The popularity of DeFi has decreased a bit in recent times, and both from the perspective of DeFi token price and return rate, it has fallen back compared to its prime. But it would be an exaggeration to say that DeFi has entered the cold winter. I believe that the next wave of DeFi trends is gaining momentum.
Following the announcement of Paypal’s official announcement that it will support Bitcoin transactions, the price of BTC broke through a two-year high. The foundation of DeFi is still strong. With the entry of Silicon Valley venture capital institutions, some commentators believe that DeFi will enter a bubble period in the next few years.
It seems that Silicon Valley has finally discovered DeFi. Compared to the aboriginal people of the crypto community, the folks in Silicon Valley are late, whether it is BTC, ETH, or DeFi, they are all late. But if the historical revelations have reference value, we can say that they will hype and create a huge DeFi bubble in the next few years. ”-Qiao Wang, Crypto Analyst
But like all early industries, the advantages and disadvantages of DeFi are equally obvious: there are stories of getting rich and high-yielding opportunities, but it is also full of lies, scams, plates and sickles. Players who participated in it had to pay more attention and improve their ability to control opportunities and risks, so that they would not be like a rash man, holding up the torch and passing through the gunpowder barrel.
Today’s article originated from an article by Medium, and talked about playing in the DeFi industry, what experience is there for reference, and what pitfalls to avoid in time.
The flaws of CEX and the rise of DeFi
With the emergence and prosperity of DeFi applications such as Uniswap, crypto asset traders can be regarded as finding their favorite toys. Criticisms of pin insertion, fraud, and black-box operation of centralized exchanges have emerged one after another. DeFi has emerged, and it has also been generally welcomed and actively responded to by the crypto community.
There are many criticisms of CEX, such as:
- Become too powerful, become a monopolist of a project
- Conspiracy to corrupt and harvest traders
- Manipulate asset prices
- Minting counterfeit coins and circulating them on exchanges
- Inside transaction
- Manipulate margin trading and option trading
- The transaction ran away and the price was manipulated
- Mandatory customers must do KYC procedures
- Give personal data to government agencies without your consent
- High rake
- When something goes wrong, let the user take responsibility
- The pin drops the chain at the critical moment
With the recent accident of OKEx, perhaps we can add one more thing to this: The private key controller is at risk of losing connection and cannot withdraw coins.
In summary, it is not difficult to see that centralized protocols are becoming more and more popular, and many people expect DeFi to play a key role in the next round of cryptocurrency bull market. However, it should also be considered that the risks of DeFi networks cannot be ignored.
Where there are people, there are rivers and lakes, and where there is money, there will be scams.
The transaction process of the decentralized protocol allows traders 24*7 access to the encrypted market, their funds and new projects. With this in mind, we will now investigate some security rules to help transactions in this attractive growth area.
The DeFi protocol allows traders to continuously trade encrypted assets, participate in new projects, and manage assets. When we want to participate, we need to understand some basic principles to improve safety as much as possible.
9 basic principles
- Follow new projects of interest via Twitter and Telegram. Many projects will publish official information through these channels, and verify the news through official channels as much as possible.
- Follow up and analyze team announcements. Is the team working as scheduled and proceeding as planned? If there is an abnormality, it may indicate that the team is understaffed, poorly planned, or worse, there is a risk of running away.
- Use information from trusted websites, such as Coingecko, or domestic chain news and other websites, to compare and verify the announcements in the telegram group. It is not complicated to verify the contract address of the project, but such a simple operation can prevent scammers from using fake addresses to deceive unsuspecting traders under the name of legitimate projects.
- Check the liquidity of the corresponding token in Uniswap. Although some projects are already online, they have not increased liquidity on Uniswap, which means that traders cannot trade tokens in time. Often this will be a dangerous signal, which means that the project party may have to pull up and let the crypto asset traders take over.
- Understand the secret fraud of project members. This kind of information is often difficult to detect, and sometimes it is impossible to prevent it. However, when there are “accidents” in the distribution of project tokens and the progress of the project, especially when things go wrong where they shouldn’t go wrong, you should be careful at this time.
For example, when a project goes online, three rounds of private placement are conducted first, and only the tokens distributed in the third round can be fully unlocked. Before selling the tokens, team members stated that they would provide liquidity through Uniswap. However, they later made the market through Balancer DEX with token liquid funds worth $2 million. The team members first bought the tokens themselves and used robots to preempt transactions to increase the price of the tokens. Later, he claimed that because of errors in the first and second rounds of private placement, these tokens were cancelled.
You know, for the project team, token distribution is one of the simplest tasks. It is difficult for an experienced team to make mistakes in this kind of thing. Some people suspect that this is just a pretext. Later, the team cancelled the original token and created and released a new token within 24 hours. After going online again, the tokens issued at the original price soon broke. The team tried to erase the traces of price manipulation and sold it to private equity investors.
- Check the smart contract. Through the release and verification of the smart contract, some clues of the project can be found. The contract can be verified through GitHub, but also pay attention to the delayed release of the smart contract. If a project only releases a smart contract 24 hours before it is released, it may indicate that the project party has something to try to hide.
- Inquire about project details, such as white papers and website information. These tasks can help you make a judgment and see whether the project is a scam.
Whether it is insufficiently prepared, or is it just that the market conditions are inappropriate and the time to go online is not ripe. Some standards should also be listed, such as the lock-up situation of the team’s tokens, and the influence of the team’s part on the market’s token circulation.
- Use common sense. Many copycat projects are named after food, which sounds ridiculous. Such projects are prone to runaways. As a DeFi participant, your common sense should tell you.
- independent thinking. Remember, even though social media is fun, don’t be fooled by the hype. They are not your friends, they are not your well-intentioned colleagues in the crypto community. Often they are just a combine harvester that hides the sickle and is ready to pick up the knife at any time.
People can easily entertain themselves on Twitter and blogs related to encrypted information. But consider the example of Blue Kirby. The once popular YFI fan and the well-known Twitter account Blue Kirby enthusiastically touted YFI on Twitter and played the “few understand” stalk. yEarn founder Andre Cronje also donated 25 YFI to him. It also took the opportunity to sell NFT through the Rarible platform to promote the new project Off-Blue to earn money. It took only three months for Blue Kirby to go from being a fanatic to being a fanatic. Don’t just hand over your IQ to others.
8 notes
Don’t participate in the investment solely based on the influence of the so-called KOL on the media such as Twitter/Weibo. Many experienced traders are still making money through the Tugou project. They just buy in early and then sell quickly, so don’t believe other people’s stories too easily.
- An anonymous team’s project should be vigilant, although they may give you a nice rhetoric. The risk of anonymity is obvious. The team can run away at any time, and they will remain anonymous to hide their identity. Of course, you have to judge for yourself.
- Pay more attention to the mechanism of token liquidity supply. Many projects are half-concealed and want to run away but are reluctant. Therefore, they will manipulate the price to increase the price of the currency and then sell it at a high price, causing huge losses to traders. The small supply of tokens or the low circulation of non-locked tokens may be red flags, and you must distinguish them carefully.
- Be wary of the so-called clever tongue of KOL. This is often done deliberately so that they can throw their tokens for you to take over, so be vigilant. These tokens were either obtained through private sales or were obtained for free to promote the project. The advocacy of the project is a dangerous signal, because when they do so, they often do not consider the qualifications of the project, just for the money. Do your own homework.
- Be wary of the sayings of the project team, “If you miss Bitcoin, don’t miss XXX / XXX is the next Bitcoin.” This kind of rhetoric should immediately sound your alarm. This project is likely to be copied and pasted from another project, the purpose is to quickly make a profit and quickly exit.
- If a project frequently uses rhetoric such as “coming soon”, be wary. This may mean that they have nothing to announce, they just hope to pull down the red carpet and coax you up before getting your investment.
- Some projects have few currency holding addresses and a large number of tokens are locked in. Such projects should be careful. A large number of circulating tokens are concentrated in the hands of one or a team, which is likely to allow unknowing DeFi traders to take over.
- There is another situation, which is the opposite of the above situation: some projects have a large number of addresses with a small number of holdings but the same number of holdings. This kind of situation should be vigilant. You can use the tool to view the token distribution amount and pull to the end of the list to view the details. This means that developers use this method to make outsiders seem to have a legitimate and reasonable token sale, but in fact these are just pretends.
- If there are many spelling errors on the website, beware!
7 economic advice
In addition to the impact of security factors, DeFi also has special economic risks to consider. Due to space limitations, we abbreviate these seven suggestions.
1. A high annualized rate of return (APR) does not mean a high true rate of return
How about APR? This is the first concern of people. The initial APR of many projects is ridiculously high, and it seems like a good way to increase your income. But first ask yourself two questions:
- Can high returns be sustained? At the beginning, a large number of mining coins were distributed and the popularity was high. The income of mining head mining is indeed considerable, but it will also drop significantly in a short time.
- Can the obtained tokens be sold at a good price? In many DeFi projects, a large number of tokens are locked up at the beginning, resulting in an inflated market value, but soon the price will plummet.
2. The usage scenario is very important
Is the token of a DeFi project really valuable? In fact, the value of governance tokens in many projects is overestimated. In addition to governance, what other uses of tokens are there?
For example, Uniswap’s platform token UNI can be used as collateral to obtain loans on other platforms, which is a true manifestation of the usage scenario. This gives UNI additional value. However, many other DeFi tokens are only temporarily inflated in price and are not supported by real usage scenarios. They are destined to fall soon.
3. Be wary of unaudited items
In the face of money, credibility without audit support can sometimes simply not withstand the test. Remember to check whether the project has been security audited by a well-known audit team. The code of the project must be audited.
For example, once Andre Cronje revealed that he is connected to a project under development, people trust his good reputation, and therefore invested a lot of money. However, the project was not audited, and hackers stole $15 million from the project.
4. When calculating profit, remember to take Gas fees into consideration
DeFi investors should not be unfamiliar with the period of high gas fees on Ethereum. Especially when it comes to complex contracts, if the transaction volume is small, the petty profits are often not enough to cover the high gas fees. Remember to consider this when calculating profits.
5. When to enter the market is critical
When will mining start? The time of entry is critical. It has become a tacit consensus of many people to grab the top mine. A few days after the initial launch, the market’s return rate will often begin to fall. If you notice the project at this time, you must be especially careful to avoid becoming a picker.
6. Seriously consider impermanence losses
As the price of token trading pairs participating in market making fluctuates, the number of token pairs you participate in market making will also change. Impermanent losses are caused by the violent fluctuation of tokens. Careful selection of market-making trading pairs will help reduce unnecessary losses. The understanding of impermanent losses should be known to every trader participating in DeFi. Some DeFi will provide comparative data for viewing. In the trading pool, long-term provision of liquidity may help solve this problem.
7. Remember to calculate the total market value of the project
At the beginning, the circulation is small and the token price is high, and as the circulation of tokens increases in the next few days, the price of DeFi tokens will drop. A reference method is to find out the ranking of your investment projects based on the statistical information of websites such as Coingecko, and then compare them based on the token supply of another similar project as a reference for future price fluctuations. This kind of calculation helps you to calm down from the false High of the current project, because after calculation you will often find that the unit price of the project will drop very low.
summary
The rapid development of DeFi, despite the considerable benefits, is often a high-risk game. Do your homework and manage risks before investing. Only invest in assets you can afford. Only invest in projects you can trust. Avoid FOMO. Investing a small amount of money is regarded as the cost of learning. Participating with this mentality will make you more comfortable in DeFi projects.
Following professional people and learning from professional communities is also an efficient way to help avoid pitfalls.
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Translation: Jing Kai
Disclaimer: This article is the author’s independent point of view, does not represent the position of the Blockchain Research Society (public account), and does not constitute any investment opinions or suggestions.
Original: https://medium.com/@StrongWriters/the-dos-don-ts-of-decentralised-protocol-trading-7c06b074c210.
