Navigating Liquidity Pools: How Datos is Helping Retail Investors Succeed in DeFi
Overview
Providing liquidity in pools and protocols is a well-known concept (see Providing Liquidity — What does it mean and how does it work? | by Tiago Serôdio | C-Wallet | Medium), but it remains a challenging investment option for retail investors due to the negative gamma effects (aka “Impermanent Loss” risk) of Automated Market Maker pools on returns relative to earned fees (see Half of Uniswap Liquidity Providers are Losing Money | Nasdaq). In theory, the idea of retail investors supplying funds and earning fees from traders is sound, but the lack of tools and understanding for managing risk and optimizing allocations currently allows institutional investors to dominate the market and leaves retail investors with limited success.
Retail Issues Investing in Liquidity Pools Today
Investing in on-chain liquidity pools can be a complex and risky endeavour, and there are several issues that users may encounter when making these investments. Some of the most common issues include:
Yield chasing: Retail investors often pursue projects with high yields, but these investments can be poor choices due to temporary marketing incentives and unstable token prices. Some liquidity providers take a passive approach to managing their pool allocations, resulting in suboptimal fee income without their awareness.
Lack of standardization: The spread of decentralization leads to a lack of standardization which makes it hard to compare pools that are in the same asset class as they have different underlying assets and protocol interfaces. Aggregating data and providing a central point of comparison, with dollarized information when possible, will bridge the gap between traditional finance and decentralized finance, resulting in increased growth, transparency, and understanding in the sector.
High volatility: Many pools, especially those with high yields, are composed of lesser known assets or projects, which can make it difficult for users to understand the risk and potential of the pool. The value of an investment’s underlying assets in a liquidity pool can fluctuate rapidly resulting in unwanted negative gamma. In the decentralized finance space, where decision-making is driven by price levels, it’s difficult to make informed decisions. A market for price alerts exists to help investors with this.
Lack of regulation: The decentralized finance (DeFi) space is largely unregulated, which can make it difficult for investors to protect themselves from fraud and other risks such as Smart Contract risks. Smart contract-based protocols have the potential to contain bugs or vulnerabilities, which can lead to the loss of funds if exploited.
Illiquidity: Lack of trading volume and liquidity in some pools can make it difficult to enter/exit or hedge positions, leading to slippage and potential loss of capital. There is a need to better quantify the liquidity risks associated with investments which may draw users in via alluringly high yields.
The above risks are persistent in both hampering existing users in the DeFi space and also putting off new participants who have an appetite for the asset class however not the required resources for understanding. Introducing a tool to help inform users of the risks that they take on and empowering them to take measures to not only protect themselves but thrive will be a key tenet of bringing widespread adoption of the many benefits of DeFi.
The Datos Roadmap
Datos aims to address the issues mentioned above with its flagship product, WalletSync. WalletSync is designed to level the playing field for retail investors by providing more detailed and user-friendly monitoring capabilities of liquidity pools, including metrics such as current yields, total value locked, deposits and withdrawals, and more. Converting these metrics to dollar values allows for greater standardization and comparability of pools, making decision-making easier for even new DeFi participants, while still providing the level of detail experienced users require.
A key feature of WalletSync is the ability for users to set alerts on any and all metrics in relative, absolute or comparative terms; this bridges the gap between retail and institutional participants in terms of monitoring capabilities to increase efficiency of decision making based on the latest information. Accompanied by a Datos Smart Score feature, which aims to quantify the risks associated with each and every pool (such as underlying asset, liquidity, smart contract, etc.), the mission statement is set out clearly to empower retail users to make more informed decisions when investing in DeFi.
Datos’s roadmap is built on a “data aggregation first” approach to ensure high quality, accurate and scalable data sets for its users. We believe that providing users with complete, actionable information and more useful tools will help them make smarter investment decisions. From here, the data that we aggregate will serve any and all product lines that will be accelerated by our proprietary data structure.
Datos recognizes the level of competition in the field, but currently, data analytics is heavily skewed in favor of institutions and the wealthy. The average DeFi participant does not have access to thousands of dollars per month to gain access to complete data. They are often left with fragmented free platforms with limited data, lack of actionable information, and poor coverage, which further disadvantages retail investors while giving those with resources an advantage by funding access to advanced data and tools.
Datos is committed to playing its part in building tools and a platform which bridges TradFi, CeFi, and other financial platforms by introducing WalletSync as a complete freemium product to match and better the high ticket data analytics platforms available today. With tools such as WalletSync, Datos believes that both the existing market participants and prospective entrants can benefit greatly from a perspective of more complete information and competitive equality.