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What risks are involved in using Swop.fi?

In this post, we’ll explain what risks you should be prepared for when using Swop.fi, an AMM service in the Waves ecosystem.

First off, if you plan to use Swop.fi only for token exchange, risks are almost non-existent. True, a price can suddenly change if other users make swaps before you. However, the amount you get cannot be smaller than what was indicated in the “Minimum received” field. The minimum amount is calculated based on the “Slippage tolerance” setting which is 0.1% by default.

If we talk about investing in the SWOP token by providing liquidity to Swop.fi pools, there are factors to be considered. The use of any financial instruments involves risks, and if somebody promises risk-free investments, they are definitely lying to you.

Even bank deposits or keeping money under your pillow are not totally risk-free. So, it’s natural to ask the question “What are the risks of using Swop.fi and how big are they?”.

There are three main risks related to crypto in general, which apply to Swop.fi, too:

▪️ Impermanent loss

▪️ SWOP token price risks

▪️ General smart contract risks

The very first and obvious risk exists for all automated market makers, like Swop.fi, Uniswap, or PancakeSwop, is impermanent loss for liquidity providers. If the market price changes significantly after you added liquidity, the ratio of token amounts in the pool also changes because of arbitrage. If you decide to remove liquidity at this moment, its market value can be less than the initial state. This loss is dubbed “impermanent loss”. You can find a lot of articles on it. For example, see this explanation on the Swop.fi blog. You can also use the impermanent loss calculator, like this one on CoinMarketCap. It should be also noted that impermanent loss doesn’t apply to stablecoin pools.

At the same time, in case of significant price changes, there are more swaps than usual are conducted, which leads to more fees accumulated.

The second risk is related to the SWOP token’s price, which may negatively affect liquidity providers’ APY. Currently, SWOP offers a pretty high APY in all pools, but these numbers may change in the future because they depend on SWOP’s price, which, on the other hand, depends on the volume of swaps. A decline in SWOP’s price will lead to a decline in APY. Therefore, users should be aware of a possible decline in APY in the long term.

This article explains how APY is related to SWOP’s price, and you can also check out this video, which answers the question “Why is APY so high and how does the SWOP token affect APYs”.

The third type of risks is common for all dApps: their code is written by people and sometimes they inadvertently insert bugs into software. But SWOP is implemented in the Ride programming language, which was designed to be safe and help developers to avoid bugs.

SWOP smart contracts’ code is also 20% more compact than, for instance, Uniswap’s, which means fewer chances for bugs. And, of course, the SWOP contracts were developed by a very experienced team and are currently being audited to mitigate potential risks.

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A community of passionate blockchain developers & enthusiast across Africa

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