There are countless decentralized protocols and possibilities to use them. In AnalytEx we know that more than a thousand smart contracts with the signature of MasterChef are created every month, generally called farms. In addition to farms, many people know of the existence of swimming pools. There are several commonly known types of pools, such as liquidity pools, syrup pools, or staking pools, but how do they really differ?
Even experienced investors find it difficult to understand the terminology used in the protocols because it varies. Let’s take a closer look at the details, using TVL’s top decentralized protocols, according to AnalytEx, such as Pancakeswap, Apeswap, Uniswap, and Sushiswap.
What is a liquidity pool?
A liquidity pool is a pair of exchange tokens with locked funds from liquidity providers. When investors place two tokens in a liquidity pool, they create an LP token and receive income from all trades made between these two tokens on a specific protocol. The only risk they accept by creating an LP token is the so-called “impermanent loss”.
What is an impermanent loss?
The crypto market is well known for its volatility. When the price of tokens changes in value. In this regard, liquidity providers may suffer a temporary loss when two tokens in the liquidity pool move differently (a negative correlation), which subsequently leads to a change in the ratio of tokens in the pool. This happens to stabilize the overall value of the pool.
For example, an investor deposits 310 BUSD and 1 BNB into the liquidity pool by creating an LP token. In addition to this investor, there are 9 other investors who have contributed the same amount to the same pool. It turns out that the total value of the pool is 10 BNB and 3100 BUSD, for a total of $6200. So each investor owns 10% of the pool and they all get back 1 BNB and 310 BUSD upon withdrawal.
But what if the price of BNB goes down? The pool will have more BNB, but less BUSD. Thus, investors will still have 10% of the pool, but now in USD. This amount will be less than the initial amount because the price of BNB has fallen against BUSD. This is called impermanent loss.
It is impermanent since it is only implemented when liquidity is withdrawn from the pool. If the investor does not touch the funds in the pool, the liquidity value may return to its original levels. Let’s also not forget that investors receive income from the provision of liquidity, which can compensate for impermanent losses.
Liquidity pools consisting of stablecoin pairs or token pairs with a positive correlation (when two tokens in the liquidity pool move together) are considered the safest, but always be sure to DYOR.
Distribution: what is a farm?
A farm is a smart contract where you can place LP tokens in order to receive additional income in the protocol tokens you use. For example, if you put your LP token, consisting of BNB and BUZD pairs, into Pancakeswap, you will receive a token from this protocol called CAKE (which, at the time of writing, has an APR of 20.15%). At the same time, the investor will receive a double reward, for staking the LP token and for providing liquidity in the BUSD-BNB pair.
Very often a farm is simply called a decentralized protocol that has the ability to farm, for example, the Pancakeswap farm – this is not entirely true.
In fact, it is correct to call a farm a MasterChef contract, which allows you to receive income in protocol tokens, whether an investor puts an LP token (a pair of tokens) or a regular token on it. This all belongs to the MasterChef contract and should be called a farm.
Downtime: Pancake Interface
Consider the Pancakeswap interface.
According to Pancakeswap, the FARMS tab contains farms where an investor can stake their LP tokens and earn a CAKE token.
We observe the same situation on other protocols, for example, Apeswap. We can stake the LP token and get BANANA – the token for this protocol.
A similar picture can be seen in the rapidly evolving new FstSwap protocol, which was recently auto-detected on AnalytEx Farm Aggregator. You can stake your LP tokens to earn FIST tokens.
All these farms are under the MasterChef contracts of the above protocols.
However, there are also staking or syrup pools. They are two names for the same thing. Different protocols call these pools differently. They have nothing to do with liquidity pools, which we talked about at the beginning of the article.
Breakdown: What are staking/syrup pools?
Staking or syrup pools are the kind where you can stake an ordinary token (usually a protocol token) in a smart contract to earn other tokens. This is done on proof-of-stake blockchains, where a user receives interest to pledge their tokens to the network to provide security.
For example, on Pancakeswap, you can wager CAKE tokens to win various tokens.
We can see the same situation on Apeswap.
Pay attention to the first lines in the “POOLS” tabs of both protocols. There are “Stake CAKE to win CAKE” and “Stake BANANA to win BANANA” pools. Only a few people know that these pools actually refer to the MasterChef smart contract as a farm, unlike all the other pools, which belong to completely different smart contracts. This results in a confusion of terminology.
If an investor places an LP token or a regular token and earns protocol tokens (in the case of Pancakeswap, that would be CAKE), they are using the MasterChef contract. We can call these pools “agricultural pools”.
But as a rule, most known protocols do not explain this difference and divide farming opportunities according to the criterion of tokens placed in a smart contract. If we are talking about LP tokens, the commonly applied term is “farms”. But if it’s ordinary tokens, it’s called “pools (staking/syrup)”.
In AnalytEx, we show all the pools that belong to the MasterChef contract in one place, whether it’s an LP token or just one. Here is the Apeswap protocol presented on the AnalytEx website.
From everything we covered above, it can be concluded that regardless of the interface and terminology in various decentralized protocols, if you receive token revenue from the protocol you are using, you are accessing the MasterChef contract of that protocol. This is regardless of whether you use LP tokens or regular tokens for staking.
If you use regular tokens and receive a reward in other tokens, you are using third-party smart contracts, but all of these farming opportunities are called pools.
In order to fully understand what is happening in the DeFi space and make data-driven decisions properly, it is necessary to understand the basic terminology and its differences.
About the Author
Olga Ortega is the Product Manager and Co-Founder of Real-Time DeFi Explorer AnalytEx by HashEx. She is an accomplished IT expert with over 12 years of experience developing and implementing large-scale data systems. Over the years, Olga has held leadership positions in several global organizations, such as IT giants Google and Facebook. She has led the creation and implementation of scalable data solutions, analytics software, web and mobile applications. Olga has also implemented business intelligence practices to improve business decision-making processes. At AnalytEx, she is in charge of leading the development of the project.
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