Understanding Decentralized Finance (DeFi): A Comprehensive Guide to Earning Opportunities

[Music] hello everyone uh today we're going to be talking about d5

which is decentralized finance in crypto um terms and we're specifically going to be talking about

how you can make money out of decentralized finance we've covered a bit of decentless finance

but i'll explain the basics about decentralized finance and how you can make money about it

now so first question is why d5 so there's a teaser that i prepared for the content which is like

people ask me about bitcoin mining how you can do crypto mining now uh to do bitcoin mining and crypto mining you

need technical knowledge you need to buy hardware computers or you need to know something about you

know mining in general or computers in general but with decentralized finance you don't

need to have a computer knowledge or a technical knowledge you can probably make more return of

investment using decentralized finance using liquidity mining in decentralized

finance than using the conventional crypto mining or the bitcoin mining

that's why we need to look at d5 that's what we'll be looking at in detail today so p you would have noticed that this

video is actually a lengthy video now the the reason why the videos are a bit lengthy especially like in i think

episode 1 episode 3 and episode 15 they were some of my lengthy videos

the reason why these are lengthy videos is because i'm trying to make my content for people who have no idea

what crypto is or who have no background in crypto uh market or crypto industry and they

are they are like you know beginners or learners like how i was in the beginning of last year

and whatever i have learnt i wanted to share it with everyone that's why i go into the bit of detail

assuming that people don't know anything about the subject and try and build it for

people who can understand it easily and i give in context and i give examples which are

easy to understand for people and when you try and do that when you try and explain it in such an easy

language when you're trying to simplify the concept you need to simplify it in a

language that they're able to understand which makes the video lengthy and uh it's not that you know i get

more money because i make lengthy videos you know youtube is not my profession i make youtube videos because

you know i wanted to share the content that i have learned youtube is not my profession and i spend

a lot of time making these videos so it's easier for me if i make smaller videos but that serves no purpose

and some of this content especially the d5 content that i'm showing today had taken like almost you

know several weeks for me to prepare to oversimplify the content to prepare the demo for the content and everything

um that had to go into the the preparation of the content itself right that had taken several days in fact

almost like five six weeks have been putting this content together and you know i think after episode 15 this was

one of my most difficult videos in terms of content preparation that's why the video

is long so if you are really interested in making money if you really interested in

in understanding it your time is your is more important than your money and you will probably

watch the video fully and then you'll be able to understand and appreciate better and use it properly so

let's get into the video so let's start with the disclaimer and warning i'm not a financial

advisor i'm not an investment expert so these videos are not an investment advice they are for learning purposes i

am sharing my personal experiences and these are for learning purposes only now uh

one bit of warning is that never send your money to professional brokers or investment

most of the advisors most of the brokers who want to take your money off frauds i will not approach anyone in an email

or a comment if somebody is using my name also don't ever send your money or crypto to

anyone your money you invest it so today's agenda we'll be talking about what is decentralized

finance now what is all the hype about so we'll do our d5 intro main advantages of d5

we look at the terminologies and introduction and then we will also be looking at

liquidity pool that's the main concept that we need to understand and liquidity mining finally now the

trailer for the content right so um people who understand crypto today right

um you know people who don't understand crypto vs people who understand crypto it's like

you know 20 25 years back people were using kodak film roles in cameras without knowing what digital

cameras were people who were using digital cameras at that time were saving so much money on buying film rolls

and not requiring to you know go and repeatedly buy those film roles that's what

crypto industry is looking like but with d5 people even who understand blockchain

and cryptocurrencies and people who don't use d5 it's like people still using digital

cameras but not understanding what a smartphone is or what a smartphone camera is now

everybody is using smartphone cameras today but 10 years back or 20 years back if

you told somebody that you know people will not use a camera a normal camera kodak film camera or 10

years back if you told someone that digital cameras will also go out of fashion people wouldn't have believed it

that's the kind of innovation that we are talking about with regards to the decentralized

finance so that just gives you a flavor of the technological advancements that are

happening in blockchain and that within a span of 10 years you know the the

amount of progress technical progress in in blockchain has been staggering and we'll

look at what the technical progress actually has has meant for common people like us so what is b5 d5

stands for decentralized finance and it taps the true power of blockchain crypto there are so many

usages of blockchain cryptocurrencies but probably nothing comes close nfts come close but we'll cover it in a

different topic uh decentralized finance probably taps the true power of blockchain and cryptocurrency like

nothing else literally and the ability to have a true financial ecosystem that is not controlled by an

organization by one person and controlled by common people

without any middlemen right that's the goal of d5 and how does it achieve it how what is what does it mean

so essentially define lending uh through a concept called smart contract is a period of your loan and these are

the three common products right d5 lending and then there is a dex which is decentralized exchange buying

and selling and then the final concept that we're going to look at today is liquidity pool and liquidity mining

which is in a way related to decentralized exchange but that's uh that's the main product that we're going

to look at so these are some of the use cases of d5 that we look at today which will help you understand

what d5 is all about and how you can and finally when we talk about liquidity mining

you will be able to understand how this finally translates into an earning opportunity or earning

potential for common people for anybody like you know even if you have 100 rupees how you can invest it

and get a portion of the investment or revenue from it

so in its simplest form right define lending is like a peer to peer loan service people

always exchange collateral and loan between themselves you know there's so many

pawn shops where you can go and and get money from somebody but uh imagine you go to a bank and then

you pay interest to the bank right that's like a centralized exchange d5 is like

going to one person or somebody that you know or you know an individual

and you're paying it back with an interest to that a lower interest to that person let's say bank is saying 10

percent and another person that you know a friend probably is giving like two

percent or something like that three percent then you basically go and get the money

from them and paying back but then fundamentally there is a need to trust that person so

what if we don't have to trust that person right that's what d5 is doing let's look at another example

in centralized finance today in the traditional financial system we all deposit our money into banks and savings

account and what these banks do essentially is that they take our money

and our money is then loaned back to people again at a higher interest rate sometimes even

up to 15 percent interest rate on home loans and 40 percent api on credit card loans the credit cards that

we don't repay you if you don't realize you actually end up paying like 40 api on those credit card

loans and home loans even though it says 15 20 percent

or you know 10 percent sometimes right everybody know that if you take like 10 lakhs loan uh over a 20 year period you

are ending up paying nearly double or triple that amount 20 to 30 lakhs as a loan so home loan sometimes

the apy is also miscalculated so the the amount of uh money that they make by loaning our

money to others is staggering and sometimes we might even take a loan from the same bank in

which we have a bank balance and they might be double charging us by by asking us to pay interest on the loan

that we take and also we'll be asked you know uh minimum account balance and everything

we we might be getting charged on the fees on that end as well so

the banks are basically making money out of our money and they are probably giving very very

less money back to us in fact in uk we get like less than one percent bank interest if we keep our money even if i

keep like 100 000 pounds in the bank so another example um is the common uh

jewel shop loan right or the pawn shop loan where if you have a jewel in india for example

you can go and put it in a pawn shop and uh you can get money out of that guy but that guy will

generally charge you a very very high interest rate i mean you know we all know how the indian pawn shops

work the uk pawn shops the worldwide pawn shops work pretty much the same way right you know jewel

loans or whatever collateral that you go and give uh there's like you know there is a

there is a possibility that the guy might charge you like fifty percent apy so if

you get like thousand five thousand rupees loan from that guy uh you might have to return like

thousand five hundred rupees in total and five hundred rupees is the profit directly going to that pawn shop guy

so it is again centralized even though we say that it's not the bank involved it is still centralized because this one

guy is making all the profit at the same time 10 people in the same village where this pawn shop is

operating might all have 100 rupees each but they don't actually give it to this guy

but what if this guy can take interest take the loan from these 10 people all of them giving 100 rupees to this

guy and he pays like 20 ap interest which means that he's only paying back 200 rupees

and he's saving 300 rupees and everybody will get a share of the 200 rupees if we equally divide it it's 20 rupees

profit for them so they had 100 rupees now they have 20 rupees profit by loaning it out and safely getting the

money back from this person and the guy is also saved 300 rupees and you've eliminated the guy who was making

so much profit but how do you do this because you know um i know how do you connect these 10

people with this one person right and how do you make sure that the dwell is you know safely kept how is it

returned who monitors it who makes sure that the money is distributed to these 10 people

who collects the money from this there's so many things that need to be done so what if there was a coordinator

or an organizer and then the organizer says that he'll keep a small percentage of the profit

so if there is a if there is 200 rupees profit and everybody is getting 20 rupees

let's say he takes two rupees from each person so for them it's like you know still a win-win

scenario because they're getting like 18 rupees back now trust is the main issue right how

can we trust a human for this because the guy can take away the money and run away i know he can do all sorts of

things with it but what if instead of a person instead of a human being what if that's a

robo or if it's a you know a computer that is doing it like you know we've seen robots in in

coin movies and everything right like uh not like an ultron robo but like a good robot let's say that you know

like a chitty robo for example what if there's a robo that never lies

never cheats never it can never be controlled never be hacked and it's always loyal and it's always

truthful right so uh if that robot sits there and then it collects the money and then it it takes

the jewels keeps it safely safeguards it pays it back and it says that i want even lesser

profit on lesser profit share i'll keep only one rupees for my charging of my

electricity or whatever and then it says that you know i will give everybody 19 rupees back so it's still

working so replace that robo with a computer program and that program is called as the smart contract so the

smart contracts are really small computer programs that can run on the blockchain

itself and not all blockchain support for example bitcoin doesn't support a smart contract there are certain

blockchains like ethereum where they have a virtual machine ethereum virtual machine that supports

these smart contracts so only you can only deploy these smart contracts on certain blockchains and

what happens is in essence that does the job of the robot it basically collects money from people

and you can put money uh you can put your uh crypto as a collateral like you can put your

uh you know whatever crypto that you have like gold you can put it as a collateral and you can take money from

it and the smart contract automatically gets created and it collects money from the lenders

it gives them the interest back and one you when you repay the money when you repay the loan it gives you

back your collateral so everything happens you know invisible to the naked eye and that's

exactly what we were talking about you know what if we could do that and that is what has been done in decentralized

finance in the smart contract lending process and you will see a lot of defile lending

providers offering smart contracts and offering percentage interest on the money that

you deposit even if you have 10 pounds worth of crypto you can actually

use it to lend it into the defi lending platform and that's when you can use your money to earn like 20

30 percent out of the defile lending because somebody is taking a loan off that

defile lending platform and they are sharing most of the interest with you because

it's that's the decentralized finance concept so in the example that we spoke about

thousand people could can actually converge together and even if they put one rupee into this

smart contract one rupee into this lending process there is a loan of 20 000 rupees that

can be given to one person and everybody will get a share for that one rupee that they are depositing so

earlier even though there were investment opportunities where you know people with uh

a little bit large amount of money can contribute to the ecosystem people like small investors were never

allowed to uh you know take a pie out of this those lending platforms or this

any investment platforms if you have only 10 rupees 50 rupees one rupee you were never allowed to be part of

these kind of ecosystems before now with smart contracts even if you have a very very small amount of money

you can actually put it and you can trust it and you can get your um interest back

and it is a safe ecosystem that they are creating pretty much the whole concept of

blockchain we will be talking about from episode zero zero to episode zero one that how the blockchain unlike the

conventional database cannot be hacked cannot be uh you know modified and why the blockchain

technology for data storage or for the crypto industries is essentially a leap

in terms of the technical computing um that that we've had and the smart contract builds on top of

it to say that you know gives you the security that you can get your interest back and the passive

income out of your money in a safe way i mean even if you put it in a bank

banks are also often hacked and that's why the smart contracts are often even better security and even better um

collateral power that they can combine uh people together from one corner of the earth to another corner of

earth pretty much easily now let us look at decentralized exchanges how what is called as

dex in in common or in short in its simplest form like we talked about the defile ending right in

the simplest form defined trading or the on the decks is practically a barter system people used to exchange

products and services between themselves like if i made tomatoes and you made onions

we can exchange tomatoes and onions and you know if you're a barber for example i'll give you one kg of rice and you do

my uh you know whatever services that you render right so you can get services or

products and they used to butter exchange between themselves and that's when we evolved into money and

you know we've gone into crypto and all that so we're kind of going back to the same concept

that you know people are able to uh exchange products and services between themselves

and imagine going to a supermarket and you're buying vegetables and fruits that are available in a supermarket that's a

centralized exchange defy exchange or decks is basically decentralization is basically

you can go into a farmers market and you are basically able to exchange fruits and vegetables

without any middlemen in operation we'll actually take on one example of of this and then we will use

it to demonstrate how the d5 process works and you don't need to know each other and

fundamentally you don't need any permission i mean if you want to sell jackfruit you can go

sell jackfruit if you want to sell bananas you can go sell bananas so why do we need decks you know when we

have centralized exchange why do we need a decentralized exchange like let's just talk about it for a couple of minutes

so in most cases the blockchain in the cryptocurrency is not controlled by a central

organization it's truly decentralized like apart from exceptions like trx or tron based

ecosystem where justin sun pretty much owns it most of it right or there is a speculation that

he owns most of it and it's not a centralized currency our usdt for that matter whether it's owned by

tether but obviously tether is collateralized so it's not truly uh you know uh centralized i would say

but apart from those exceptions most of it is truly decentralized which means that

it is common people who have it who have control of it but uh the irony is that we go to a

centralized exchange like coinbase or xerx and buy it because it's so easy to do it and

it's ironical because you know it defeats the whole purpose of the concept that

the blockchain and the crypto is truly decentralized but the place from which we are buying

it is actually centralized and essentially what it means is that the coinbase and wazirex and all those

ecosystems uh all these centralized exchange providers they are becoming richer and

richer because of the fees that they collect by selling the crypto and by buying the

crypto from us so um and there are limitations to the centralized exchange right like for

example many countries have got different laws which means that uh

you cannot trade certain popular cryptos in that currency uh like you know in sri lanka for example

crypto i think there is a there is a wider ban as well and but in us for example right

uh cryptos are really harder to buy if it is a new crypto especially like for example

um injector protocol we've talked about it and i've even said that it's one of my top

cryptos and i realize that injector protocol is so difficult to buy in a centralized exchange in u.s

and in new york for example if you live in new york and they have city-wide they have some specific rules

that you are not allowed to trade even if it is available like 100 miles across the border to another city

if you are living in new york then you are not allowed if you are a new york resident they do not allow to trade

certain crypto so there are so many restrictions that they have in u.s for example even one of the most

developed countries and centralized exchanges control the prices using order book spread and fees

and they keep the profits and especially like geotests in episode in one of the episodes we talked about geotests where

how the order broke was completely broken and why it is very important to use something like wazirex and

not go with other providers basically and order book is very very important and we've spoken about how the

blockchain the underlying crypto technologies is kind of unbreakable and you know how

much it is a technological advancement to the traditional data storage that most banks

or centralized banks use but despite the fact that we are still trusting the centralized exchanges

with custody of our crypto private keys and if the centralized exchange can get hacked

because exchange is using a traditional security system and the exchange if it gets hacked then

uh we are still you know kind of you know giving the keys of our of our crypto to those exchanges

which means that we could lose our crypto as well if we are trusting a wrong exchange for example which is why

you need to trust some of the strongest security protocols and the most trustable crypto exchanges like

point based bid through azerex binance and crypto.com we've been talking about these

pretty much these five in most of our videos and a lot of people keep asking about new exchanges the reason why you

don't trust the other exchanges because the security is lacking or the

collateralization is lacking or there's something that is wrong in those exchanges

like the order book is broken or they're offering a higher incentive which means that

potentially they could run away with your money at any point of time because we're talking about billions and

billions of dollars here so one of the reasons why i don't go out of these five ecosystems is because i've

i've invested pretty much most of my money with these exchanges and even with indian exchange i think

bazirek's you know sleep and bounds above the other crypto exchanges and despite the fact

that we are trusting our in these these kind of exchanges there is still that element of risk where that

you know the the security protocol however strong it is still a traditional security protocol

um the underlying crypto is is blockchain based but the the traditional security

protocol that the safeguarding these exchanges is something that is used across the

industry for any other website or any other exchange i would say and uh we have spoken about how

uh sometimes these centralized exchanges even if you have validated 100 parameters

um they can have performance issues during critical time like what xerx went on when wrx was shooting up one day

and coinbase pro for example it has had poor performance issues when you really wanted to

make a good uh profit out of one particular crypto on coinbase flow has been down

for example right many cryptos crypto exchanges have gone down during critical points in time and

eventually you are putting your entire trust in one organization and the organization's goal

is to make profit all of these central exchanges um the only purpose that they exist

today is to make profit so um what are the let's just boil down those things that we talked

about right into five topics you know centralized exchanges the limitations trust

permissions border restrictions single institution control and profits is all going to

one organization that's fundamentally all these problems are boiling down to if you flip it around

the decentralized exchange is basically trustless which means that you don't need to trust anyone there is no need

for trusting anyone because of the smart contraction because of how they are built and it's permissionless

which means if i want to go and sell something then i can go and sell it i don't need a permission from

anyone um like in centralized sections if they don't allow you to sell certain cryptos

you can't sell it or you can't buy it basically and it's borderless and global like i said decentralized exchange is

like internet right if you have internet you pretty much have access to the decentralizations

that's what the whole concept of decentralization is borderless and global

and it is controlled by the community there is no centralized body that com that controls it it is all based on a

governance voting model where everybody who wants that crypto contributes to the crypto

and they contribute to the voting mechanism of it is with controlled by community

and profits are shared literally um everybody takes equal profit you know the model that we've talked about where

if there are 10 people loaning out to that one guy and they all share the profits

and a very very small percentage goes to the the person who's acting as a coordinator right instead of

that person taking the whole cut and you get nothing you practically the profits are shared

between everyone and the very very small percentage go to the validator node or go to the coordinator

that is playing the role of trying to coordinate the decentralized exchange basically but

that's the whole concept you basically taken all of the problems of a centralized exchange

and you flipped it around in a decentralized exchange so uh in summary right centralized exchange is

like going to a supermarket or the shopping mall where the profits are going entirely to the supermarket or the

shopping mall and uh in centralized section you don't need to pay an entry fee though you only

pay for what you buy you know you could pretty much you know enter into a supermarket or a

mall anywhere in the world free of cost you don't need to pay an entry fee to go in there but

when you want to buy something you obviously buy whatever you are choosing but

you can't sell your stuff in those shops like you can't go and put a stall inside a supermarket or

a mall and then start selling your stuff you need permission to do that from that shop but in a farmers market

the profits are entirely going to the sellers and the farmers and anybody can actually go in

set up a shop for a small fees anybody can go in and buy it but there is a small entry fee for buyers

you know typically in some farmers market there may not be an entry fee but in most developed countries big

car boat sales or farmers market or anywhere when you want to enter into that place and start

selling or buying for both you have a small fees that you need to pay which eventually goes to the maintenance

of that market and maintenance of that ecosystem but anybody can go pitch up a car or which

patent and start selling um their products or start selling their goods and services basically but

like for example nobody can stop you from selling jackfruit like i said if i want to sell jackfruit i can go there

and start selling jackfruit there are no restrictions in this kind of

decentralized section which is like the equivalent of a farmers market that i am talking about

so we talked about uh earning potential and earning opportunities in distance exchange and up and mining right so

where does it come into picture it comes from the liquidity provider and the liquidity mining concept so let's look

at what this means and how this translates into earning opportunities for us now uh to

understand the dex and liquidity there are some terminologies that we have to explain like market maker order

book model liquidity liquidity pools d provide tokens ah amm which is automated market

maker impermanent laws and how the there are curve pools and balance of bulls and

liquidity mining and finally forming now if we do the technical explanation of it it will be really

really difficult so what we're going to do is we're going to try and use some examples in a couple of minutes

and we're also going to try and break it down in layman's terminology for easy understanding of what these are

without going into a technical definition of it so in simple terms right in a

centralized exchange like wazir x and these these pages were actually incorrectly

saying decentralized in the tamil version but in a centralized exchange like vasirex

when you want to sell your crypto and no one's available to buy it then you'll have a difficult time selling it

and same way if you want to buy it and there's nobody selling it at that time then you'll have to wait for somebody to

come and sell it to you to avoid this delay and to make this experience faster what happens is there is a middlemen

that come into picture these guys are called market makers they always hold stock

of a particular crypto and if you want to sell it they will buy it from you and if you want to go buy it they will

have that stock and they will sell the crypto to you and this process by which these guys are

acting as middlemen holding a stock of crypto always and and selling it

uh and buying it that process is called as providing liquidity without these guys in place

it'd be really difficult to be slow for anybody to try and sell it or buy it because they have to wait for

somebody else to come and buy it or sell it from the other side now what happens is

these market makers they operate a simple concept called as an order book model

wherein they try and keep a profit margin so if a cryptos price is saying 10

in the in the price charts right when you want to um and you want to buy it from them so

you you you go and buy it um they will sell it to you for 11 but if you want to go and sell that

crypto back to them they will buy it from you at nine dollars so if you um if you actually buy the crypto

uh in this minute at uh the centralized exchange you could buy it from

11 and next minute if you want to sell it it will go down to nine dollars which means

you lose out the profit that's why you need to wait before you sell it and uh generally when the crypto is

volatile you won't notice this kind of a spread but that's what is called as a spread

between the buy price and the sell price and that's their profit margin they keep

this two dollars as a profit margin where they will buy the crypto from you but they'll pay you one dollar less

which means that they're taking the crypto from you at nine dollars and when you want to

actually buy it and they are going to sell it to you they will charge one dollar extra to

sell it to you and by this by providing the liquidity they are actually keeping two dollars

of every sale or they are taking the profit of every sale and this is called as an

order book model in this order book uh the profit margin if it's very very small if the spread is

very very small that's a good order book model like wazirex and uh

some of the good indian exchanges they have a good order book model binance and uh coinbase and uh you know

um crypto.com that we've spoken about bit true that we've spoken about we've shown

in episode 15 in the demo with example how this this order book is very important and how if the spread is very

very small you are not losing out on the profit that the market maker is making but

some exchanges like geotests where we showed in the example that market maker is making a huge profit

because he is uh selling it to you at uh you know fourteen dollars and buying it from you

at six dollars where is keeping nearly eight dollars of profit which is you know greed out of

the from the market makers perspective and he's making a huge profit and we end up

losing money in this model basically now um how the market makers manipulate these

prices sometimes in in episode 7 of my share trading i'll give you a link in the

description i had i had put a detailed chart and went through in a very very simple

example how these market makers sometimes they manipulate the price of a stock

or a share and how they are actually manipulating the order book as well with a very very simple example

that applies to all centralized exchanges and sometimes when the price goes up and down

depending upon the the demand it is because these market makers are also

behind this this price fluctuation sometimes not only necessarily because there is a

proper price fluctuation market makers can also play a big role in these centralist exchanges

and uh that again will result in a huge loss for us if we play into these market makers

so but we can't take away the market makers in centralized exchanges but in decentralized exchange if we again

bring the concept of a market maker it defeats the whole purpose and it negates the whole concept of a decentralized

exchange and we still have the problem then who will provide this liquidity if i don't

have a market maker then who will who is actually going to buy it from me and sell it to me and who

is going to provide this liquidity because we need this liquidity we need the stock

in between where we are able to go and buy and sell it easily without

waiting for somebody else to do it at the other end so which is where common people come in all

of us any one of us even if i have 10 worth of crypto i can become a market maker i can become a liquidity provider

by providing liquidity on a pair of crypto for example if i'm going to become a liquidity provider and i am

going to say that for link and usdt pair i am going to be providing liquidity whatever dollar amount whatever value i

am providing liquidity foreign link the same dollar amount i provide liquidity for in

usdt the combined value will be like uh if i'm providing hundred dollar worth of

link for 100 worth of usdt so i'll be providing 200

worth of crypto as a liquidity into the liquidity pool so what is a liquidity pool

when more and more people like us you remember the 10 people you know contributing 100 rupee each

becoming thousand rupees more and more people when they contribute into that

into that one pool that place is called as a liquidity pool or that concept is called as a liquidity pool

and what happens is that the first person who puts in that pair

he creates that liquidity pool and then anybody can then join the liquidity pool and they can contribute more and more

amount into the liquidity pool and when you provide liquidity when you put your crypto into that liquidity pool

you become a liquidity provider against that now what's the benefit of providing liquidity right so

that's fine for people who want to buy and sell because now liquidity is created

but what is the benefit that you get by providing liquidity into a liquidity pool like this so

let's take a fruit market for example where there is a farmers market for example

where people are selling different fruits or they're giving one fruit and taking another fruit

and you intend to become the liquid eating provider by providing let's say apples and

oranges equal dollar amounts but before we jump into the example let us look at a couple of more

points that we are also going to cover in that example what is the liquidity provider token what is the incentive

right so liquidity provider token uh is the representation of the fact that you

provided that 200 worth of link and us dollar it is basically like

uh like how if you buy a crypto you have that crypto in your in your wallet liquidity provider token lp token as

it's called represents the uh the denotion that you have actually provided liquidity into a

particular pool that's proof of ownership to say that you provided liquidity that's what

a liquidity provider token is ah the incentive is that for every

transaction that happens there is a fees that is taken from the transaction so if

somebody is buying or selling linked to usdt or usd link for that matter

there's generally a 0.15 percent or 0.2 percent fees that is generated for every

transaction in the centralized exchanges entire fees goes to the um the exchange itself like the xerx or

coinbase or whoever but in a decentralized exchange because you've contributed liquidity

depending upon what is your proportional amount on that liquidity pool you will get that fees

to your proportion so if you contribute a 20 to the liquidity pool whatever fees get generated if it is one

dollar two dollar for every transaction you will get the 20 liquidity fees

to you and that is your benefit that's your incentive for providing the liquidity now um there is

a very very big concept called as impermanent loss in liquidity mining and uh implement loss and liquidity

mining so in the beginning when you provide a liquidity you're trying to make money out of the

fees alone but what happens is that it looks like a very good passive income

when the crypto market is stable but when the crypto market becomes unstable right you might end up with a

loss even though you're earning every transaction if you're earning a fees

even with that you will end up or you might end up with a loss on one side or both sides with the

number of combinations and this loss is called as an impermanent loss if you withdraw

at that point in time and to compensate this loss what the dex aggregators what the new

decentralized exchanges are doing is that they are incentivizing you more by providing a

reward on top of the fee structure on top of this process of collecting fees and that reward is called as

liquidity mining and we will see that with an example of the orange and apple like i talked about

so let us take a farmer's market where people are exchanging apples and oranges and you intend to

become a liquidity provider in this market so which means that you have to supply both apples and oranges in equal

value not the quantity but the dollar amount that we spoke of so let's say apple is one apple is four

and four rupees and one orange is let's say one rupees and you want to provide

400 rupees worth of uh apple or oranges so you have to provide equal value equal dollar amount right so you provide 100

apples which are 400 rupees and 400 oranges which are again 400 rupees so in total

the value you are providing is 800 rupees that you are providing liquidity into it

so the first person who comes if they are buying um oranges from you and giving you apples

so they will give you 10 apples and let's say they will take 40 40 oranges from you

because that's the equivalent amount that you need to give them so now you have 110 apples in the in the

first trade and you have less oranges we have taken they've taken away 40 oranges from you

so you have 360 oranges and let's assume the fees paid in every transaction is 5 rupees

to you that's your proportion so keep it as flat for this example right but

what happens at that point is that let's say the prices are remaining same in this scenario

throughout the end to end process which means that even at that point your value is still 800 rupees total value of your

apples and oranges put together is 800 rupees now the next person comes in or the next

few people who come in are all buying apples and giving you more and more oranges so which means the

stock of your apples will keep going down so first person buys five apples gives

you more oranges 20 oranges and they keep buying apples from you and they are giving you more

and more oranges and eventually when the last trade is completed

um they've bought more apples from you and they've given you more oranges which means that you've got

now 50 apples in hand and they've taken they've given you more oranges so you have 600 oranges in hand

if you keep the price of the apples and oranges as the same then you still ending up with 800 rupees

in total worth of apples and oranges and if you had not participated in the in the liquidity pool then it would have

still been if you kept your 100 apples and 400 oranges it would still be 18 rupees

there's no difference but the five trades that happened each of them giving you five rupees

you've now gained 25 rupees in terms of the um the liquidity provider fees which is

your gain that's the passive income that you have generated by keeping your apples and oranges but

obviously your quantity has now changed now this is true if the prices are remaining the same

what if the prices are not remaining the same right so in the same example let's take the scenario where

your your cost of the apple is going up and the cost of the orange is remaining the same

so for example your cost of the apple is going up from four rupees to six rupees after those trades have all completed

now had you not done this liquidity provider concept have you not provided liquidity

you would have had 100 apples and you would have had 400 oranges which means a total combined total of thousand

rupees now because you participated in the liquidity provider pool and you become a liquidity provider

you have only 50 apples which means that in total you have only 900 rupees despite the fact that the oranges

the quantity of oranges have gone up the price of the orange is still remaining the same

so which means that even if you add the 25 rupees fees or commission that you got

on top of the money that you will have after the end of the liquidity provider pool

you only end up with 925 rupees had you not participated you would have had thousand rupees

that 75 rupees difference is your impermanent loss i didn't even go into this liquidity

provider concept and i could have actually made because my my value of the crypto that i have

quantity less is now gone up i am not going to be able to make the same amount of profit

that i would have made that's your impermanent loss because if you had not done this you would have

made more profits because you have done liquidity provider concept

despite the earning that you got you have now less total value than what you would have had if you had

not done it that's your impermanent loss now this is a scenario where the

value is going uh down by only a small amount now imagine that both sides it's

happening that your crypto that you have lesser the value has gone up

the crypto that you have higher the value is going down orange is going down so for example the

apple value is now going up to 6 rupees the orange value is now going down to 80 80 percent right

it has also gone down so which means that because you've got more oranges your value will be totally

even lesser so you now have only 780 rupees add up the 24 rupees you have only 805 rupees

had you not done the liquidity had you not participated in it your total would have been 920 rupees so

your impermanent loss is now even higher 115 rupees so till now we saw only the the profits that you could lose because

you are not holding on to the crypto but still you know the value that you

had was 800 rupees now you have 805 rupees now but there could be a scenario where

you might end up losing that value even if uh if you had participated in that despite

that that money that you earn from the liquidity provider fees that is if the

the crypto that you have or you know the oranges that you have more in your hand if it goes down by let's say 75 p rate

uh instead of 80 pins then the total value that you will have after the participation will be like 775

rupees which is even less than the money that you had originally

so even if the prices had not even gone up you could have ended up with a loss scenario

that's what we are talking about here where um despite the fact that you know you had 800 rupees and now you

have less amount even though you have participated in the liquidity

you become a liquidity provider you got the fees you earned that fees still your total value is now less you

ended up making a loss now why would someone then participate in liquidity provider fees why would

someone take this risk because d5 mining is coming with this inherent risk

and this is very very important to understand the the concept of impermanent loss because this is a

very very valid risk scenario how do i avoid this how do i incentivize people then

to take a risk in that particular scenario where it is a very common scenario there is a number of

permutation combinations we can go on and on basically but how do i

incentivize people right so i incentivize people by giving them a liquidity reward

now take the same scenario where i ended up with a lesser amount in hand and now i am putting on top of the fees

that you will gain normally for every transaction i am giving you something called as a

liquidity reward in addition to that fees that you are earning that liquidity reward let's say it's about 930 130

rupees right that liquidity reward will now mean that okay you will have more than 905 rupees

in total um when you participated at the end of the liquidity when the liquidity ends so net

gain is still 5 rupees so had you not participated you would have got a 900 rupees

because you participated and you got that liquidity reward as well on top of your normal fee structure now

your total gain is about five rupees so that's that liquidity reward mechanism and in

going after a liquidity approval that gives you a liquidity reward is called as liquidity

mining and that's where you can make money out of it despite the fact that

there is a risk about impermanent loss over and above your impermanent loss you are looking at the liquidity reward and

saying that that will be covering my risk scenario in terms of

the impermanent loss so so in summary right you could always end up losing

lesser value in terms of quantity on either side of the pair you will definitely for

for the the very first time a trade happens one of your pairs is going to become less and one of your pair is

going to become higher and there is a number of permutation combinations where both sides could

become lower both sides could become higher and you if you look at the examples you

will realize and you can if you play around with apples and oranges you will realize how that's

possible i'm not going to go into that that level of permutations and combinations but

the liquidity reward needs to be good enough that you can make a decent profit out of it

these days a lot of liquidity mining rewards can go up from 100 percent apy to about

500 percent apy in some of the pools so the the uh the option is to look for a

reward mechanism where the apy is at least you know decent enough that you think

that the liquidity mining reward will cover your liquidity risk scenario of

impermanent loss liquidity mining as a concept is still fairly new to people and then that's one

of the reasons why a lot of people have not indulgent but still there's a whole lot of

community that is built around this liquidity mining there's a lot of players that have already come

into the market but the process is sometimes very cumbersome and needs a little bit of

learning of all these fundamentals and the risks are extremely higher if you do it incorrectly if you don't understand

it and if you try and do it you might end up ah you know you end up with a loss like

i explained right so um a lot of centralized exchanges you know they take crypto from the holders

they tell them that they're going to safely invested in d5 mining on their behalf

but they will give a far lesser uh reward because they are using a crypto to earn from the

defy earning opportunities and they're giving you a very very less return in in terms of the safety that

they offer for example bitru had offered a 145 liquidity mining apy reward if you

participated in the liquidity mining yourself for the btr usd pool but if you did it yours if you if

they did it for you on your behalf they were offering a 30

api return and you can actually go and see the notification which in which they posted this where they

gave you both the options you know if we do it we'll give you 30 percent if you go and do it yourself you know in

a decent released exchange you can get up to 145 percent but the risk is yours so that's what centralized

these times are doing they're making it easier for players who don't understand what define mining is

and they give far lesser rewards but if you understand it you can directly go after the the higher

uh reward mechanism so how do you do it where do you do it so all this theory is fine where do we get

in how do we get into the practicals right so in the initial days uh the decentralized

technical concept of dex was made popular by uni-swap almost single-handedly i would

say and then it still continues to be the dominant dex provider or dominant text enabler i

would say and most of the popular ethereum based research

is our uni spam one inch exchange balancer banker curve pool balancer banker curve they are

interesting because they brought mathematical formulas into picture to

minimize this impermanent loss or to tackle the price variations and they they had really uh interesting

uh you know calculations that they brought into perspective you know there's

absolutely the cover pool um for example you know they were they were trying to they were trying to make sure that the

price fluctuation do not cause too much of an impermanent loss to the liquidity providers but it's it's

fascinating to read all of it but it's far too technical for this particular topic today

so we're not going to go into the details about balance or pools or curve pools in in

detail but those are all exchanges that were built upon mathematical models and mathematical principles

loop ring as a concept you know we've talked about looping in our previous episodes as well

they are doing something called as a layer 2 of ethereum which is scalability ethereum has got

fundamentally big problems like scalability and fees lubring is trying to do you know a

solution to that scalability problem and we'll see a demo of looping as well in the end of this video

so uni swap like i said right industry continues to be the most popular crypto exchange

and uh when there is a crypto that is very very hard to get from any exchange or it is hard to get from a centralized

exchange uni swap like injector protocol if you are in us you can easily get it from uni spam for

example so but for a long time ethereum was the only blockchain

or most of the decent exchanges we're using only ethereum to uh to execute these smart contracts

because ethereum was predominantly you know i think in 2015 they were the first blockchain to

introduce the concept of virtual machines which can execute these smart contracts

inside a blockchain or alongside a blockchain so they enabled this in fact technically so even today

predominantly most of these interest exchanges are using ethereum but the biggest problem with the

decentralized exchanges today and smart contracts today is the ethereum scalability and gas fees

ethereum processing is extremely slow it is it is like running a 2021 3d game on a 2010 computer it is

that slow and then the fees is exorbitantly high i mean imagine the internet fees that we

were paying 10 years back compared to the fees that we're paying today right

so the fees is extremely higher and the scalability is also part of the problem actually and it is

it is what it means is that the cost of executing these transactions is insanely higher i will show you with

a demo of how high this piece is and how it kills the whole concept of decentralised

exchange for small players like us only people with large amount of money

are now able to make decent profits out of it so if you use uni swap to swap two cryptos

as a small investors um that you couldn't buy anywhere for example you will end up

paying for like 100 pounds worth of crypto if you want to buy you could end up paying up to 200 pounds

in gas fees and fees alone if the network is congested which means that i'm only buying hundred

dollars worth of crypto but actually i have to spend 300 because 200 is the fees for buying that crypto

because the network is congested and you need to pay for it and sometimes if it is over congested

then you are actually paying extra to speed up the process so imagine a

toll road rate where you are carrying a package from one city to another city and

they are giving you a benefit to say that you take it from one place to another place you will get 200 rupees

for the package um for for doing that job but then you take a taxi to do that and then

the tolls are charging you almost like 600 rupees and then there is the taxis charging your

a surcharge because there is a there is a peak over traffic so eventually what will happen is you will