How to Survive in the crypto jungle: A more technical approach.
While we have already explored multiple ways to protect yourselves from the more common pitfalls of the DeFi world, we still want to point out that there are more layers of knowledge to this field than you may even know, and we want to get into the specifics tools and technicalities that you can use to make your crypto journey safer.
There is a myriad of projects on the internet that are trying to hook you up with amazing ROI, shiny baubles and crazy banners, but it’s always important to remember that, just like in many other cases, slow and steady wins the race.
If you are looking to get into value trading, futures trading, leverage trading and the riskier options available to you in the various CEXes and DEXes, kudos and good luck, just remember to not invest more than you are willing to lose, but especially if you are just now starting your journey in the DeFi ecosystem, be aware that there are easier, less involved and less risky options to still get back something passively from your investments.
APR and APY in DeFi
Everyone that has been in the space for more than a couple of months knows what those two labels stand for. Still, if you just entered into the world of Decentralized Finance, you will need to understand that APR and APY are two fundamental concepts that will not only let you grow your portfolio but also safely spot troubles before they get to you.
Both APR and APY represent the return we get from an investment in one year. However, there is a substantial difference between the two of them, a difference that you need to be aware of before moving your funds in any direction.
The Annual Percentage Rate (APR) does not take into account compound interest. In practice, it consists of the annual return without reinvesting earnings.
In contrast, the Annual Percentage Yield (APY) takes into account the investment at certain intervals of what has accumulated as an annuity.
APR follows the ‘deposit and forgets’ thinking: we deposit coins or tokens in the dedicated place (usually cash pools, liquidity pools or vaults) and know that the return will be X% per annum. We will not have to make any changes or monitor our activities (although it is of course always recommended, especially if you decided to forsake some security for higher returns).
The only action required will be to periodically collect the accumulated returns so that we can actually receive them on our crypto wallet.
APY, on the other hand, requires a certain degree of participation on the part of the user. In fact, we will have to collect the rewards, convert them into cash and reinvest the same into the pool. The higher the frequency of this action (called compounding), the higher the APY will be. However, there is a limit dictated by common sense as well as mathematics: reinvesting compounded interest over and over again leaves time to be found.
This of course is amazing, especially when we have so many options to choose from, but, even if you decide to go for the Forget approach, you need to be aware of a couple of things.
First, your ROI won’t be anything crazy unless you invest massive amounts of money, and even then, the higher your investments the lower your returns, simply due to the fact that if everyone were to take that approach the institutions holding your liquidity wouldn’t be able to give you back your ROI properly.
Second, you can usually spot fake websites, scams or simply projects destined to fail by their promises. If you stumble upon a project that has a liquidity pool that promises you to give a 2000% APY monthly you either run away as fast as you can, or you monitor them until you are absolutely sure that there isn’t anything fishy going on, and even then if you decide to actually trust them, check your investments as often as you can without going crazy, because while it’s true that you can get massive ROIS while investing in the DeFi ecosystem, it’s also true that usually, you have to work for it, and that if something seems too good to be true, then well, it’s probably a scam.
DeFi and security
Now, let’s start with some very basic concepts that we have yet to cover in regard to security, and, more specifically, cybersecurity.
First of all, using your PC is better than using your smartphone. Apart from underlying issues in many smartphones, usually, websites aren’t truly optimized for mobile options, and even when you are 100% sure that you have the same level of security on both devices, you should still use your PC due to more optimal speed of transaction or, more simply to avoid individual mistakes, since the much smaller screen of the smartphone can more easily lead to mistakes or unintended typing, and if you are laughing at the thought, everyone in our team can attest that there are at least a dozen people each sale coming to us saying that in the heart of things have clicked something they didn’t want to click, and it’s been the same for any project that I’ve worked on.
It’s all fun and games until you waste 10k on a meme coin that you didn’t want to buy simply because your thumb slipped.
In addition, using your smartphone can lead to very easy security breaches, since it’s more common to have multiple personal information on your phone than it is on your PC and even then our suggestion is to have a computer dedicated only to crypto investments, preferably with a MAC or a Linux based system.
Unfortunately, Windows is statistically less secure and the risk to run into malware targeting our fund is much higher. Obviously, it all depends on the capital involved: and on how much you are willing to lose: Personally, I recommend having a smaller portion of your portfolio on renowned platforms like Binance or Coinbase for easier access and easier trading, while having a holding account somewhere else.
On the subject of security, beware of wallets.
Never share your seed phrase and do not give it to DeFi or ‘customer care’ platforms: it is definitely a scam. The seed phrase should be kept safe and only used if it is necessary to retrieve one’s wallet in extreme cases.
In addition, a hardware wallet is highly recommended to increase security and is where I usually keep my holdings whenever I feel like my ROI has been enough for the cycle. There are multiple hardware wallets available on the market, but Ledger here has a clear edge over the competition.
Extreme caution with all things phishing.
Even while discussing technical aspects of the market, phishing is still a problem: we have talked about people contacting you with phishing scams, and now we talk about Websites.
Remember: when you move into this market is forbidden to search engines for the name of the platform just to click on the first result: scammers often buy advertising space with the aim of attracting users of DeFi protocols and scam them.
Also, once again, watch out for e-mails and private messages from self-styled financial advisors.
And, even at the risk of sounding repetitive, keep in mind that there are no 0-risk policies, even if you do your best you can still get burned by a faulty app, a faulty link, a fallacy in the project you trusted and in a myriad of outside factors.
This is where research into the project, including the team members involved, becomes crucial. Well-known and authoritative names are synonymous with seriousness, just as ex-scammers or anonymity represent clear red flags.
Analyze, Research and come to your conclusions.
Fundamental then is data such as deposited liquidity (the more consistent it is, the greater the solidity of the protocol) and longevity. That’s right, it is crucial that fundamental analysis must be carried out before investing in a platform, as is crucial to know some of the basis on which the DeFi world is built.
One of the most important fundamentals to gain is an understanding of what impermanent loss is.
Confusion often reigns supreme with regard to this term. In reality, it is a fairly simple concept to understand.
In decentralised finance, liquidity pools play a key role. Every decentralised exchange has several, depending on the crypto markets offered.
Users pour coins and tokens into these virtual vaults, receiving a passive income in return. The funds will be used to enable regular and unrestricted trades. Let’s look at an example.
Let us imagine a virtual cryptocurrency box, specifically dedicated to two of them: BNB and SNP. It will contain a certain amount of these coins, in a 50:50 ratio. Thus, if the total value of deposits were $1 million, 500,000 would be in BNB and 500,000 would be in SNP.
A user wants to trade BNBs for SNP. By executing the trade, the dedicated smart contract will interact with the liquidity pool, depositing BNBs and withdrawing SNP.
To maintain balance, the pool is programmed to rebalance automatically.
OK, so far so easy but what happens if the value of the cryptos changes?
If both currencies go down/up in the same or similar way, the variation between them is negligible.
On the other hand, if one of them goes up or down, or worse, both of them move but in opposite directions, the exchange rate changes dramatically.
This is precisely where the impermanent loss comes in, i.e. the loss one suffers by depositing cryptocurrencies into a liquidity pool as opposed to simply holding them.
As the pool rebalances to maintain equal value between assets, changes in the exchange rate lead to significant imbalances compared to the starting amount. This is why we may end up with more or fewer coins and tokens than we had initially, incurring a loss or taking a smaller gain.
This is an important concept to understand simply due to the fact that if you want to have a more stable passive income you are going to need to invest in a coin that is either stable or really strong to begin with, while if you want to take more risk for more ROI you can invest in a lower valued coin that you think will grow exponentially in relation to other coins traded in the same platform.
A multitude of chains and DApps
Last but not least: to navigate the DeFi ecosystem we have to be comfortable with the multitude of blockchains and DApps.
Crypto bridges, DEX, lending platforms, exotic protocols: decentralised finance is an ever-expanding jungle. The user must therefore stay up-to-date and be able to seize new opportunities.
Not only that: it is essential to be able to study DeFi protocols and be able to recognise those that are dangerous and how to avoid them at the outset.
Of course, we can limit ourselves to operating on well-known realities that we know better than our pockets. However, if you are further ahead in your DeFi journey and you wish to set new boundaries for yourself, you will very often find coins, projects and protocols that nobody really knows.
The study of those projects and their fundamentals are therefore the only weapons that can protect you, and while having someone pointing you in the right direction is more than what many new users have had in the last decade, ultimately the amount of information we would need to give you to really paint the full picture of this matter is massive, and thus we can only encourage you to keep up with your research and to never lose a critical mind.
Always exercise caution while interacting with your funds, check out each project, team, protocol, smart contract and exchange you want to invest in, take the right measures to defend yourself from virtual attacks and you will be able to go far on the path of wealth building.
This is all from this iteration of the crypto jungle series, stay tuned to our media channels to never miss an update and check out our Telegram if you want to talk directly with our core team members.
About Synapse Network
Synapse Network is developing a cross-chain investment and start-up acceleration ecosystem based on blockchain technology to give everybody an equal chance to contribute to great upcoming projects and to do so early on. We are bridging the gap between the traditional & crypto market. The idea of the Synapse Network technology goes beyond the standard offer of launchpads available on the market, becoming a true technological brand providing tech solutions.
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