Andrey Didovskiy

💎 Digital Asset Investor 🧙‍♂️ Crypto Content Wizard Laser focused on bringing incredible applications to Life 🌟

The arrival of cryptocurrency into the public domain has sparked the next chapter of economic evolution for mankind. Touted by the world's most prominent technologists and financiers as the frontier for global economic transformation, tokenomics has become the focal point of financial innovation.

Stemming from computer science and acting as vehicles that capture arbitrary, abstract forms of value, tokens are essentially tools that facilitate the accounting, storage, and exchange of information.

Economics are the physics of finance; models that quantify the behavioral and monetary relationships of human activity.

Bringing these two concepts together can supercharge society, however, when amplified by the open, decentralized nature of crypto/blockchain, the level of exploration achieves exponential proportions.

While it has been a blessing and truly given the concept of equal opportunity a radical new meaning, tokenomics have invited malicious and inexperienced market participants into the fray.

Delusioned by visions of extremist grandeur that will tear down governments and “decentralize everything” Memecoins, degens, and everything in between have imposed a distorted perception of value.

It is mindboggling how many downright stupid projects have been able to garner attention with shady, manipulative marketing tactics while having absolutely nonsensical vaporware token models with no purpose besides gambling.

Tokenomics alone do not define a quality project, there must be strong visions, a realistic sense of technological capabilities, adequate teams, and a problem that can be (should be) solved.

However, tokenomics do serve as a powerful proxy through which we can ascertain the depth of a project’s thinking and connection to reality.

With years under our belts and billions of dollars in scams and fraud destroying people's life savings, it is hard to believe how so many projects do not comprehend what real, good tokenomics implies.

To be fair, poor tokenomics does not only apply to scams. There are cases with phenomenal teams, great tech, and strong visions failing due to lackluster tokenomic designs.

There is no universal model for “correct” tokenomics, tokenomics must be designed to intimately serve a purpose for its specific application/use case.

There are three major elements that tokenomics addresses; all of them are equally important in their own way. The absence of any of these is a red flag for a crypto project:

When people hear tokenomics they start looking for charts about the assets allocations and funding rounds. This alone is so shallow and nearly impossible to properly quantify.

If a project is “fully decentralized”, meaning deployed with no pre-mine or team to push for its development, then this portion doesn't even apply.

Allocation and distribution give insight into the potential centralization of economic power within a project. The beauty and elegance in this portion relates to a balanced understanding of where supply belongs.

Here we find so much misconception among novice market participants suffering to understand where tokens should be deployed to.

At the most basic level, there are 8 segments to which tokens can be allocated:

*** These are rudimentary percentage allocations to just express a basic idea.

Market making must have a sizeable portion of the supply.

Listing across many different venues requires having tokens to provide them for opening markets. If the supply of tokens on exchanges is small then the price is subject to violent swings in price. However, even if a lot of supply is on exchanges, over the course of time as people enter a market they will be able to increase the decentralization of the token (how many holders) and still drive the price up.

Some mechanisms to reward users and bootstrap the application.

Fundamental for getting some economic activity moving and bolstering adoption in the early phases of the project.

Layer 1 blockchains implement this as block rewards that ultimately add tokens into circulation through the network operator's contributions.

DEFI protocols for lending/DEX might provide bonus APY in the form of their token in order to attract some liquidity.

This only applies to capped supply projects! Some cryptos might even have perpetual inflation (Dogecoin) that cannot be quantified into this model. (FYI, there is no team/dev allocation in DOGE).

Incentives for the hard work and risk to build a project.

Skin in the game for the project creators is important to align their actions with the maximum potential qualitative development of the product.

Ideally, 5% is perfect; however, the larger the team the larger the allocation might be acceptable. I already consider 10% to be very generous, but there are cases with projects allocating >20% to their teams. I personally consider this a red flag and do not/will not invest in any such projects.

A high level of decentralization in distribution at an early stage of a project is a red flag. This results in masses of people that are hard to coordinate and will result in chaotic selloffs that can drive users/investors away from a project before it even has a chance to develop properly.

High levels of distribution to early investors shows laziness on behalf of the project’s founding team and attempts at just attracting fundraising, without too much care for being decentralized. 

(nothing wrong with this, there are very successful examples of VC-driven projects that are alive and well).

Key opinion leaders and external professionals to act as ambassadors.

Advisor allocations are important for attracting influential people to a project. These individuals help build brand recognition, promote the project, and help with a slew of problems.

Advisors are like external team members, therefore these allocations must have some kind of vesting schedule.

Crypto is all about cooperative competition. Building partnerships is quintessential for accelerating the presence of a project, its technological capabilities, and cross-pollinating communities.

Engagement from a crypto project’s community of retail investors or just believers is priceless. There should be a least some portion of the supply allocated to reward them for supporting the social activities necessary to push the project forward.

(ex. having a social media campaign for Tweeting or making memes)

The Decentralized Autonomous Organizations Treasury.

Not required if a project will be centralized, but if there is a DAO in its roadmap then it should have some portion of tokens allocated to its treasury. By doing so, the community will be incentivized to work together and coordinate how to utilize these funds at a later date.

Technical fundamentals about the asset itself.

This is so basic and fundamental that not being able to find this in a tokenomic section of a project should be an immediate tell of a lack of attention to detail and a sign to stay away.

This is the factor that distinguishes true crypto-projects from wannabes.

A token should capture the delta of value between the service it provides and the solution it solves.

The trick art the art of good tokenomics exists at the intersection of the application and how the token relates to it.

Generally speaking, there are three grades of a tokens relationship to its network project:

None means that there is no tie between a platform and the asset they are issuing. This is lazy construction that has no respect for its end users. Tokens are just waste emitted in order to satisfy the founder's desire to be important in some way.

For example, if a token is only used to reward people for participating 

(such as every time you post on our social media you earn token XYZ),

 there is no actual utility for the token and users have no incentive to hold it. Their only objective would be to accumulate the tokens with the intention of selling them. This builds no connection to the platform and promotes the mercenary behavior of spamming.

Weak means a very low level of interconnectedness between a token and its issuing platform. If a token is necessary in order to access some functionality, such as membership to a DAO, there is a small vector for users to desire ownership of the asset; namely, gaining more governance power. However, this is still considered “weak” because monetary/intrinsic value cannot have a hard formula ascribed to its demand side. Odds are, in the case of a purely governance/access-based model users that acquire tokens just to sell will continually outnumber true holders.

The highest/purest form of tokenomic design that qualifies as strong are those that demand the asset in order to utilize the network itself. Case and point here being something like Ethereum. Every time an action takes place on the chain ETH must be spent. Now it becomes somewhat more possible to model the potential demand side of the equation based on how much activity the network will warrant over a given timeframe.

Besides base layer coins, another example of such strong ties to the network can be found in a project such as Chainlink. Here, there is a wholesome, multi-sided demand from operators that must stake LINK in order to become nodes and users need to pay operators in LINK tokens to make requests/provide data to applications. There is 

for the token and the project understands that its value comes from the business-related functions, therefore it wastes no time catering to retail end-users, instead, they allocate their efforts towards building out their partnerships with companies that need on-chain data.

Ultimately, regardless of how fancy a use case or how futuristic a concept may sound, the most important factor to consider in a tokenomic model is supply vs. demand.

No matter how large an economy was, how mature its financial systems were, or how old a civilization is, economies never stood the eternal test of time.

From the dawn of man, when trade took place as barter, through to seashells, metal coins, paper bills, and credit cards, economics have always been experimental.

The very premise of economics is, by virtue of its own nature, transient.

Tokenomics are giving society a chance to design their economies anew.

But I hope that you can find some valuable insights for your journey through the wild world of crypto, blockchain, and Web3.

Anybody who is looking to get involved in the space or is building something and would like to chat, I propose to you, my friend:

A Primer on Crypto Economics

Talking Tokenomics

The Tinkering Society

Insights from builders and thinkers on a mission to further develop the crypto ecosystem through protocol research and incubation.

, I believe crypto-specific blow-ups and forced liquidation is behind us. Yet the 

 is in cash with the thesis that crypto will go down with the rest of the public markets should the economy enter a recession and public equities suffer a bear market.

Here are some things we are monitoring as milestones along a way towards taking long positions in crypto:

. Currently, the US Treasury 2-year/10-year and the 3-month/10-year spreads are both negative. They should go positive before we take long positions.

10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity (grey shading = recession)

. It’s likely that we will not know this when it happens as it is usually dated after-the-fact as data rolls out. Various coincident indicators might give us hints we are in a recession but even those are often revised after the fact.

. Minimum level is 50, though I think we’ll see 80+ like in the Global Financial Crisis and Covid.

Proprietary indicators signal time to buy

. We will post in real time with on-chain proof as we take long positions.

My anecdotal observations of crypto speculators is that most are in a filter bubble and few pay attention to the TradFi markets. And within TradFi markets, most equities speculators pay little attention to the bond market or broader macro metrics. Currently, it does not appear that the equities markets are pricing in a recession. All of this likely adds up to some alpha. We shall see.

Look outside crypto's bubble and key economic indicators can hint when the bear market could pop. Here's what the gm Portfolio will be watching when plotting long positions.

Milestones Towards a Long Position

, a SWOT analysis framework provides excellent insight for evaluating the state of a project’s well-being through the lens of a birds-eye view.

It can help formulate decisions on what areas require more attention, set performance goals, and organize a foundational understanding of where a project is headed.

Rarely (if ever) used in crypto, it is time to apply this timeless method of evaluation to the digital asset space.

Injective (INJ) is ridiculously underappreciated. Among the few innovative leaders in the DEFI space that provide such robust architecture and truly differentiated technologies while preserving such a humble social presence is worth watching.

This was my first time diving deeper into the fundamentals of Injective and after all of the inspections and research, I will be adding this jewel to my arsenal. I do know yet if I will be using their technology but I certainly want to have exposure to their network.

I might have missed something and would tremendously appreciate some feedback.

I hope this serves you well on your journey.

SWOT Analysis: Injective (INJ)

Dave Swinbank - a blog about me, web3, my insights, opinions and thoughts.

 I want to talk about areas of growth within the industry. The Crypto market as a whole is a still kind of a niche market and anyone who wants NFT's to grow needs Crypto as a whole to grow and more adoption of blockchain technology. There aren't long enough to do anything than summarise some of my thoughts and you know how I love sharing them.

There are 2 main reasons that I believe the technology behind the blockchain and NFT's will catch on. The first is that the blockchain as a whole is an immutable ledger. Every transaction is visible to anyone who wants to see it. The second is that NFT's are unique identifiers that can carry anything, attached to an end user. The overriding thing for me is that both promote accountability and individual responsibility. 

An immutable ledger is what so many people want, even if they don't realise that is what they are asking for. The ability to see every transaction is both a little daunting and a little exciting. It's the anonymity aspects that are most intriguing. If there is an insistence for anonymity then this space doesn't progress as quickly as I believe it can. There is a fine line between digital ID's and government enforced digital ID's, but that (and CBDC's) are for another time.

If you've been following me for a while, you probably know why I believe end user ownership is important now and why I think it will become even more important. To summarise though, I think with the progression of blockchain technology, AI and the moving attitudes/feelings towards corporations, more and more people will want ownership and clarity over their things, digitally or physically. And this includes work and jobs. Content creation is only ever going to grow and owning that content will be important.

When humans were an agricultural society, we ran on credit and debit. People borrowed their seeds and then gave some of their yield to the people that provided them with seeds. It was also a way to barter if you only grew one thing. The term yield doesn't start 7000 years ago, it came about in the middle ages. My point is that humans don't know another way of handling money. In todays society it is no different. 

Car finance, credit cards, mortgages and loans are all personal credit. Money is borrowed to buy a thing and then paid back over time. It's the only way some big purchases are possible for the vast majority of people. This is also true of companies and governments. Most world governments are in debt to the tune of their GDP (if not more). To clarify, most countries owe more money than their whole economy can produce in output in a year. 

How do governments deal with this huge amount of debt. In a variety of ways but quantitative easing is one way. This is where the central banks and/or governments effectively print money to stimulate their economies. This has a multitude of impacts and I don't have enough room to explain them all today, and you will need more knowledge than I can offer to understand it fully. The main point is it means the supply of a currency can be increased and that can destabilise a lot of things economically inside a country. 

Fractionalised banking just adds fuel to this debt fire. Banks only need to keep a small percentage of deposits in hand, to pay people that want to withdraw their money. This has been approved by most governments and is the current way of banking. That means banks can lend a huge sum of their deposits to make an income. This can be via investments, stocks, bonds, loans, mortgages or other forms of credit. 

There are so many reasons for DeFi and Crypto, but regarding my points above. The token is bought, earned or mined and you know how that works before you pay for it, put in the work or the power. You know if the 'currency' you are buying is inflationary or not. You are in control of your funds. If they are in your wallet, they are not being lent out without your permission. There are quite a few assumptions in those statements, but when you add in the immutable ledger aspects I think they are fair. If not today, they will be over time. 

The most important aspect of the Web3 space is the ownership. NFT's are about unique end user ownership and the benefits that can come with that. At least for me. You, as an end user, own whatever it is that is attached to the NFT. This is immutable and stored on the blockchain. You can attach anything you can think of too an NFT, as long as it has the data storage for it, including physical items. If it doesn't have the data storage required, then it can be a membership token to a place that does have that data storage. 

This is an opportunity for consumers to really understand the products they are buying and what rights they have as a user of that product. The Intellectual Property aspects of art and brands is fascinating to explore, the potential is ridiculous and each artist or brand gets to clearly define what their buyers, collectors or end users get as part of their purchase. All terms and conditions can be wrapped into the NFT. This is an opportunity for businesses and customers to do transactions differently. 

Without going into all the potential use cases for NFT's, there are a lot, I want to cover two. I think they are big. The first one is ticketing, for concerts etc. Imagine if Ticketmaster was taken out of the game. The artist and venue would be in full control of any resales (they could limit to a max  of 25% above purchase price and one sale for example) and both have the potential to earn royalties from those sales. Digital tickets have been a thing for a while. 

And data, my big one. When we browse on the blockchain, rather than on Bing or Google, we will be able to attach our data to an NFT. Then as a group, based on our demographics, we will be able to sell our data. Either to companies wanting to build AI language models, do market research or to the blockchain so our wallets can be hit with targeted adverts. Even if we don't drive individual income, we are our own date controllers. 

Web3 gaming will be huge. It just will. Will the gamers know it is Web3? Time will tell. One thing I do know is that our industry needs to stop telling Web2 gamers they need to change and that they are gaming wrong. If someone told you everything you are doing is wrong, or sucks, would you want to hang with that person, try out their tech? Probably not. 

There are a few problems to overcome before the traditional gamer will buy in to games here. Confirming transactions is one of the biggest things. On-Chain gaming needs to figure that out. A lot of the UI/UX is still incredibly clunky and not smooth to navigate. A lot of games aren't games as such, there is no user input that determines the outcome, or no live gameplay for the end user. The gaming demand isn't there to drive development in terms of playability. 

There problems aren't insurmountable and people making games in the Web3 world need to focus on a few things. Remove the need to continuously sign transactions and that could be through a custodial wallet or a portal log in. Keep the user experience fun and simple (there are 100's of games to look at for inspiration and ideas). Reward people in a fun way for taking part, make this a key part of the games eco system. 

These are all the start of points to be made as ever, please look into it further. The only way more people come into crypto is if we make it accessible and understandable. Show the benefits without telling people the way they do things is wrong or idiotic. 

It's been fairly heavy today, I appreciate that, it's why I shared more images than usual. As ever I welcome your opinion and thoughts. Welcoming other perspectives is one of the ways I grow. Thank you for your company and time, I will catch you next Friday! 

If you got this far and you haven't subscribed to my #BlogCast on Spotify, then you can listen to the latest episode (last weeks Blog) and subscribe 

A summary of some key areas for growth

Areas We Can Grow as an Industry - Issue 45

The DeFi ecosystem needs lending markets for the long tail of protocol tokens.

So I was initially very excited by the idea of Silo Finance. It has an elegant design of risk isolation such that blow-ups of one token only affect the tokens in that silo (typically that long tail token and ETH) without any spread of contagion to other Silos. Intuitively, it seems the interest rate on deposited ETH in each silo would be different based on the risk of borrowing that ETH using the long tail token in that Silo as collateral.

If I want to use CRV as collateral to borrow CVX, I perform a hop in between: I use CRV first as collateral to borrow the ETH in that silo, and then use that ETH as collateral to borrow CVX in the second silo. The interest rate is netted out as deposit rate of CRV - borrow rate of ETH from Silo 1 + deposit rate of ETH is Silo 2 - borrow rate of CVX. ETH is the “bridge” asset.

However, the protocol has added a stable coin (”XAI”) layer on top which can be used as a bridge asset as well. Each silo can be extended credit in the form of XAI by governance.

I’m not sure I like this. I assume the reason for adding the stable coin layer is that it “lubricates” the markets without having to wait for ETH liquidity to be deposited into each Silo. Or maybe having a stable coin is the thing to do these days. Regardless, it seems to me to add a lot of governance (”How much credit do we extend to this silo or that silo?”).

Taking a step back, looking at the lending markets landscape, we know AAVE is the biggest player in money markets. People can borrow any asset against any other asset in the shared pool, and they are even doing experiments with long tail assets in a limited way, and of course, they have to be very careful about what assets they allow as collateral so they have a somewhat complicated design with concentration limits and so forth, but it’s very governance heavy.

On the other hand, Compound Finance, the second-biggest money market, recently changed to a model in which only USDC deposits can earn a yield, and the only asset that can be borrowed is USDC. All other deposited assets can only act as collateral for borrowing USDC. In other words, Compound Finance is a lot like MakerDao with USDC obtained from depositors instead of DAI created by minting.  In other words, Compound Finance has greatly simplified their protocol and diminished the required governance.

In my eyes, Silo Finance has another niche to capture: money markets with governance minimization. Like Uniswap, the ideal long tail protocol should allow anyone to activate factory pools and wait for the markets to sprout. Maybe a lending protocol needs a bit more governance to set collateralization ratios in, say, three different buckets, but aside from that, it should be “set-and-forget”. Most of the risk should be handled by the market in the form of interest rates, not by governance. Yet, with the stable coin credit lines to each silo, governance becomes a bigger factor.

I’m likely over-simplifying the complexity of standing up a long tail lending platform, so take everything I say with a grain of salt.

At the time I’m writing this, it has a ~$92M FDV, so it’s at a fairly low relative valuation. I like the lending silos; I’m not thrilled about the governance-set stable coin credit lines. That said, at some point, valuation may get low enough for the 

 to grab a bag as a speculative position.

Lending for long-tail protocol assets needs innovating. Silo's novel design isolates risk and buffers contagion.

Silo Finance: Interesting, but…

Everything Blockchain

Blockchains and smart contracts are self-contained closed systems that can't access data external to their network. However, many contractual agreements require off-chain data to facilitate their execution.

So, how do these self-contained systems access off-chain data? The answer is Oracles.

Oracles can retrieve data from various sources, including APIs, websites, and sensors, and then provide this data to the smart contract to trigger the appropriate actions. This allows for more complex and dynamic smart contracts that can interact with real-world events and information.

Without oracles, smart contracts would have minimal use, and DeFi would not be where it is today.

Watch the video to learn more about Oracles and the various types.

If you find this helpful, please support through subscribing and following.

 🧐 - Freethinkers, Writers ✍, Blockchain explorers 🔭

In pursuit of simplifying the different blocks of the chain metaverse

The information provided through this work is intended solely for educational purposes and must not be treated as investment advice. Any lapses in presenting any of the information correctly are ours alone. We disclaim any liability associated with the use of this content.

Explained Under 5 mins

Blockchain Oracles

 the most widely adopted and trusted oracle network in the industry will get a SWOT.

As you might have noticed there is a disproportionate amount of positives on the left side of the chart. Not only are there more beneficial points, but the relative importance of each positive far outweighs the potential impacts of the negatives. With just one weakness 

(which is honestly not even that big a deal)

 and three threats that don't pose an existential risk to Chainlink's livelihood, it seems as though LINK is a fundamentally sound project.

It’s possible that my biases might have skewed the perception of the project. However, based on the single fact of how much critical infrastructure Chainlink provides and the integrity that the project upholds, it is hard not to bet on them.

SWOT Analysis: Chainlink (LINK)

Existing at the intersection of finance and technology, DEFI has been heralded as the frontier of innovation and the solution to the woes of the traditional financial system.

Over the last few years, a tsunami of protocols and applications have come to market, harping on this promise, all claiming to provide some kind of unique value proposition that will enrich the lives of its user and protect them from the evils of legacy finance…

Assuming that these projects did have good intentions 

 the moat of informational asymmetry due to the complexities of the technology itself creates an enormous spread between truth, security, and reality. Moreover, DEFI inherits the underlying primitive of sovereignty from crypto, where the responsibility of asset ownership and management is entirely in the hands of the users, a level of responsibility that consumers have never been faced with.

While this noble, utopian mission has attracted the attention of people from around the world and drawn in hundreds of billions of dollars in TVL, it has not been able to express the full scope of potential implications during its development.

Even though all of the experimentation that has been taking place has flooded networks with more value, the level of security in the industry has not changed at all.

 (arguably, with Ethereum moving to POS it might have even degraded).

Therefore the only genuine way to protect yourself and your assets from the whirlwind of fuckery that is monitoring your wallets and trying to steal your money is by equipping yourself with knowledge.

Sure, it may not sound sexy. But if you can understand the fundamental touchpoints that can cause financial ruin, you will be far more emotionally prepared and most likely much wealthier.

So without further ado, let's put into focus how genuinely broad and varied the surface area of risk in DEFI really is.

MEV is a contentious topic in the world of crypto. Perhaps nowhere more so than in the DEFI sector.

Simply put, MEV is a botnet that is looking to front-run your transaction and squeeze out any potential excess value, that should trickle back to you. Imagine paying for a $17 shirt with a $20 bill and the clerk at the register told you there is no change because of the physical entropy he has to exert in order to manually organize the bills…

In DEFI, every single function from lending to trading is subject to MEV. These pretentious bots can reorganize/sandwich/delay your transactions, prioritize their own, and force you to miss opportunities. The best way to engage in on-chain finance is minimally; try to reduce the amount of interactions that must be done.

Given that DEFI protocols depend exist in blockchain environments that are not aware of information that exists outside of themselves, they need a method by which to get their data from somewhere.

Oracles are the connective tissues between on-chain and off-chain data. They are pipelines that funnel information from the real world into the digital economy.

Whenever you go to an exchange like Uniswap and see the price of Ethereum, what is happening behind the scenes is that Uniswap is asking an Oracle network (chainlink) to quote you a price from trusted sources. That Oracle then scans/queries other venues that provide the requested data point (Binance, KuCoin, 1inch, etc) and provides a spot price to trade at.

In this process of receiving a request, going to find the request, and fulfilling the request, subversion exits in two general ways:

The sources from which oracles get information collude to produce fake information or their servers are hacked and the data is spoofed. Chainlink might trust Binance for ETH price, but what happens if the information on Binance does something egregious (wicks the price 10x)?

Given how valuable the information that oracles provide is, it is not outside the realm of consideration that the oracles could be provoked through incentives by external forces to provide incorrect information.

The most fundamental form of risk exists in DEFI.

Smart contracts may be mathematically sound, but when their hard-coded structures are met by extremely savvy hackers that can identify logical loopholes and find exploits to drain protocol liquidity, cause mass token minting, or manipulate protocol functions, it is the end user that ends up paying the ultimate price.

Besides being subverted by malicious entities, poorly coded contracts might just result in internal systemic failures. A function that is accidentally defined incorrectly can result in an error that locks liquidity permanently or a single line of code that does not map the relationship between token owners and their rights to send the token can freeze assets in wallets with no ability to ever move them.

Logic that might hold up in a closed alpha on a testnet somewhere will not be the same as the logic in a public mainnet.

The ultimate combination of the two smart contract failures can be seen with the painful example of Terra/Luna (r.i.p. billions of dollars).

You might have heard this one before, crypto assets are volatile.. very volatile.

Where traditional financial instruments, such as stocks, might swing +/- 3% in a day, it is totally normal for a crypto asset to swing upwards of +/- 15% in that same day.

When it comes to DEFI, we're not talking about the price risk you have regarding just holding an asset, we are talking about how the price movement can impact the more exotic forms of portfolio exposure. There are two general classes of this exposure:

When tokens are provided to an AMM and the price deviates from the exact rate at the moment of deposit, impermanent loss takes place. If ETH is at $2,000 and somebody provides liquidity to an ETH/USDC pool they would supply an equal amount of 1ETH+$2,000 USDC. Doing so would obviously incur basic transaction costs, already putting them in the hole, but then if the price of ETH rises to $2,200 then the user will only be entitled to claim 1.1 ETH + $1,800 USDT. Considering there would be another basic transactional cost incurred the user would have to be exposed to an unknown duration of providing liquidity to cover those base costs from the generated yield. Moreover, the user would have to now go through more intermediaries in order to balance out their position proportionally (selling the 0.1eth for USDT). The reason this is called impermanent loss is whenever price fluctuations exceed the returns that could have been had by simply holding the asset. Think about it, the person who provided liquidity provided $4,000 worth (1ETH @ $2,000 + $2,000). When they withdrew, they got $4,000 worth (minus fees). If instead of providing the liquidity they had just held the same assets they would have $4,200 (1ETH @ $2,200 + $2,000).

Image ETH is trading at $2,000. Say you want to borrow $2,000 USDT. In order to do this, you must provide excess collateral in ETH to take the loan. So you lock up 2 ETH ($4,000) and take out the loan. Next week, ETH plummets to $1,000. Now the collateral you posted is worth $2,000; a level that is algorithmically considered risky (if you only have $2,000 worth of collateral for a $2,000 loan, you are not incentivized to pay it back). To protect the lender, your assets get market sold (likely at $1,100ea) and you're stuck with $1,000 instead of your original 2 ETH.

Even if a protocol is designed properly and everything seems to be working fine, there is a not-so-subtle dependency of that protocol on the network to which it is deployed.

Validators behaving out of line, consensus mechanisms proving to be inadequate, and sudden outages, among other things can trickle up the stack and result in damaging effects to the DEFI users.

As a decentralized entity, a DEFI project must have some form of governance in place to steer the project’s development and oversee its operational specifications.

In the event of a sudden revolt from the governing committee that results in some radical parameter adjustment holds the DEFI user in a perpetual limbo of uncertainty. While most of the time the governing body will be aligned with a vision of progression, that vision is highly subjective to interpretation.

Not to mention that flash loan attacks have taken place where proposals are forcefully pushed by entities that acquire large enough token amounts on the open markets just to vote on their own proposals.

There are no heroes in this industry. Everybody is fighting for themselves. The insane majority of projects simply do not give a sh*t about you.

Scammers will create the most elaborate systems to subvert your conscious mind. They will pretend to be representatives from a project or exchange you are involved with. They will call you, text you, email you and do anything else possible to trick you into doing some kind of action.

The most common forms of social engineering are:

2. Pretending they are official reps from other projects.

3. Asking you for help through a DM and offering a reward.

4. Telling you they can help you make money.

If anybody contacts you about anything remotely related to the above. IGNORE them. If you feel worried about anything, opt to go directly through the official interfaces (website/app) that you use and reach out to the projects. 

Official moderators/admins will not initiate contact with you directly without your prompting.

Still in its infancy, this sector lacks any standard framework of definitions. So many idiotic projects throw around buzzwords in an attempt to sound convincing and tempt unknowing users.

One of the most painful to watch is when a Memecoin starts offering people a DEFI ecosystem for NFT financialization that can help solve the interoperability problem between blockchains.

If the last message made sense to you, beware, you will be taken advantage of. If you caught on the stupidity of it, kudos you are protected.

The misrepresentation of intentions is called a Rug Pull. As the name might hint out, people put money into a project and then the rug gets pulled right out from under them. Shadowy super coders create fake contracts to collect money and then at some point just “poof” and disappear with the funds.

As a general rule of thumb, if a project’s slogan/mission statement is chock full of buzzwords, stay TF away.

There are many more complex security vectors that arise whenever interchain operations are introduced and advanced multi-lingual social engineering tactics are considered.

All that matters at the end of the day for your safety is the understanding that risk does not get removed with blockchain architecture, it is merely transformed into a new type of risk.

DEFI’s siren call is the displacement of human infrastructure with automated smart contract infrastructure. Trading off human error with mathematical logic. Even though intuition might guide us into believing that mathematics is more reliable than humans, the truth of the matter is that humans have room to correct errors, mathematics does not know the difference. Therefore, the risk profile of this transition of trust is nearly impossible to quantify.

Just don't forget that there is no such thing as a safe investment in crypto.

May your journey through Decentralized finance be fruitful and may your bags always be protected.

The 8 Dangers of DEFI

DAOs or decentralized autonomous organizations have become one of the most powerful and widespread applications of distributed ledger technologies. 

Being an innovation based on blockchain technology, DAOs are transparent, auditable smart contracts intended for the purpose of coordinating groups of individuals, with a vested interest, in making governance decisions on a unified subject matter.

Typically consisting of parameters relating to proposing, voting, and implementing structural changes to an application’s codebase or operational system, DAOs can be built around any arbitrary purpose. 

DAOs redefine the model of arriving at social consensus. Traditionally group structures existed in a hierarchical “master-slave” model where a central organizer(s) was tasked with execution and demanded to be trusted.

DAOs supersede the traditional model by providing three key functional benefits:

1) Displace hierarchical structures with horizontal ones.

This is where the D in DAO comes in. Power over organizations is no longer centralized, rather, it is proportionately distributed amongst all participating members. This minimization of reliance on a single entity results in a more efficient flow of processes and strengthens the relationship between involved parties.

 *It’s crucial to note that there is still some element of centralization risk present in DAOs, namely in the form of developer/deployer key controls.