About the recent launch, not of @Holozing as a game, but of the initial distribution of the $ZING token and some economic aspects surrounding this kind of events, I consider it appropriate to draw your attention to some terms that we cannot forget if we are thinking of getting involved in a DeFi project of this kind.
Specifically I am going to focus on the liquidity pool and how it works.
What I explain below would work the same in other DEX such as Uniswap, PancakeSwap, ApeSwap or Tribaldex itself. But first...
What is a DEX?
A decentralized exchange (dex) is the technological evolution of a traditional exchange, in which we can perform operations without the need to give our data or deposit our cryptocurrencies.
If our money is not deposited in the DEX, where does the liquidity (availability of funds) come from when a trade is executed?
For that, DEXs have implemented liquidity pool (lp), which are nothing more than funds locked in a smart contract.
Any user is allowed to add funds to the contract to ensure liquidity on the exchange.
By providing liquidity, two tokens of equal value are deposited into a pool.
For example, 1000 HIVE ($301,70) + 48954.98 ZING ($301,70)*
*(price taken at the time of writing this post)
What do you earn by adding liquidity??
When you add liquidity to a pool, you get LP tokens in return, which are tokens that are generated to represent the part of the pool held by the provider (us). In this case the LP token is the ZING itself.
Then the LP tokens must be placed in a Farm (here it is called stake) in such a way that they bring us profit in the process.
The money of course does not come out of the air (this is not a ponzi), the profits obtained come from the commissions charged by the DEX itself when a trade is made.
Is this always profitable? Guarantees?
Actually... NOT ALWAYS.
There is a phenomenon called impermanent loss (you can also see it as Divergence Loss). This loss occurs when the relationship in the price of the pair in which we provide liquidity, changes.
The loss is the same in whichever direction the price change occurs.
To put it another way:
A price change of 1.25x results in a loss of 0.6% relative to HODL.
A price change of 1.50x results in a loss of 2.0% relative to HODL
And so on and so forth, the losses can be greater.
In other words, YES, you will always be exposed to losses. Of course, if the price were to return to the same value as when the liquidity provider added its liquidity, this loss would disappear.
In addition the loss may be offset or rewarded with commissions earned. The performance of fees depends on many factors and there will always be some price difference loss to consider.
My take: If the long term price movements are large, they could result in much larger losses than commission gains, however, if #Holozing achieves a significant volume of daily transactions it could be profitable for liquidity providers, and since in this case the LP fully matches the base token of the pair, if after the official launch of the game the $ZING token reaches a price much higher than the current one, it could leave very good returns for those who initially bet on this distribution modality. The comparison will always be against HOLD and what would have happened if you had just holde your coins.
Notes:
- Providing liquidity to a pool on Tribaldex is an interesting way to discover the emerging world of decentralized finance.
- Holozing offers the opportunity to earn returns on our $HIVE and $ZING without entrusting our funds to third parties, but it has its own set of risks and tradeoffs.
Disclaimer:
Nothing here constitutes Financial Advice. DYOR.