I tried providing liquidity in a liquidity pool in DeFi, and this is what happened
I tried providing liquidity in a liquidity pool in DeFi, and this is what happened
Part 1 of 2, final episode tomorrow
I have wanted to play around in DeFi for several years on exchanges like Uniswap, but I have never pulled the trigger. The reason was that most platforms are Ethereum-based. This means a smart contract can potentially sign a transaction to move tokens, which can be a big source of vulnerability. Billions of dollars worth of tokens have been hacked in DeFi. The vulnerabilities exploited were often bridges between blockchains or re-entrancy attacks into a smart contract. This is because the smart contract owns the tokens, as I understand it, thus the end user doesn’t necessarily have to sign a transaction to change the balance of their tokens. The other reason was that I had doubts about the security of a MetaMask wallet. I was also afraid there could be other risks that I wasn’t aware of.
I have no problem risking a small amount of money to learn the ropes, as a form of tuition, but only with a view to play bigger down the road. And as long as these fundamental doubts existed, I wasn’t interested in playing around just to test an interface.
In the past, I lent money to BlockFi. But I looked into it before investing and I realized it was just TradFi, but the underlying asset was crypto. Having worked in TradFi for many years, and having lived through the banking crisis of 2009, TradFi in fact reassured me because I knew what risk I was exposed to. When rumors appeared about Celsius and when the premium on GBTC turned into a discount, I immediately withdrew my money from BlockFi, about six months before the proverbial kaka hit the fan. I knew what could happen. I had been in BlockFi just to reap the arbitrage of lending stable coins at 7.5% when classic dollar interest rates were 2-3%. I wasn’t going to risk my interest and principal when I saw warning signs.
So what changed? Why did I try DeFi on Alephium?
The most important element was that Alephium has a UTXO model for tokens like on bitcoin. The smart contract itself cannot move the tokens; only the individual through their wallet can sign a transaction to move tokens. The architecture is fundamentally different from Ethereum in this regard. And I was reassured because every transaction I did on the Ayin DEX (Alephium-based DEX) prompted me to sign a transaction. Furthermore, I was using a mobile wallet on my iPhone. As far as I am aware, mobile wallets are on a secure element in the phone and are, in fact, quite secure. On Uniswap, are you prompted to authorize each transaction? To be honest, I don’t know; I never tried Uniswap. In the past, I have made payments with MetaMask on Ethereum, but the fees were so high that there was no point. To reduce fees, you need to go to a second layer, and those are a lot more centralized, thus potentially more vulnerable. So I just walked off the playing field and decided to watch the game instead of playing it.
To be honest, I only have a superficial understanding of the differences in architecture between Ethereum and Alephium, but to my understanding, there are 2 main differences (Utxo model and Powl), but they are signifigant. Furthermore, I have a very high regard for the founder Cheng Wang and his work. So yes, I do trust, and I did not verify everything. That is true of everything in life where you are not an expert. Experts can also be proven wrong. Trust comes from a proven track record. Alephium is still young.
But I was ready to come back on the playing field and try something new. Learning by doing.
Two more things: I am making the fundamental bet that Alephium will increase in value over time, so I want to be long. If you want to acquire Alephium, there are three ways to do this:
Buy them directly
Mine them. This requires an investment and know-how
DeFi
So stay tuned for the next installment, and I will walk you through what I did, step by step, and show you my numbers.
