The Critical Balance Between Low Swapping Fees And High Liquidity Provider Reward In DeFi

By July 21, 2021Binance
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DeFi is liberating. Instead of relying on centralized entities for better yields, this emerging sub-sector in finance does away with intermediaries. They anchor their operations on mainly audited smart contracts for security and the burgeoning DeFi community to extract maximum value.

The Age Of DeFi In Binance Smart Chain (BSC) And Ethereum

Trackers show that different DeFi protocols manage over $23 billion worth of value in the Binance Smart Chain (BSC). The figure is even higher in Ethereum, where it stands at over $55 billion.

DeFi is an umbrella term describing various open finance activities ranging from ordinary trustless swapping, lending and borrowing, derivatives trading, insurance, and so much more.

As vast as it may be, DeFi is known for facilitating trustless trading. Some of the largest DeFi protocols, therefore, revolve around offering DEX-related solutions.

In the BSC ecosystem, PancakeSwap is the largest and one of the earliest to launch. Nonetheless, new entrants like OrionSwap promise to improve on flaws picked out in PancakeSwap without binning the all-important Automated Market Maker (AMM) system.

OrionSwap, like PancakeSwap and Uniswap in Ethereum, depends on the community to perform efficiently. For users to quickly and cheaply swap tokens, the underlying must be scalable and ideally interoperable. Blockchains like the BSC ensure these conditions are met.

AMM Protocols And Liquidity Providers

What remains for AMM protocols, after that, is to build a strong force of liquidity providers. These are drawn from the community and are primarily keen on offering, first and foremost, offering liquidity with the expectation of getting a share of transaction fees.

On the surface, that's what liquidity provision is all about.

A level lower, it can get complicated.

Aforementioned, a liquidity provider, could deposit capital to the CAKE/BNB pool, but must first be comfortable with the protocol’s overall security. Besides, a liquidity provider must also be guaranteed consistent passive income streams at rates displayed by the protocol when marketing.

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