Lose Money in DeFi
If you want to get involved with DeFi, there are a few things you should know before making any investments. These include: Functional autonomy, protection and transparency
Website design By BotEap.comdefi คืออะไรThe most fundamental reflection any investor can make is to decide which kind of financial decisions they’d rather have their money make – those that are made by individuals susceptible to fear and greed, or those that are protected by code and protocols. This is a simple question that encapsulates the difference between CeFi (centralized finance) and TradFi (traditional finance).
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Centralised finance relies on centralized financial institutions such as banks and exchanges to carry out financial transactions, but the problems associated with these institutions are many. These institutions have been known to fail due to poor risk management, and they can often come close to collapse during times of high volatility.
How Do You Lose Money in DeFi?
DeFi, on the other hand, is a technology alternative that uses smart contracts to achieve distributed consensus in a way that is much more resilient and capable of operating in difficult conditions than centralised finance. It also ensures that all the parties involved in a transaction are code-wired so they cannot break the rules, no matter who is on one side or the other of the deal.
A liquidity pool is a smart contract-locked collection of tokens that facilitates trading in DeFi markets. The pool aims to reduce the price of assets by providing liquidity to the market.
Liquidity pools are also referred to as AMMs (automated market makers) and can be used for yield farming, a popular DeFi strategy. Yield farms use smart contracts to lock tokens for a set period of time in order to earn rewards, which can range from a few percentage points to triple-digit rates.
These rewards are usually based on the quantity of the tokens locked and can be redeemed in a variety of ways, such as trading them for other crypto assets or cash. These rewards can be significantly higher than the original value of the underlying tokens, and they can also provide a source of passive income.
However, it’s important to note that staking carries several risks that are not applicable to other financial products. Staking requires a significant amount of capital, and there are many ways to lose that capital.
For example, if the smart contract on the tokens acquires a bug, investors could lose their funds completely. Additionally, if the pool loses its reputation, they may not be able to withdraw their funds.
The impermanent loss phenomenon is a big issue in the world of DeFi, and it is important for investors to understand how it works and how to avoid it. It is especially relevant for investors who are leveraging their funds in liquidity pools and AMMs, since it can have a serious impact on their overall returns.
If you’re investing in a DeFi liquidity pool, it’s important to check that the AMM is reputable. You should also be sure to read the terms and conditions carefully, since many AMMs are not transparent about the risk associated with their platforms.