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Looking at trends and tracking popular topics through the community of crypto enthusiasts on Twitter, I came across SafeMoon token. In the last week and a half, the number of queries on the project in Google, and the number of posts in the mentioned social network, has increased significantly. I tell you what global and significant problems of the decentralized finance market Safemoon solves, and what risks should be considered for decentralized finance projects.
Safemoon – what is it
SafeMoon is a decentralized finance (DeFi) token. It has three characteristics: it burns, it accumulates, and it is 100% community-driven.
The project entered the market only in March of this year. According to the company’s website, at the moment the token is traded in pair with DogeCoin on the Bibipom cryptocurrency exchange. Negotiations with WhiteBit and BitMart are also in progress.
It is interesting that around the seemingly very young project has already formed a strong community. So, not even an hour after WhiteBit’s announcement that deposits and withdrawal of SafeMoon on the site is possible, and it has already gathered more than 600 likes and reposts.
Since March the price of the asset rose from $0.0000010 to $0.0000012 as of today. It is indicative or not, but the trading volume of the coin for the last 24 hours has increased by 100%. At the same time, it is important to remember that the cryptocurrency market is a speculative market. Trading volume can be trivially provided by voshtrading. But.
Farming income and other “must know” concepts
The decentralized finance market is functional. This includes exchange, credit, insurance, etc. DeFi (DEX) exchanges are governed by smart contracts. As soon as a developer puts smart contracts online, they become available for users to explore and interact with. As long as the developer does not make changes to the contract, it will faithfully perform its intended tasks without the need for customers to provide identification information, open and fund accounts, exchange funds, or withdraw money.
The key phrase you need to know in the context of this project and decentralized finance in general is Yield farming, or “income farming. It is similar to a bank deposit with interest. When a new DeFi project enters the market, it distributes free tokens to encourage users to explore it and use its platform. To earn these tokens, the project may require the user to send cryptocurrency, more often ETH, or common liquidity pairs such as ETH / USDT, into a contract for a period of time. This practice is called “betting.” The project then calculates the number of currencies delivered and the duration of the staking and provides its free tokens. The user is usually charged a transaction fee. These free tokens can then be sold on the open market. Income farming usually has a relatively low annual percentage yield (APY), but can sometimes reach 1000% to 3000% if someone joins the project early on.
Where are these tokens sold afterwards and what is the interest in these assets? The series of actions described above are followed by liquidity mining (LP). To provide liquidity, a new user must send equal amounts in dollars or a common cryptocurrency, such as ETH or USDT, and a new token to the liquidity pool on DEX. He then places the liquidity provider’s token on the project’s website and eventually receives interest in the form of the new token. The more purchases from the liquidity provider (LP), the higher the value of the LP token becomes. Correspondingly, the more sales, the lower the price.
Liquidity mining is the core of any DeFi projects, because these projects are usually not listed on CEX (centralized crypto exchanges), and users must move to the DEX (decentralized crypto exchanges) liquidity pool to buy and sell. Consequently, mining the liquidity of new tokens must have a high APY to attract traders. Usually it is between 1% and 6% per day.
Without compounding, even a 1% charge per day equals a 365% profit for the year. But you can’t ignore that the LP token can fall in value.
Transaction fees are a major obstacle to generating revenue on such DeFi projects. Because they are created on publicly available blockchains, the user simply has to interact with the contract to invest the interest earned in the LP token. Hence the transaction costs. For example, during peak hours on the Ethereum network, compounding costs between $50 and $150. The higher transaction fees are due to the rising price of ETH (it has increased from $1 to $2000), excluding compounding in the ETH blockchain.
Common problems eliminated in the project
As DeFi grows in popularity, many cryptocurrency avenues fall into the trap of high APY LP-farming, as they are squeezed out by earlier buyers with higher rewards. However, tokens almost always suffer from the inevitable valuation bubble followed by an explosion and impending price collapse. SafeMoon’s solution to this problem has been static rewards.
As they write in the project’s White Paper, first, their size depends on the volume of token traded. This mechanism aims to alleviate the selling pressure caused by first holders selling their assets on the market after insanely high percentage farming yields. Second, the reflection mechanism encourages holders to hold on to their tokens in order to get higher returns, which are percentage-based and dependent on the total number of tokens in the holder’s hands.
Incineration cannot be of course and controlled, on the other hand, supply reduction is beneficial only in the early stages. That’s why SafeMoon controls the burning by announcing the terms and number of tokens to be destroyed. This strategy is aimed at those holders who aim for the project in the long term. The company has also created an Automatic Liquidity Pool (LP) to prevent prices from collapsing when whales decide to sell their tokens. Technically, this is ensured by the following scheme: a smart contract charges tokens from both sellers and buyers, and then adds them to the common pool, thus forming a price threshold. In theory, the added LP creates stability from the delivered LP by adding tax to the total liquidity of the token, thus increasing the total LP of tokens and maintaining the price threshold.
Three main risks
As for the risks associated with DeFi projects and direct Yield farming:
- The developer is usually anonymous and may be an imposter. The team can leave the project for any reason at any time. In such a scenario, while the project may still have some value, it will cease to be maintained and updated.
- The developer may intend to steal the supplied assets. This is an atypical situation, because the codes are publicly available and any deviation from them can be noticed, but still. There is always the possibility that a developer will create a backdoor to steal assets.
- There may be an error in the stacking contract. Sometimes staked assets are used for other purposes, such as as collateral for loans. A hacker can discover a flaw in a staking contract because it is publicly available and extracts funds from the contract.
Buying and holding cryptocurrency is very risky. It took 3 years for the largest cryptocurrency, Bitcoin, to recover in price. Remember that you can lose 99% in one day holding an altcoin, and what’s more, it won’t keep you from losing the next day either.
