The Elephant in the Coup: The Risks of ROI Dapps and DeFi
DeFi wouldn’t have some of the best financial vehicles available without the failures of protocols. DeFi protocols fail for many reasons which I will briefly go over below. However, my goal for this medium article is multifactorial, here is what you will learn by reading this article:
1. The Risks Associated with Return-on-Investment Decentralized Applications (ROI Dapps)
2. How failures of protocols lead to more sustainability
3. What is Elephant Money? How did it outperform BTC and ETH on the Yearly Chart?
“You have to crack a few eggs to make an omelet”- Anonymous, Chicken
The Risks of DeFi, including ROI Dapps:
1. Impermanent Loss and Hyper Compounding
2. Smart Contract Risk
3. Liquidity Risk
4. Operational Risk
Note: There are others risks such as regulatory and black swan events that I will not cover in this article.
Impermanent Loss and Hyper Compounding: Hero to Zero
Impermanent Loss (IL): The chicken or the egg
The risk of impermanent loss has to do with my last article, “Unpacking The Matrix: Automated Market Makers and Elephant Money Zion”. Automated Market Makers (AMMs), like Uniswap or Pancakeswap (PCS), need liquidity so that DeFi users can swap from one token to another. For example, the Ethereum (ETH) / DAI (DAI) liquidity pair (LP) as stated in my previous article:
“When a trader wants to buy ETH with DAI, they send DAI to the AMM’s pool and receive ETH in return. This increases the quantity of DAI in the pool and decreases the quantity of ETH, but the product remains constant. The AMM calculates the new price of ETH based on the new quantities of ETH and DAI in the pool.
More DAI into ETH / DAI liquidity pool = Higher price for ETH relative to DAI (Price Appreciation)”
Conversely, if everyone started to sell ETH by taking DAI out of the LP. There would be massive price depreciation for ETH/DAI LP holders. This is due to the imbalance in the ratio of ETH vs. DAI in the liquidity pool. We call this “Impermanent” loss. It is impermanent, in theory, because the loss is temporary. DeFi users (if there is still value in both tokens) will arbitrage this price and increase its value.
Note: When providing liquidity to a protocol or AMM, you should be confident in both tokens within the liquidity pair. If you don’t know what the other token is, research it. You will risk serious impermanent loss if that token goes to ZERO. From Hero to Zero in the blink of an eye.
Hyper Compounding: The Unsustainable Emission
Hyper compounding is not a well-defined term per Chat GPT. Nonetheless, from my experience with Return on Investment (ROI) Dapps, hyper compounding is when a protocol promises yield via emissions of a native token without requiring subsequent investments i.e., Furio, Drip, Splassive. These protocols only require a one-time locked deposit while offering unsustainable yields with no real revenue source. The locked deposit earns native token yield that you can compound back into your locked amount increasing your balance overtime. When Peter’s locked deposit pays for Paul’s Yield, you know you have a problem. Some protocols have tried to limit bank runs by decreasing percentages of return and or limited sell amounts, yet a majority of these ROI Dapps have failed or are on their last breath.
Note: Understand the tokenomics of each Dapp you research. “If you don’t know where the yield is coming from, YOU ARE THE YIELD”- Darkwing Duck.
Here are 1 year charts of Drip and Fur to illustrate their unsustainable emissions which have tanked their native token price:
Smart Contract Risk:
Smart contract risk is a trickier egg to fry. This all depends on the coding expertise of the protocols developer and the auditors that review the code. If there is a coding error that can be exploited, that is easy money for a thief. Common risks associated with smart contracts are governance risks such as when a DAO has a mechanism for a single user to gain 51% voting power. Another common attack vector last year (2022), was flash loan attacks. Flash loan attacks manipulate the price of a token using a large amount of capital, and then returns a lesser amount of funds before the end of the transaction, usually on one block of a blockchain transaction. There are many other smart contract risks associated with DeFi, but most protocols don’t survive after being exploited.
Note: Make sure the protocols you invest in are thoroughly audited by reputable companies within the DeFi landscape. They should tell you what companies audited them and have reports to prove it. i.e. Certik, Solidity etc.
2nd Note: Operational Security (Opsec) should be your focus as a DeFi user. Although you may not be able to control smart contract risk. Secure your funds by putting them on a hardware wallet such as a Ledger or Trezor.
Liquidity Risk:
This one is an ugly duckling. It’s way easier to spot in the group of risks. Liquidity risk is exactly as it implies, the risk of not having any. Meaning, if a protocol has more demand than supply of liquidity, you may not be able to sell your tokens on the market. Low Liquidity = High Risk.
Note: If a liquidity pair has low liquidity, it means its higher risk. Tread lightly. Make sure you check the liquidity of the LP on an AMM before investing. Don’t always look at the APR/APY. Even chickens get hit when crossing the road.
Operational Risk:
Operational risk is the umbrella over smart contract risk; however, my focus will be on the human involvement within the protocol. DeFi is the wild west of financial vehicles. It is rampant with fraud due to greed. Many, and I mean many protocols and investors have been a victim of theft/hacks within DeFi. If you are investing into a protocol, please investigate where your money is going i.e.
Is my deposit on-chain in my (hardware) wallet?
Is my deposit staked on chain in an AMM?
Is it going to a developer’s wallet to be traded on a CEX? (Be Careful…)
Is the developer doxed?
Note: People change when money is involved. Know who you are investing with. A developer with a history in finance is a plus! Always ask questions before clicking buttons and depositing funds on a Dapp.
The Failures of DeFi: The Chicken from the Ashes
Or Pheonix, whatever. I have a list below that I will share with you of all the protocols that have failed due to the risks I defined above.
In Memorandum: Please… A moment of silence. (Imagine Morgan Freeman saying each one really slow emphasizing a pause after each one.)
Wealth Mountain. StableFund. Yield Nodes. Trident. BloomDefi. Ooze. Avion Finance. My Diamond Team V1 & V2. Universe Nodes. LUNA / UST / Anchor Protocol. Skybridge Capital. Horde. Defi 100. StableOne. Stable Magnet. Baked Beans. Snowdog. HNW. Avarice. Freeway. Pegasus. Swapnex. Celsius. SpringGame. AMMDX. AMXDOGE. FX Master Gold. Splassive.
Rest In Peace. I apologize if this triggers anyone. I know a lot of people who lost hundreds of thousands of dollars to the above DeFi protocols.
It is because of their losses that developers have found more sustainability with real revenue sources on chain. Although some of the above were rug pulls, many of these protocols were experimental trials of new financial vehicles in DeFi. They set the foundation for the next generation of sustainability by proving what does not work in this new DeFi landscape.
It’s not ALL DOOM AND GLOOM, I promise.
I have found two types of sustainable revenue sources within DeFi:
SaaS Protocols: Transaction Fee Revenue (Dexfinance, Perp Dexs, and AMMs)
&
Drum roll, the most interesting animal in the room:
Elephant Money:
AMM & Constant Product Formula Advantage: Exponential Asset Growth Vs. Linear Liabilities
The Elephant in the Coup
Elephant Money’s two-year anniversary is in May 2023. It has outlasted all the above failed protocols because of the superior tokenomic design related to supply dynamics. Developed by a MIT computer scientist with over 25 years of experience in finance, including Fidelity and State Street, Elephant Money is the first web3 decentralized community bank in DeFi.
1 Year Chart: Elephant Money vs. BTC vs. ETH
Elephant Money: Up 49 %
BTC: Down -26 %
ETH: Down -36 %
As a store of value throughout the bear market, Elephant Money has performed better than all 100 of the top 100 assets in crypto in 2022. It has also outperformed BTC and ETH on the Yearly Chart above. This is all due to its unique tokenomic design, deep protocol owned liquidity, and the utility of the Front office & Back office.
Elephant Money has a front office and a back office. ( If you didn’t know)
Front Office Tokenomics: Elephant Money Futures
- 0.5% a day on BUSD
- BUSD in / BUSD out
Futures is an “Accelerated Retirement Account” which provides passive income to its users. It is designed for sustainability because it requires regular fresh capital deposits with delayed claiming ability to prevent bank runs on the treasury. The treasury is currently 4 times the size of the total TVL owed to users (EM Treasury $16 million vs. TVL $4 million). This is not a hyper compounding ROI Dapp and it does not use its native token for emissions.
Deposit BUSD (min $200) and then earn 0.5% per day on your balance. Rewards will accumulate in your account up to a maximum of $50k. You can choose to claim* your rewards at any time (instantly) or you can choose to make a fresh capital deposit (min $200) which will automatically roll your accumulated rewards back into your balance.
The yield will be generated and paid from the buffer pool first then subsequently the Elephant Treasury.
Note: There are limiters in place to prevent over compounding. Please see this article by Crypto Stu to review all the specifics about Futures.
The Back Office: Where do deposits go?
- 90% of Futures Deposits take Elephant out of the LP — Locking it up in the EM Treasury
- 10% of Futures Deposits go into a buffer pool to pay out daily liabilities.
Remember from the previous article and the Bailey EMH Video, that the more Elephant taken out of the Elephant/BNB LP by providing BNB, the more the Elephant Money Token will appreciate in value up the constant product curve. This is due to the deep Protocol Owned Liquidity (POL) of the ecosystem causing scarcity in supply.
Elephant Money Ecosystems Token Supply:
Graveyard (Locked Liquidity): 50.48% or 504 Trillion Tokens
Elephant Treasury: 12.65% or 126.59 Trillion Tokens
PCS EM/BNB LP: 11.03% or 110.38 Trillion Tokens
PCS EM/BUSD LP: 7.66% or 76.62 Trillion Tokens
Elephant Money Ecosystem / Smart Contracts hold over 81% of the supply of the tokens!
This Protocol Owned Liquidity (POL) allocation is ripe for a supply shock which will dramatically increase the price of this token.
Where’s the Yield!
The yield is paid from the ever growing Elephant Money Treasury which currently sits at $16 million. The Treasury has over 4x the amount of value in comparison the Total Value Locked (TVL) which is the total liabilities of the protocol. There are additional revenue influxes from buy sell and transfer taxes which were stated in the previous article! Check it out here!
In conclusion, DeFi has inherent risks and failures but without them, we wouldn’t have Elephant Money. Take the time to research the incredible tokenomics of Elephant Money. I’m sure you will be as impressed as I am!
· Twitter: https://twitter.com/asignore19
· Telegram: https://t.me/elephant_money
· Discord: https://discord.gg/elephant-money
· Medium: https://medium.com/elephant-money
· YouTube: https://www.youtube.com/channel/UCBHcyR7ixP70R6hhpck1qUQ
Note: This article is not financial advice. Please do your own research before investing in cryptocurrencies.
