This article is the first one to introduce DeFi. It will be followed and updated with links to the next articles.
Today our writer is @PVMihalache, well-known writer in Publish0x. You should check out his wonderful and prolific blog at: https://www.publish0x.com/@PVMihalache
Can banano get sweeter? Can banano have more Potassium? Can wBAN make the BAN FAM happier? Yes it can ... as Wrapped Banano (wBAN) is currently developed. Wrapped Banano, or wBAN will run as a BEP-20 token (the same thing as what an ERC-20 token is on Ethereum) and will be pegged to $BAN. The Binance Smart-Chain (BSC) will create DeFi opportunities and easy swap from $BAN to other BSC tokens.
The Wrapped Banano will be paired on BSC to supply liquidity, LP that is subject to Impermanent losses. But what does LP mean? Or Liquidity and Impermanent Loss? This post comes as the DeFi ABC for all wBAN fans!
Decentralized Finance (DeFi) is the general term used for all financial apps that do not rely on centralized or traditional financial intermediaries. The DeFi apps are built on the blockchain, using smart contracts for actions such as lending or borrowing of funds. It's like a huge forest where you can plant trees and harvest fruits without intermediaries. No need for John to sell a banana to Jack when Jack can pick it up from the same tree that John got it from!
Smart Contracts are programs or protocols that can execute a task automatically. The smart contracts will complete the task faster than an intermediary, keeping a minimal risk of accidents or fraud losses.
The wrapped token is a tokenized version of another cryptocurrency, created on a different blockchain than the one where it was issued. The wrapped token will maintain the same price as the original asset, therefore, wBAN is another version of $BAN. Wrapped Banano will always mirror $BAN value and can be redeemed at anytime, for the same number of $BAN used for minting. Wrapped or Unwrapped... how you like your $BAN?
Liquidity is the fundamental concept of DeFi, and is linked to how easily one asset can be converted to another. Liquidity Pools are (usually) pairs of tokens locked in a smart contract, which are then sold to bidders and bought back at the lowest price possible. The pairing is usually made in a 50% - 50% ratio. The pool will use both tokens from the pair to facilitate swaps and the provider will earn passive income from the swap fees, based on the share he supplied.
The Liquidity Providers, or LPs, are the users who added funds into a liquidity pool. When they provide such liquidity, they get back a LP token which is a share of the liquidity pool. Supplying a liquidity pair into the liquidity pool will generate rewards, from the swaps fees.
The wBAN will be paired with other tokens on BSC and the new wBAN LP tokens will be used to earn passive income. Monkeys would stake LP tokens and earn wBAN.
Impermanent loss is the DeFi Bogeyman! Providing liquidity will earn passive income but the whole process is not risk free. The impermanent loss happens when the value of a token locked in the pair changes compared to the other token of the pair. If the change is bigger... the loss is bigger. I found the video below easy to understand and a great source of information regarding impermanent loss.
It's called impermanent because until the supplier asks the liquidity pool to give back the tokens, the loss could change or even disappear.
We know that's a lot to understand, so that's it for today.
Next article will dive into more details and examples so that you have a better understanding of all this!