There are countless decentralized protocols and just as many ways to use them. At AnalytEx, we know that over a thousand MasterChef smart contracts (usually called “farms” since they are used for yield farming) are created each month. In addition to yield farms, many people are familiar with pools. There are several types of pools, including liquidity pools, syrup pools, or staking pools. However, how are they different?
Even experienced investors sometimes find it difficult to understand crypto protocol terminology, as it changes from platform to platform. Let’s take a close look at the lingo of the best decentralized protocols in terms of TVL, namely: PancakeSwap, ApeSwap, Uniswap and SushiSwap.
What is a liquidity pool?
A liquidity pool is a trading pair that contains funds locked by liquidity providers. When investors place two tokens in a liquidity pool, they create an LP token and receive fees on all trades made between these two tokens on a specific protocol. The only risk they incur by creating an LP token is what is known as an “impermanent loss”.
What is an impermanent loss?
The crypto market is known for its volatility, i.e. the strong fluctuation of the prices of its tokens. Thus, liquidity providers may suffer a temporary loss when the 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 in order to stabilize the overall value of it.
For example, suppose an investor deposits 310 BUSD and 1 BNB into the liquidity pool by creating an LP token. Then, 9 other investors decide to deposit the same amount within the same pool. So, the total value of the pool will be 10 BNB and 3100 BUSD, making a total of $6,200. This means that all investors own 10% of the pool and upon withdrawal they will get back 1 BNB and 310 BUSD each.
But what if the price of BNB drops? The pool will contain more BNB, but less BUSD. Therefore, investors will still own 10% of the pool, but in USD. This amount will be less than the initial amount, because the price of BNB has fallen compared to that of BUSD. This is called an impermanent loss.
We say that this loss is impermanent because we only suffer it when we withdraw liquidity from the pool. If the investor does not touch their funds, the value of the liquidity may return to its original levels. Let’s also not forget that investors receive returns by providing liquidity, which can offset temporary losses.
Liquidity pools made up of pairs of stablecoins or tokens with a positive correlation (when the two tokens in the pool are moving in the same direction) are considered the safest. However, always make sure to do your own research before investing in it.
What is a yield farm?
A farm (farm) is a smart contract in which you can place LP tokens in order to earn an additional amount of the tokens of the protocol you are using. For example, if you deposit your LP token, consisting of BNB-BUSD pairs, on PancakeSwap, you will receive the CAKE token (which currently offers a yield of 20.15%). Indeed, the investor will receive a double reward: the first for having placed his LP token in staking and the second for having provided liquidity to the BUSD-BNB pair.
Very often, these farms are defined as decentralized protocols with yield farming functionality, for example, the PancakeSwap farm. But, that’s not entirely true.
Indeed, it is more correct to define these yield farms as MasterChef contracts, which allow you to receive yields in the protocol token, regardless of the type of tokens you place there (LP token or normal token).
The PancakeSwap interface
Now, let’s take a close look at PancakeSwap’s interface.
According to PancakeSwap, the FARMS tab contains farms where investors can stake LP tokens and earn CAKE tokens.
We find this mode of operation on other decentralized protocols like ApeSwap where we can place LP tokens in staking and obtain BANANA – the native tokens of the protocol.
The same is seen in the burgeoning new FstSwap protocol, which was recently auto-detected by AnalytEx’s Farm Aggregator tool. On FstSwap, you can stake LP tokens to earn FIST tokens.
All of these yield farms rely on the MasterChef contracts of the aforementioned decentralized protocols.
However, there are also staking pools or syrup pools. These are two names that mean the same thing. They have nothing to do with liquidity pools, which we talked about at the beginning of the article.
What are staking pools?
A staking pool or syrup pool is a place where you can stake a normal token (usually the protocol’s native token) into a smart contract in order to earn other tokens. This is done on proof-of-stake blockchains, which pay users to secure the network with their tokens.
For example, on PancakeSwap, you can stake CAKEs to earn other tokens.
We find the same mode of operation at ApeSwap.
Pay attention however to the first lines of the “POOLS” tabs of the two protocols. There are pools where you can “stake CAKE to win CAKE” and “stake BANANA to win BANANA”. Few people know that these pools consider the MasterChef smart contract as yield farming. This, unlike all other pools, which belong to completely different smart contracts. This can cause confusion.
If an investor places an LP token or normal coin and earns the protocol tokens (in the case of PancakeSwap that would be CAKE), they are using the MasterChef contract. We can call these pools “farming pools”.
However, in general, most major decentralized protocols do not explain this difference and divide the farming opportunities according to the tokens placed in the smart contracts. If we are talking about LP tokens, the most commonly used term is “farms” But if we are talking about ordinary tokens, we use the term “pools (staking/syrup)”.
On AnalytEx, we consolidate all pools that belong to MasterChef contracts on one place, whether it is an LP token or a single token. For example, here is a list of ApeSwap protocol pools on the AnalytEx website.
Considering everything we have seen above, it can be concluded that regardless of the interface and terminology of decentralized protocols, if you receive rewards in the tokens of the protocol you are using, you are entering the MasterChef contract of this protocol. This, regardless of the type of tokens you place in staking (LP tokens or classic tokens).
If you use regular tokens and receive your reward in other tokens, you are using third-party smart contracts, but all of these farming options are called pools.
In order to fully understand what is happening in the DeFi industry and make the right decisions, it is necessary to understand the basic terminology of decentralized protocols and its nuances.
About the Author
Olga Ortega is a product manager and co-founder of the real-time DeFi explorer AnalytEx of HashEx. With more than 12 years of experience in the development and implementation of large-scale data systems, Olga is a recognized expert in the field of IT. During her career, she has held senior positions in several Big Tech companies, including Google and Facebook. She has led the creation and implementation of scalable data solutions, analytics software, and web and mobile applications. Olga has also implemented business intelligence tools to improve business decision-making processes. At AnalytEx, she is in charge of project development.
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The Terminology of Major Decentralized Protocols – BeinCrypto Global
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