Generating passive income was traditionally the reserve of the business savvy or wealthy but DeFi has changed this, empowering almost anyone to generate a return on their assets.

In the early days of crypto, blockchain assets had limited uses, primarily for trading or storage on exchanges and wallets. However, the advent of DeFi has revolutionized the utilization of crypto and has enabled users to maximize returns on their idle assets. "HODL" has become a popular strategy in the crypto community, encouraging buying and holding of tokens regardless of price fluctuations.

Through Decentralized Finance, individuals can now explore new avenues of earning passive income by putting their dormant cryptocurrencies and digital assets to work on lending protocols, liquidity pools, decentralized exchanges, and other options.

DeFi, or decentralized finance, is a rapidly growing sector in the world of cryptocurrency. DeFi allows for the creation of financial applications that are open and accessible to anyone, without the need for a centralized authority such as a bank. One of the most exciting aspects of DeFi is the ability to earn passive income through various mechanisms. In this article, we will explore how to earn passive income through DeFi and what strategies you can use to maximize your earnings.

Before we dive into earning passive income through DeFi, it's important to understand what DeFi is and how it works.

Essentially, DeFi refers to financial services and products that operate on a decentralized network of computers, eliminating the need for a central authority or intermediary to facilitate transactions. DeFi is a new financial system that uses blockchain technology to create decentralized applications that can be used by anyone, anywhere in the world. These applications can be used for a variety of purposes, such as lending and borrowing, trading, and investing.

DeFi is seen as an alternative or even as a successor to the conventional financial system, which is administered by banks, central banks, credit unions, governments, and other well-established financial institutions. DeFi protocols support operations such as payments, loans, and transfers that are executed on a blockchain through self-executing computer programs known as smart contracts.

As a result of these features, DeFi technology allows for the establishment of a global financial system that is less bureaucratic, more transparent, safer, cheaper, and accessible to everyone. One of the most popular types of DeFi applications is decentralized exchanges (DEXs). These are platforms that allow users to trade cryptocurrencies without the need for a centralized authority. Another popular type of DeFi application is lending and borrowing platforms, where users can lend their cryptocurrency to other users in exchange for interest payments.

Now that we understand what DeFi is and how it works, let's explore some of the ways you can earn passive income through DeFi.

There are various methods to earn passive income through DeFi, with one of the simplest being to deposit your tokens into an account and receive interest in return. This method is akin to having a fiat savings account and earning interest, except that DeFi interest rates can be significantly higher than those offered by traditional banks.

Many DeFi platforms refer to this process as "staking," and the interest earned can be in the form of the same tokens staked or any other token supported by the blockchain. By staking your crypto assets, you act as a transaction validator, or node, for the network. This is crucial to the network's security and functionality, which is why stakers receive financial incentives to continue doing so. When you stake a cryptocurrency, you are essentially locking it up and making it unavailable for trading.

Staking rewards can vary depending on the cryptocurrency you are staking and the platform you are using. For example, some platforms offer higher rewards for staking certain cryptocurrencies than others. Additionally, the amount of rewards you earn can depend on the length of time you are staking your cryptocurrency. Generally, the longer you stake, the higher the rewards.

Liquidity mining is another way to earn passive income through DeFi. Liquidity mining involves providing liquidity to a decentralized exchange in exchange for rewards. When you provide liquidity to a DEX, you are essentially allowing other users to trade cryptocurrencies on the platform. In exchange for providing this liquidity, you earn rewards in the form of additional cryptocurrency.

The rewards you earn through liquidity mining can vary depending on the platform you are using and the cryptocurrency you are providing liquidity for. Additionally, the rewards can vary depending on the demand for the cryptocurrency on the platform. Generally, the higher the demand, the higher the rewards.

Yield farming is a more complex strategy for earning passive income through DeFi, but it can also be more lucrative. Yield farming involves moving cryptocurrency between different DeFi protocols in order to maximize your returns. This strategy involves looking for opportunities to earn high yields on your cryptocurrency by taking advantage of the different interest rates and rewards offered by different platforms.

Yield farming can be a risky strategy, as it involves moving your cryptocurrency between different platforms, which can be volatile. However, if done correctly, yield farming can be a highly profitable way to earn passive income through DeFi.

Now that we've explored some of the ways to earn passive income through DeFi, let's discuss some strategies for maximizing your earnings.

The first strategy for maximizing your earnings in DeFi is to do your research. Before investing in any DeFi platform or strategy, it's important to understand the risks and rewards involved. You should research the platform or strategy thoroughly and look for any red flags or warning signs. Additionally, you should research the team behind the platform or strategy, as well as any reviews or feedback from other users.

Another important strategy for maximizing your earnings in DeFi is to diversify your investments. It's important not to put all of your eggs in one basket, as the DeFi market can be volatile and unpredictable. By diversifying your investments across different platforms and strategies, you can reduce your risk and increase your potential returns.

Once you have invested in a DeFi platform or strategy, it's important to monitor your investments regularly. You should keep track of your earnings and adjust your strategy if necessary. Additionally, you should keep up-to-date with any news or developments related to the platform or strategy, as this can affect your earnings.

To make it easier to monitor your investments, you can use a portfolio tracker. A portfolio tracker is a tool that allows you to track the performance of your investments across different platforms and strategies. This can help you to identify which investments are performing well and which ones are not.

Finally, it's important to be prepared for volatility in the DeFi market. The DeFi market can be highly unpredictable, and prices can fluctuate rapidly. It's important to be prepared for this volatility and to have a long-term strategy in place. By taking a long-term approach, you can ride out any short-term fluctuations in the market and maximize your earnings over time.

Earning passive income through DeFi can be a highly profitable way to invest in the cryptocurrency market. By staking, liquidity mining, and yield farming, you can earn rewards in the form of additional cryptocurrency. To maximize your earnings, it's important to research your investments, diversify your portfolio, monitor your investments as with all financial investments.

How to Earn Passive Income Through DeFi*

**Swaap is the first market neutral Automated Market Maker (AMM). It leverages a combination of oracles and dynamic spread to provide sustainable yields for liquidity providers and cheaper prices to traders. What exactly is an AMM though? We get back to basics with this guide to AMMs. What they are, how they work and why it’s important. **

An Automated Market Maker (AMM) is a decentralized exchange protocol that allows users to trade cryptocurrencies without the need for an intermediary, such as a centralized exchange. It uses a mathematical formula to determine the price of assets, which is then used to execute trades between buyers and sellers.

In traditional exchanges, the price of an asset is determined by the order book, which is a list of buy and sell orders placed by users. The exchange matches the buy and sell orders and the trade is executed at the price agreed upon by both parties. However, this model has some drawbacks, such as the risk of market manipulation.

AMMs, on the other hand, use a liquidity pool to determine the price of assets. Liquidity providers deposit two different tokens into the pool, which are used to create a trading pair. For example, a liquidity provider can deposit equal amounts of Ether (ETH) and a stablecoin like USDT to create an ETH/USDT trading pair. The liquidity provider earns a fee for each trade executed using their pool.

When a user wants to trade, they simply submit their transaction to the blockchain, which executes the trade using the AMM's mathematical formula. The formula uses the balance of each token in the liquidity pool and the size of the user's trade to determine the price of the assets being traded.

AMMs use a mathematical formula to determine the price of assets in a liquidity pool. The most common formula used is the Constant Product Market Maker Formula, also known as the x*y=k formula. This formula ensures that the product of the amount of each token in the pool remains constant, which in turn ensures that the price of the asset remains constant. When a user makes a trade, the amount of each token in the pool changes, which adjusts the price of the asset based on the formula. 

The constant sum market maker (CSMM) is the second type of automated market maker (AMM) that is best suited for zero-price impact trades but is limited in providing infinite liquidity. Using the x+y=k formula, CSMMs produce a straight line when graphed. However, this design can result in the depletion of one reserve by arbitrageurs if the off-chain reference price between the tokens is not 1:1. In such a case, one side of the liquidity pool would be destroyed, and all liquidity would be concentrated in just one asset, leaving nothing for traders. Due to this limitation, the CSMM model is infrequently employed by AMMs.

The constant mean market maker (CMMM) is the third type of automated market maker (AMM) that allows for the creation of liquidity pools containing more than two tokens and weighted in a non-standard 50/50 distribution. Under this model, the weighted geometric mean of each reserve is maintained at a constant level. To illustrate, in a three-asset liquidity pool, the equation would be (xyz)^(⅓)=k, enabling different levels of exposure to the assets in the pool and facilitating the swapping of any of the pool's assets.

A liquidity pool is a smart contract that holds two different tokens and provides liquidity for trading. When a user wants to trade a token, they swap it with another token in the pool. The price of the token is determined by the formula used by the AMM. Liquidity providers deposit tokens into the pool and earn a portion of the trading fees for providing liquidity. The size of the liquidity pool and the amount of trading fees earned by liquidity providers depend on the popularity of the token and the demand for trading.

Liquidity providers deposit equal amounts (in $ value) of two different tokens into a liquidity pool, which are then used to create a trading pair. For example, a liquidity provider can deposit 1 ETH and 100 USDT to create an ETH/USDT trading pair. The liquidity provider earns a fee for each trade executed using their pool. The fee is usually a small percentage of the trade value, and it is distributed to the liquidity providers in proportion to their contribution to the pool.

In traditional exchanges, the order book model is used to determine the price of assets. The order book lists all the buy and sell orders placed by users and the exchange matches the buy and sell orders based on price and time priority. In contrast, AMMs do not have an order book. Instead, they use a liquidity pool and a mathematical formula to determine the price of assets. This allows users to trade directly with the pool instead of having to match orders with other users.

Automated Market Makers (AMMs) provide several benefits compared to traditional order book-based exchanges:

In addition to the above, liquidity providers have the potential to enhance their earnings through yield farming opportunities. By depositing the appropriate ratio of digital assets into a liquidity pool on an automated market maker (AMM) protocol, LPs can participate in these opportunities. After confirmation of the deposit, the AMM protocol will issue LP tokens to the provider. These tokens can then be staked in a separate lending protocol to earn additional interest, providing a way to maximize returns.

In response to the above challenges we are seeing new design patterns, including hybrid automated market makers, dynamic automated market makers, proactive market makers, and virtual automated market makers, are helping to overcome the limitations mentioned. These models can be broken down as follows:

Virtual Automated Market Makers (vAMMs) offer several benefits, such as reducing price impact, minimizing impermanent loss, and enabling single token exposure for synthetic assets. Unlike Constant Product Market Makers (CPMMs), vAMMs do not rely on a liquidity pool. Instead, traders deposit collateral into a smart contract. By trading synthetic assets instead of the underlying asset, users can gain exposure to the price movements of multiple cryptocurrencies in a highly efficient manner. However, holding an open position in a synthetic asset also poses a risk of collateral liquidation if the asset's price moves against the user.

The Proactive Market Maker (PMM) model imitates the market-making actions of human traders in a traditional central limit order book. The PMM protocol relies on precise global market prices obtained from price feeds to move the price curve of each asset proactively, thereby enhancing liquidity close to the current market price. This results in more effective trading and lower impermanent loss for liquidity providers, making it easier for them to participate in the market.

The Dynamic Automated Market Maker (DAMM) model utilizes price feeds and implied volatility to effectively allocate liquidity across the price curve. By integrating several dynamic variables into its algorithm, DAMM can create a more resilient market maker that adjusts to the prevailing market conditions. This model concentrates liquidity close to the market price during low volatility periods, improving capital efficiency, and then expands it during high volatility periods to shield traders from impermanent  loss.

AMMs have become popular because they offer several benefits over traditional exchanges. They provide high liquidity, which ensures that trades can be executed quickly and at a fair price. They are also decentralized, which means that users retain control of their funds and can trade without the need for a trusted third party. Additionally, AMMs are open to anyone with an internet connection, which makes it easy for users to access a global market of cryptocurrencies.

There are several popular AMMs in the crypto space, including Uniswap, SushiSwap, and 

. These protocols have their own unique features and attract different types of users. For example, Uniswap is known for its simplicity and ease of use, while SushiSwap has developed a wider array of services, like staking?. Swaap utilizes more advanced algorithms to reduce impermanent loss and offer lower risk yield.

Automated Market Makers have become an important part of the decentralized finance (DeFi) ecosystem, providing users with a way to trade cryptocurrencies without the need for a centralized exchange. They offer several benefits over traditional exchanges, including decentralization, and accessibility. However, they also have some challenges that need to be addressed, such as price slippage, impermanent loss and high gas fees. As the crypto market continues to evolve, it is likely that we will see more innovation in the AMM space. Swaap’s upcoming v2 being a prime example of this and will likely be the template for a new wave of second generation AMMs with superior yield. 

Swaap is the first market neutral Automated Market Maker (AMM). It leverages a combination of oracles and dynamic spread to provide sustainable yields for liquidity providers and cheaper prices to traders.

What is an Automated Market Maker (AMM) in Crypto?

Does APY represent the crypto equivalent of snake oil? A cure for financial woes that ultimately turns out to be of little worth to investors. The LP Token Price Method offers a better solution.

There is an established trend among DeFi protocols to attract users and investment via Annual Percentage Yield (APY) usually with an unrealistic percentage attached. A two or three-digit APY seems to trigger the same urge to invest as Black Friday triggers when it comes to impulsive shopping. This is the hook used to attract the true degens. However, advertised APYs can often be misleading and don’t give a complete picture of a protocol’s performance. Most of the time, the advertised APY is very different from the actual yield obtained during the investment period.

Indeed, most APY advertised by protocols only reflect information about their revenue, and not their cost. Take the example of an AMM displaying a 100% APY for a given pool. On the surface, it looks like a great investment opportunity. However, this number does not take Impermanent Loss into account. This phenomenon — which affects most AMMs — causes a decrease in a pool’s value when the prices of the assets it’s made of diverge. In this particular case, Impermanent Loss might be 95% or even 105%, which sets the net APY between -5% and 5%. All of a sudden, the investment is much less attractive given the level of risk. In the traditional finance industry, this gap between an advertised return and the actual return would be considered fraudulent behaviour.

This example shows that DeFi is still a very immature industry and presents a significant roadblock to the mass adoption of DeFi as a true alternative or even a successor to TradFi. Unrealistic or in many cases unachievable APY calculations serve to disappoint users and reduce their confidence in DeFi. They also discourage institutional investors who are the heart of TradFi and who’s conversion is a key factor to the long term success of DeFi. How can we work to change this and improve DeFi as a whole?

Swaap has designed a transparent method for analysing the actual performance of protocols. We call it the Protocol NAV Method. This method calculates the price of LP tokens, which are similar to the Net Asset Value (NAV) of a traditional fund. By calculating the LP token price, we take into account both the revenues and costs of the protocol. This provides an accurate picture of a protocol’s performance.

There are several advantages to using the LP Token Price Method.

Suppose an Automated Market Maker (AMM) has a TVL of $1000 and has issued 100 LP tokens. Suppose the pool is initially made of 10 ETH and 10,000 USDC. The price of ETH is thus 1,000 USDC (10,000/ 10). The initial value of the pool is $20,000. An LP token is thus worth $200.

Imagine now that one year later, the price of ETH has climbed to $4,000. The pool is going to be rebalanced with the evolution of ETH price. The new balance is going to be 5 ETH and 20,000 USDC. Let’s also assume that the trading APY during this period (what is usually displayed on the pool’s performance section) is 20%. So, the pool has accumulated 1 ETH and 4,000 USDC in fees and has a total balance of 6 ETH and 24,000 USDC.

The total value of the pool is therefore $48,000. There are still 100 LP tokens in the pool — an LP token is now worth $480. So, you think that everything is great but this is not the case in fact. In order to compute your net APY, you need to compare to your benchmark which is HODL in this case.

So, if you had HODLed, what would have been the value of an LP token? In fact, you would have held: 0.1 ETH + 100 USDC per LP token, which would be worth $500 end of year.

So, your trading APY is +20% while your real net APY using the NAV method is -4%

The beauty of the NAV method is that it can be applied to any protocol, any timeframe and is not impacted when people withdraw / join the pool (new LP tokens being burned / minted).

Beyond correctly calculating the performance of protocols, it is also important to consider the level of risk involved. In the traditional finance industry, this is done through risk assessment tools such as Value at Risk (VaR), stress testing or mean-variance analyses inspired by Markowitz’s portfolio theory. DeFi protocols could apply those frameworks and leverage the potential of blockchain technology to offer real-time insights on the level of risk incurred by the capital they manage.

There are a number of other protocols who are working hard to provide a more accurate model for APY that is takes into account potential downside in token value, impermanent loss and other factors. 

 has found in their interactions with users that having a trailing view of metrics like APY in a base currency like US dollars can give better context to a position. Stated APY figures are often quoted based on the current market price of the token, which means in order to earn that quoted figure one must assume the price of the token will not go down, which is unlikely if the token is being distributed as a reward!

Stated APY numbers also assume that no new users will enter the liquidity pool. Everytime a new user enters the pool, the number of reward tokens emitted per user goes down. New users entering the pool will drive down the true APY of the position. Stated APY figures assume that emission rates will not change over time, which is often not the case.

APY.vision takes all of these factors into account and reports historical APY data based on real world returns.

In conclusion, it is important to look beyond just the advertised APYs when evaluating the performance of protocols. By using the LP Token Price Method, we can get a more accurate representation of a protocol’s actual performance by considering Impermanent Loss. Being more transparent about the level of risk will also be a crucial step going forward. This will ultimately lead to a more mature and transparent DeFi industry.

Calculating Yield: APwhy?

Why would you even need an AMM simulator?

DeFi is a very young industry. In fact, it’s only four years old!

Thus, we lack historical data to measure risks and returns. Unlike the stock market, we can’t look at 40 years of data and see what kind of strategies performed better. This makes it harder to design efficient investment strategies, iterate on them and understand their risks.

In our recently released paper written in collaboration with Louis Bachelier Institute, we built a simulator able to test the behaviour of any market making strategy in thousands of different market conditions.

The market conditions are generated based a comprehensive set of parameters, including the price trajectory (drift, volatility, etc.) and the demand evolution (transaction size, demand curve, etc.).

We tested AMMs like Uniswap V2, Curve V2, Swaap V1 and a naïve oracle strategy in a variety of market configurations, for a pair with a USD/ETH profile.

This approach enables us to test each strategy with 1,000s of different market conditions, as if DeFi had existed for 1,000s of years instead of 4. 🤯

The research shows that there are opportunities to design significantly more profitable onchain market making strategies with increased risk tolerance.

We will focus on developing those strategies so that more more investors with different risk appetites and financial goals can benefit from Swaap’s yields 😇

We will also continue to enhance the simulator’s precision by integrating more parameters, thus more accurately reflecting market conditions.

For a summary of the research paper, check out this 

Introducing the AMM simulator: Turning 4 years of data into 1,000 years

“The Big Short” (2015) is a film based on the true story of a group of investors who made a fortune by betting against the housing market prior to the 2008 financial crisis. While the film is set in the traditional finance world, we can draw several lessons that apply to the crypto industry.

Let’s have a quick recap of the main characters.

Michael Burry is one of The Big Short’s main characters. As an introverted person, he likes numbers and often spends days deep diving into datasets to spot patterns. After having doubts about the quality of the mortgage market, he spends weeks researching on the quality of the thousands of mortgages making up MBS (Mortgage-Backed Securities) to spot early signs of default.

The FrontPoint Partners team is also one of the main characters in the movie. After getting a misdialed call informing them about credit default swaps on mortgage bonds, their interest is picked up. However, the bet looks so crazy and contrarian that they want to conduct their own research. They thus travel to Miami, where they survey homeowners about their mortgage payments and find out most of them are in default.

 Always deep dive into the documentation of a project yourself before investing a substantial amount

It’s key to grasp the underlying fundamentals of an investment, rather than just following hype or speculation. The Big Short’s main characters conduct extensive research and analysis to identify the flaws in the housing market and the potential for a collapse.

In the film, Michael Burry asks a new hire to find out exactly what mortgages are in each of the top 20 mortgage bonds. The hire is shocked, as he knows a mortgage bond is made up of thousands of mortgages. However, it is precisely this kind of deep research that allowed Burry to spot the immense fragility of American mortgage bonds and the implication for the wider financial markets.

 Try to rely as much as possible on verifiable data when investing in a project (e.g., on-chain data, smart contracts, etc.).

Third parties (rating agencies, data aggregators, analysts/ researchers) can be a good way to understand the risk profile of an asset but may be subject to different kinds of bias. So, it’s always better to verify the information they give you!

Later in the movie, FrontPoint Partners meets with a manager at Standards and Poors. Their goal is to understand why credit rating agencies have not been downgrading CDOs as mortgage defaults skyrocket. They discover that S&P provided AAA ratings despite the junk nature of the CDOs to keep a good business relationship with the banks and prevent them from switching to their competitor Moody’s.

Lesson 3: People underestimate risk and overestimate reward.

 Think about stress scenarios (like Terra/Luna which broke the peg under some stressed market conditions).

Think about lotteries and casinos: they’ll make you take a risk for a negative expected reward, yet people only see the upside and still pay for casinos and lottery tickets.

In the film, the young investors at BrownField capital turned $110k in $30 million in 4 years taking bets on the principle that “people hate to think about bad things happening, so they always underestimate their likelihood”.

Another scene from the movie shows Mark Baum meeting with a stripper in Florida. The young woman brags about her multiple adjustable-rate mortgages which enabled her to buy five houses and a condo. She avoids paying excessive monthly payments by refinancing with lower interest rates as her property prices go up. Mark tells her that as soon as real estate prices stop going up, she won’t be able to refinance and her monthly payments will then rise by 200–300%, which will cause her to default.

 Never put all your eggs in the same basket: different tokens, different wallets, different CEX (if using any), and different underlying markets.

You should never bet a large portion of your wealth on a single investment. In the crypto world, it is also essential to diversify your investments across different coins and projects to mitigate the potential impact of any one investment going sour. It’s also essential to keep a sizable portion of your net worth outside of the crypto market.

The main characters in the film took massive bets with no clear exit plan. They all experience massive levels of stress as the CDOs and mortgage bonds’ prices keep rising despite early signs of a market crash.

Lesson 5: Don’t be afraid to be contrarian.

 Especially during bull runs, try to understand the real value created by a project to see if it’s a disguised Ponzi or not.

Question conventional wisdom, and be willing to go against the crowd. This is what distinguishes highly successful investors from the masses.

In the film, Mark Baum is a character that likes to question everything and everyone, making tons of enemies in the process. This contrarian bias enables him to take action when hearing about market players who shorted the housing market, as opposed to most other Wall Street institutions who considered it as madness.

All in all, the Big Short is a legendary finance movie that is not only entertaining but also full of golden advice for any investor in stocks or crypto. There are too many out there blindly aping into protocols without any framework to pocket gains or limit losses. By consistently following those basic rules, you will definitely get better than 90% of investors in web3:

Lessons from ‘The Big Short’ for Crypto

This article is part of a series called Wall Street Secrets, which applies some of the best learnings from traditional finance to Web 3. We help investors rise above the noise by providing effective frameworks to make their decisions. Not financial advice.

Over 2 trillion dollars in value have vanished from the total crypto market capitalization between November 2021 and now. The impressive rallies and crashes seen in crypto have a simple cause: misperception of risk by most market participants.

In financial theory, there is a fundamental relationship between risk and return. How to apply it to DeFi?

Golden Rule 1: Never accept more risk for the same return

At equal expected returns, investors always prefer certainty.

Imagine you have a choice between two assets which both cost $50k. Asset A will return you $200k in a year with a 50% chance, and $0 with a 50% chance. Asset B will return you $100k in a year with a 100% chance. Which asset would you choose? Most investors would certainly choose B.

The reason for that is that certainty allows taking long-term decisions and thus increases the likelihood of long-term value creation. For instance, you could want to buy a house that costs $100k in one year. Choosing asset B allows you to start prospecting and choosing your home in advance. You could even use asset B as collateral for a loan and buy the said house now.

This would not be the case for asset A. The expected return is the same: $100k. But the risk is much higher for option A. Maybe a gambler looking for risk would choose option A. But an investor will always choose option B.

Golden Rule 2: If it looks too good to be true, it probably is

In an efficient market, a low-risk/high-return opportunity will never exist long enough for unsophisticated investors to notice.

Imagine a low-risk asset, bond X, returning 3% a year. Imagine now that a new bond Y with the same risk but a return of 5% a year becomes available on the market. Investors would sell the bond X (causing its price to fall) and buy the bond Y (causing its price to rise). As a result, bond X’s yield increases and bond Y’s yield decreases. The two bonds with the same risk now provide an identical return.

The same logic applies to crypto: imagine that the market APR for a given, low level of risk is 4%. A new pool opens with $1m liquidity and it generates a native yield of 14% (without Ponzi-like token issuance). LPs will then massively deposit liquidity in the pool making the TVL climb until the yield (fees generated/TVL) goes down to 4%, the market rate.

An asset with an abnormally high return for a given level of risk is suspicious. You should investigate it by using the BS yield detector framework.

Golden Rule 3: Use the BS yield detector framework

Abnormally high returns for a given level of risk should raise three questions:

All in all, you can become a better investor by applying the 3 Golden Rules:

Found this article useful? Don’t forget to share it on social networks!

Stop getting scammed: 3 golden rules to better assess yield opportunities

Liquidity Providers in Automated Market Makers (AMM) lose billions of dollars each year to Impermanent Loss (IL). But Impermanent Loss is pernicious: it is not directly displayed on AMMs. In this article, we’ll tell you how to use an Impermanent Loss Calculator so that you can make the best investment decisions.

First of all, let’s consider the lack of information about IL. When you invest in a stock, you have a clear view of the money initially invested, and unrealized gains/losses since you bought the stock. Imagine you buy a Tesla stock for $100 and it goes up 50%. You then have $150 on paper. Your investing app displays a $50 gain. But imagine that when you withdraw the stock, you only get $80 because another financial phenomenon, not displayed in the app, causes the value of your investment to actually drop. You wouldn’t be happy. You would even feel betrayed. Well, the Tesla stock in this fictitious example is the stake in a pool, and the investing app is the AMM. The AMM only calculates your investment’s performance based on the price of the crypto assets it’s made of but ignores IL. That’s how 

In order to avoid that, we built a novel AMM backed by years of scientific research. It features proven resistance to Impermanent Loss, as well as low trading fees. It’s called 

When a company is unable to provide a service to you, your only option is to do it yourself. That’s why many people use an impermanent loss calculator. There are two types of calculators available:

That’s a wrap! I hope this article was helpful. If you have any questions related to Impermanent Loss, don’t hesitate to reach out to us on 

Impermanent Loss Calculator: How much money have you lost to IL?

, we explored AMMs: their genesis, the benefits they bring, and their limitations. Long story short: they enabled on-chain trading, but are rife with inefficiencies. That’s why we need a better solution. That solution is Swaap Finance.

Swaap is an on-chain Market Maker with a superpower: resistance to Impermanent Loss. It enables everyone to provide liquidity and trade assets while limiting losses generated by arbitrage. This is good news for Liquidity Providers, who will save billions a year. It’s also great for traders, who will pay lower fees as LPs make more money. Essentially, our aim is to grow the pie and make both traders & LPs better off.

By using Swaap, Liquidity Providers maximize their returns. They earn competitive fees while enjoying reduced Impermanent Loss.

To accomplish this, Swaap imports mechanisms used on Order Book exchanges.

Because Swaap runs on-chain, anyone can provide liquidity and LPs are the custodians of their own money. Traders benefit from lower fees as the pool does not need to compensate Liquidity Providers for their Impermanent Loss.

In short, Swaap allows anyone to trade & invest with peace of mind.

Incorporating those features on-chain means that Swaap has to process more information.

For instance, our AMM uses stochastic calculation in order to compute the dynamic spread. It increases gas consumption compared to constant product AMMs.

We chose a blockchain (to be revealed soon), which enables swift and low-cost transactions while maintaining the highest security standards.

Last but not least, leveraging oracles means that Swaap has to focus on assets listed on Order Book exchanges.

Swaap enables on-chain trading while correcting some inefficiencies of AMMs. It is a mixed approach that leverages AMMs and Order Book properties and focuses purely on market making.

We see Swaap as complementary to traditional AMMs and to Order Books:

This is the third part of a 3-piece story on AMM vs.Order Book. Check out episodes 

AMM vs Order Book — Part 3/3

, we deep-dived into order book exchanges. Our takeaway: it’s a flexible and efficient model but only works with a limited set of assets. In this article, we will examine how AMMs overcame order book exchanges’ limitations to enable on-chain trading.

Automated Market Makers (AMMs) are recent: they only appeared in 2017. AMMs automate the process of providing liquidity and exchanging assets through smart contracts.

Instead of pricing assets through an Order Book, AMMs use a simple formula based on asset quantities in the pool. This is a major innovation because trading can now take place without any intermediary other than the code.

First advantage: any asset can be freely brought to the pool. Projects can launch their own token and easily list it, making it more accessible and liquid for users. They don’t need to wait for approval by a centralized authority, or to pay fees to market makers. Thus, fees for token emission and management are drastically reduced. This helped fuel the development of the DAO ecosystem!

Furthermore, there is no need to trust a centralized exchange with the custody: the pool interacts directly with the user’s wallet. No more fear of hacks when trading your assets!

Finally, anyone can provide liquidity to the pool and therefore earn fees based on trading activity. The people now have access to market-making strategies that were previously reserved for sophisticated investors, such as Citadel Securities in TradFi.

Price discovery and quantity updates are costly. Whenever the price of an asset changes on an exchange like Coinbase, the pool’s prices are not affected. Only arbitrage traders can update asset prices and quantities in the pool, at the expense of Liquidity Providers (LPs) and retail traders.

This results in Impermanent Loss (IL), a phenomenon through which Liquidity Providers are worse off when investing in the pool relative to a HODL strategy. IL is costing LPs billions of dollars a year. An academic study recently estimated that 50% of Uniswap v3 users are losing money by committing their liquidity to pools.

Traders are also losing out because of Impermanent Loss. To prevent LPs from quitting, AMMs need to compensate for LP’s impermanent loss by increasing APYs. A move that is often financed by raising fees for traders.

 if you want to compare the performances of various Uniswap pools, including Impermanent Loss.

AMMs enabled on-chain trading at the expense of LPs and traders, who are losing out large sums due to Impermanent Loss. Making on-chain trading sustainable requires a better solution. That’s what we are going to see in part 3 of this article series!

*This is the second part of a 3-piece story on AMM vs.Order Book. Stay tuned for the third episode! *😉

AMM vs Order Book — Part 2/3

Let’s talk about the future of AMMs. 🤖

As you may know, Swaap is all about bringing efficient TradFi features to DeFi in order to smash Impermanent Loss. 👊

TradFi relies on Order Book exchanges to trade assets. This works exceptionally well for high speed and low costs.

More recently, blockchain technology enabled the emergence of Automated Market Makers (AMMs).

What is the difference between those two concepts? How is Swaap merging the best of both worlds for radically better investment and trading experience?

 Imagine you’re the New York Stock Exchange. You see a bunch of people coming in, all asking to buy or sell different assets at the same time.

How do you keep track of it? You use an Order Book (full name: Central Limit Order Book — CLOB). The OB aggregates orders to buy and sell assets in a single database. By looking at that database, traders can see which orders have already been submitted at each price. They can then submit then own order, which is executed as long as there is liquidity at their price.

In order book exchanges, liquidity is supplied by specialized companies called Market Makers. They manage their business with one main tool: spreads. Spreads are the difference between prices for buying an asset and prices for selling an asset. Tighter spreads encourage higher trading activity but lower profits per trade. In periods of high volatility and thus trading activity, Market Makers widen spreads to manage their risks. This is called dynamic pricing.

 The CLOB exchange efficiently gathers information from trading orders, exchanges, and the news. Thus prices are always up to date with the best market information: we call it efficient price discovery.

Furthermore, this centralized system features very low latency, which means that the orders are sent and executed very quickly. That’s essential for traders, who sometimes take bets for a very short time. If their order is delayed, market conditions may change, and their winning bet might turn into an awful loss.

 Commissions on trades can only be earned by Market Makers.T. They pocket spreads on each trade. However, Market Making is very exclusive. Their funds only accept liquidity from very wealthy individuals and funds ready to provide millions, sometimes billions. Thus, most individuals are excluded from Market Making strategies.

Furthermore, it’s hard for a new asset to be listed: the exchange needs to approve it first, then a Market Maker must be paid to provide liquidity. Finally, an order book exchange needs to process many transactions, which makes it difficult to run on-chain.

This is the first piece of a series on AMM vs. Order Book. Check out the next episode, which focuses on AMMs.

AMM vs Order Book — Part 1/3

We build the pure market making protocol. No IL, only yields.

We envision a world where capital efficiency would be both simple and open to everyone, not just quants.

TL;DR: 0-impermanent loss, dynamic liquidity efficiency, built-in market risks coverage and multi-asset support.

Liquidity dilemma in traditional finance 🏊

Liquidity is a critical aspect of every market. It represents the ability to sell/buy assets with ease and at low costs. When liquidity is high it essentially means less risks and more efficiency for capital flows.

In traditional finance, providing liquidity is taken care of by market makers (MM) who act as buffers between sellers and buyers. Their role consists in continuously offering short and long positions to fill sell/buy orders that traders would eventually place. Thus offering a kind of “fluidity” or liquidity to the market.

Under its purest form, market making generates revenues solely from the intermediary role market makers play, and these latter avoid asset exposure risks at all cost. It means that they try to minimise the time to settle their long/short positions and hedge themselves against any potential risk of depreciation/appreciation of their securities at the same time.

 — which corresponds to the difference between the sell and buy prices applied by the market makers — is the common answer to that dual problem and is optimized to be both market competitive as well as a form of insurance against market risks. This spread needs to be completely dynamic to be able to take into account the ever-changing conditions that markets usually display. Simply put, market makers charge low fees to drastically increase trading volumes and the overall revenue when market is safe, and apply higher fees when market becomes particularly wild to be able to maintain its operations at low risk, continue to earn fees and keep their capital safe from losses.

When done efficiently at scale it can be a rather profitable activity: 

’s reported $6.7B in revenue gives us a powerful reminder of it. 

 Q2 2021 earnings call is another good illustration with a reported $451M in “transaction-based” revenue, as a payment for order flow (PFOF) — which corresponds only to a fraction of what its market maker partners earn.

Now, when looking at the centralized cryptocurrency market we can see that the same logic applies with 

 charging a dynamic spread based on market conditions for its asset swap service. It totally makes sense as, despite having different market conditions, the risk exposure remains.

As a decentralized alternative that embraces the security, transparency and efficiency of blockchain, Automated Market Maker (AMM) systems — first introduced in 

 — quickly became popular, especially under the constant product form imagined by 

 to multi-asset pools with arbitrary weightings.

While it is able to provide a simple and elegant link between price, liquidity and efficiency (cf. fig.1), it fails to capture the market complexity.

This is mostly due to the fact that no usage of global market data (e.g. volatility, price, etc.) is made.

As a result, the system is static — which means not competitive and running high capital risks— and forced to address two rather different problems at the same time: market liquidity and price discovery.

While addressing the former can offer the same service than the one market maker provide in a traditional financial markets, addressing the latter one with the current AMM implementations (Uniswap, Balancer, etc.) corresponds to a continuous portfolio rebalancing and is equivalent to increase the pool’s risk exposure to poorly performing assets which directly translates into what has been called the “

To put it in another perspective: investing in the popular BTC-ETH-stablecoin pool in 2015 in such AMMs would have led to an astonishing +90% loss in capital (fee collection excluded) compared to an HODL strategy.

And in this case, to only counterbalance the effect of impermanent loss you would have needed an APY of +100% every single year over this 6 years period 😞

Even a “top10 market cap. cryptos” pool would have lead to a +95% IL…!

Today, the best investment vehicles in the whole blockchain landscape are the projects themselves, offering X00%+ 

Basically, continuously selling highly performant assets — which traditional AMMs do— is usually not a good choice for non expert users as it will essentially translate to either:

In other words, today’s DEXes’ users are facing a 

On the other side, TradFi with the Index ETFs has seen a democratisation of investing by providing efficient, diversified, and passive investment products at the same time.

Index ETFs have indeed the appealing property of being a rather simple and passive investment vehicle allowing everyone with a capital to gain exposure to the growing economy, and have displayed 

 has been designed to solve this exact aforementioned dilemma.

First, it totally decouples the market-making from the price discovery by leveraging on-chain data from oracles such as Chainlink, removing de facto the impermanent loss.

Then, it provides adaptive market making fee regimes based on market conditions thanks to a stochastic approach. On the one hand, it is more competitive than traditional automated AMMs when the market is less risky. On the other hand, fees are increased to account for additional risk in volatile market conditions.

Finally, it handles multi-asset pools by design, thus allowing for a diversified and passive form of investing.

All those features come built-in in the 

 thanks to our new market maker system. We called it the 