The first mine has high risk and the old mine has low interest rate. How to choose Defi mining?

Since September, DeFi has gradually lost its high-yield money-making effect. Many copycat projects have been launched, and a series of events have occurred, causing many people to gradually consider the security and risk factors of DeFi. Coupled with the third anniversary of 1994, the currency circle has ushered in a relatively strong adjustment for a while.

Many people have gradually become accustomed to the adjustments, but as a result, the interest rates of many old mining projects have gradually decreased. Currently, most DeFi projects on the market still have interest rates of 50%-300%. Despite this, many outsiders are still shocked.

There are actually many factors that contribute to the lower rate of return. On the one hand, most of the farmers participating in DeFi mining implement a strategy of mining, withdrawing and selling. In other words, they only focus on their own profits and turn a blind eye to the revolutionary results of DeFi. Therefore, they often do not hold on to the coins they have mined.

On the other hand, some DeFi mining has caused users to suffer huge losses, such as liquidity mining traps, project owners running away, or code bugs, which have also caused many participants to gradually change from embracing DeFi to fearing DeFi.

The coins mined by DeFi projects currently have little practical use

At present, most of the coins mined by DeFi projects only have governance voting functions, and there are few dividends or destruction functions to support the coin price. This actually means that if you do not plan to participate in this DeFi project for a long time, then basically you will not get much benefit from holding it. You can only rely on the stability of the coin price to maintain your own free losses, and you also have to bear the risks brought by the decline in coin prices.

Although the risk brought by the decline in currency prices is indeed relatively high, some people have proposed hedging strategies, but in fact, the most important part of hedging is to open a corresponding number of short orders. On the one hand, opening a short order means that if the currency price drops sharply, there is nothing you can do. On the other hand, long-term holding of short orders generally requires paying a certain amount of funding fees. Of course, this also depends on the market trend. Sometimes the short side pays the long side for funding, and sometimes the long side pays the short side for funding. The interest rate of this funding fee is generally not small. On average, if it is a one-sided market, you may have to pay about 30% of the funding fee in a year. For example, in last year's market, people who were long basically had to pay funding fees every day to subsidize the short side. Therefore, long-term hedging is not a foolproof solution.

How to calculate the funding fee of a perpetual contract on a certain exchange

Participating in the first mine is like pulling chestnuts from the fire

It is currently a relatively dangerous thing to participate in the first mine. Generally speaking, the first mine is the form of directly mining a new project, because we all know that when a new mine is mined, there are generally fewer people participating, but the released coins are certain, so everyone will get a lot of coins. As time goes by, more and more people participate, and the amount of funds gradually increases, then naturally everyone's income will gradually decrease. This is similar to the mining method of digital currencies such as Bitcoin.

We also know that in the early days of mining digital currencies such as Bitcoin, the risks were actually quite high and the currency prices fluctuated significantly. Therefore, the first DeFi mine here also showed such a situation. Therefore, mining DeFi can also draw on the early mining models of old digital currencies such as Bitcoin, and perhaps there will be some gains.

Old mines are relatively stable, but you need to pay attention to impermanent losses

Impermanent loss is a term that appears frequently in the DeFi mining process. Most newcomers don’t quite understand it. In fact, impermanent loss is relatively simple. Here we refer to the grid trading method. For example, when we deposit stablecoins USDT and ETH, according to the proportion of funds in the pool, we will participate in the market value with our own funds. If someone uses USDT to exchange for ETH, then at this time, the funds in the pool will be exchanged according to the price, and vice versa.

If the price of ETH continues to rise, and people continue to exchange USDT for ETH in the pool, then the funds we participate in will continue to sell ETH to obtain USDT, which makes us "sell too early", resulting in losses for us. Such losses are impermanent losses.

Of course, if there are impermanent losses, there will naturally be impermanent gains. If the price of ETH falls first in a range, then rises, and finally returns to its original position, then naturally, when we make a market, we will continue to buy ETH when it falls, and then continue to sell ETH when it rises, thus completing a market-making process, among which some market-making profits will be generated, which is different from the commission profits generated by market making.

In contrast, grid trading actually works on the same principle, where you keep buying when the price is falling, and then keep selling when the price is rising, so that you can also make a profit. Therefore, the market-making process can actually be regarded as a grid trading process.

Watch out for liquidity pool depletion

As DeFi is currently entering a stage of hotness, before new influential gameplay emerges, DeFi may be in a state of stagnation. In fact, this is a reshuffle of the market. In this process, we need to pay more attention to the market making of small currencies, which is prone to liquidity pool depletion.

The exhaustion of the liquidity pool is actually a method with a certain "conspiracy", which can be used as the main method of shipment. When we find that the interest rate of a certain pool is relatively high, we don’t have to participate in it. In fact, it may be that the amount of funds in this pool is relatively small, so the income of each participant will naturally be higher. But here, why are there so few participants?

One possible reason is that someone knows that the currency is going to fall, so in order to avoid losses, they cancel their participation, or simply exchange and sell. In this way, although the rate of return of participating in the liquidity pool will increase, there is a risk of falling currency prices. Therefore, once someone participates, it may become the best burial object for the main force to ship out, and may even cause the liquidity pool to dry up. This is similar to the pin returning to zero when speculating in coins. Once no one injects funds into the pool, the pool will be scrapped, and the coin may also be scrapped. Therefore, choosing mainstream coins is actually a safer way. For other coins that have skyrocketed or plummeted or unknown coins, it is not recommended to do liquidity mining for a long time.

As an emerging product, liquidity market-making mining is not particularly well designed in many aspects and has many loopholes. Therefore, as a participant, one should not only focus on high returns but also consider the high risks involved.