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Crypto custodian that offers secure access to Compound. Access Compound directly from the security of your Ledger hardware wallet. No seed phrase. No gas.
Earn interest and borrow assets on one of the most popular crypto exchanges. Pool Together. A no-loss lottery utilizing the interest earned in Compound as the prize. Leading crypto exchange, with DeFi staking powered by Compound. Fully-featured crypto wallet mobile app, integrating Compound. A keyless crypto wallet, built mobile-first, and supports Compound. Secure, Manage, and Exchange on desktop, mobile and hardware wallets. The first is simplicity: AMMs only support market orders — orders to buy or sell immediately at the current price — not limit orders, which are set to execute at a specific price.
Users, whether buying or selling, supply assets at quantities of their choosing and the AMM calculates the price. Second is transparency: The pricing mechanism, as well as all transactions, are available on a public ledger for anyone to inspect, so traders have confidence that the system is fair.
Small orders barely move the price, while large orders become prohibitively expensive, making it impossible to deplete the pools. In other words, AMMs achieve a near-infinite market depth with finite liquidity. Finally, there are no counterparties in the traditional sense, because trades happen between users and contracts, which self-execute.
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Despite their advantages, AMMs have an important downside: There are a lot of hidden risks. Specifically, liquidity providers lose money when the value of a currency changes, where the bigger the change, whether up or down, the bigger the loss. To make the deal worth it, liquidity providers collect transaction fees, giving them a steady stream of income in exchange for the liquidity they supply — and hopefully offset any loses.
But for all of its success, a new competitor, SushiSwap, piggybacking on the open-source nature of the Uniswap codebase, was able to quickly pull users — and liquidity — onto their platform by offering users a SUSHI governance token. This is just an example of the risks of developing free software in a bitterly competitive new market space.
As AMM platforms try to gain a foothold, the key question is: Can projects find the right mix of incentives to make their users loyal and their liquidity sticky, or are they forever at risk of disruption by competitors? In the wake of the near-zero interest rates across almost every major economy, DeFi has made cryptos an appealing choice for profit-seeking capital.
Even institutions that have limited risk tolerance and prioritize passive income over capital appreciation, e. Visa is working with a digital asset bank, Anchorage, to allow customers of banks to purchase bitcoin. This growing interest might meet further demand for democratizing finance by retail investors. For instance, the aftermath of the Gamestop debacle — with Robinhood halting trading in the Reddit-promoted stocks — has suggested that there might be demand for investment platforms that allow retail investors to trade directly while being shielded from the fury and censure of corporations and regulators.
The ripple effects of the Gamestop saga may take a long time to fully materialize, and it appears that DeFi is in prime position to benefit from it. Nonetheless, the fundamental law of the risk-return tradeoff might shed some light on why the interest rates are so tantalizing: At the end of the day, DeFi is still a far more dangerous spot to park your money with risks not well-understood by the average investor. In addition, there is obviously no FDIC insurance protecting the deposits: Lending protocols like Compound or savings accounts like BlockFi can be subject to runs, while AMMs such as Uniswap require an entirely different risk tolerance for providing liquidity.
In sum, not all DeFi products are for savings, and those that are surely are not for retirement savings. Not yet at least. But as its audience expands and institutions that are used to navigating the perils of a highly regulated industry join in, we expect DeFi to herald the long-awaited era where every household has cryptocurrencies working for it.
After all, if money never sleeps, why should the cryptos? You have 1 free article s left this month. You are reading your last free article for this month. Subscribe for unlimited access. Create an account to read 2 more. Nicholas Platias is the head of research at Terra. Wenyao Sha is a research assistant at Harvard Business School.
Nicolas Andreoulis is a Core Researcher at Terr.