemented when liquidity is withdrawn from the pool. If the investor does not touch the funds in the pool, the liquidity value can return to its original level. Also, we should not forget that investors receive income from the provision of liquidity, which can offset temporary losses.
Liquidity pools composed of stablecoin pairs or positively correlated token pairs (when two tokens in the liquidity pool move in price together) are considered the safest, but always watch out for DYOR.
Breakdown: What is a farm?
A farm is a smart contract where you can place LP tokens to get additional income in the tokens of the protocol you are using. For example, if you deposit your LP token, consisting of BNB and BUZD pairs, into Pancakeswap, you will receive a token of that protocol called CAKE (which has an APR of 20.15% at the time of writing). At the same time, the investor gets a double reward for staking the LP token and for providing liquidity in the BUSD-BNB pair.
Very often a farm is simply referred to as a decentralized protocol that has the ability to farm, for example the Pancakeswap Farm – that’s not quite right.
In fact, it is correct to call a farm a MasterChef contract that allows you to receive income in protocol tokens, regardless of whether an investor puts an LP token (a pair of tokens) or a regular token into it. All of this is part of the MasterChef contract and should be called a farm.
Downtime: Pancake interface
Let’s consider the Pancakeswap interface.
According to Pancakeswap, the FARMS tab contains farms where an investor can stake their LP tokens and earn a CAKE token.
We observe the same situation with other protocols, for example Apeswap. We can stake the LP token and get BANANA – the token of this protocol.
A similar picture is presented by the new, rapidly evolving FstSwap protocol that was recently auto-detected on the AnalytEx Farm Aggregator. You can use your LP tokens to earn FIST tokens.
All of these farms are governed by the MasterChef contracts of the above protocols.
However, there are also staking or syrup pools. Those are two names of the same thing. Different protocols name these pools differently. They have nothing to do with liquidity pools, which we talked about at the beginning of the article.
Breakdown: What are staking/syrup pools?
Staking or syrup pools are the type where you can stake a regular token (usually a protocol token) into a smart contract to earn other tokens. This is done on proof-of-stake blockchains, where a user earns interest to pledge their tokens to the network to provide security.
For example, on Pancakeswap, you can stake CAKE tokens to earn various tokens.
We can see the same situation on Apeswap.
Notice the top lines in the “POOLS” tabs of both logs. There are “stake PIE to earn PIE” and “stake BANANA to earn BANANA” pools. Few know that these pools actually relate to the MasterChef smart contract like a farm, unlike all other pools that belong to entirely different smart contracts. This leads to a confusion of terms.
When an investor places an LP token or a regular token and earns protocol tokens (in the case of Pancakeswap it would be CAKE) they use the MasterChef contract. We can call such pools “farm pools”.
But as a rule, most known protocols do not explain this difference and divide farming opportunities according to the criterion of tokens placed in a smart contract. When we talk about LP tokens, the commonly used term is “farms”. But when it comes to ordinary tokens, it’s called “(staking/syrup) pools.”
In AnalytEx we show all pools belonging to the MasterChef contract in one place, whether it’s an LP token or a single one. Here is the Apeswap log shown on the AnalytEx website.
Final breakdown
From everything we have covered above, it can be concluded that regardless of the interface and terminology in different decentralized protocols, if you receive income in tokens of the protocol you are using, you are accessing that protocol’s MasterChef contract. This is regardless of whether you use LP tokens or regular tokens for staking.
If you use ordinary tokens and get a reward in some other tokens, you use third-party smart contracts, but all these farming ways are called pools.
In order to fully understand what is happening in the DeFi space and to properly make data-driven decisions, it is necessary to understand the basic terminology and their differences.
About the author
Olga Ortega is Chief Product Officer and co-founder of HashEx’s real-time DeFi explorer AnalytEx. She is an accomplished IT professional with over 12 years of experience designing and implementing big data systems. Over the years, Olga has held leadership positions in several global organizations such as IT giants Google and Facebook. She led the creation and implementation of scalable data solutions, analytics software, web and mobile applications. Olga also established business intelligence practices to improve business decision-making processes. At AnalytEx she is responsible for driving the development of the project.
Do you have anything to say about this terminology breakdown or anything else? Write to us or join the discussion on our Telegram channel. You can also reach us on Tik Tok, Facebook or Twitter.
Disclaimer
All information contained on our website is published to the best of our knowledge and for general information purposes only. Any actions taken by the reader based on the information contained on our website are entirely at your own risk.
Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers
https://nov.link/cryptoanswers
Comments are closed.