What are DeFi protocols? Concentrated Liquidity & NFT LP Tokens17 Jun 2022
Via the technology of DeFi, finance becomes available to anyone.
Unlike the traditional system, where governments can control money, blockchain allows its users to own and control their assets. Over time, the DeFi infrastructure has evolved into an extensive network with integrated financial instruments, protocols, and smart contracts.
What is a DeFi protocol?
DeFi protocols are specialized stand-alone programs designed to solve problems in the financial process. DeFi protocols help to contain rules or guidelines that users should follow and provide a level of consistency that allows different organizations or developers to collaborate, scale, and improve services for users. DeFi services are managed by smart contracts and voting. That’s why smart contracts allow you to establish the rule of law in the ecosystem and create clear rules of the game. In simple words, a smart contract works like a deterministic program that performs certain actions when the specified conditions are met.
Although the value of many tokens has significantly decreased compared to their historical maximum, several protocols have managed to attract new users and increase capital inflows.
Why is it important?
These projects create liquidity between multiple blocks and create assets in the chain, such as stocks and shares, to encourage the adoption of cryptocurrencies. This provides increased financial security and transparency and opens up new opportunities for liquidity and growth. The DeFi protocols running on it have open-source code that can be viewed, tested, and developed by anyone. Smart contracts allow you to create protocols that do not require trust.
The participants in the process can be sure that non-compliance with the terms of the contract will lead to its cancellation. Also, the use of smart contracts eliminates the need for intermediaries, significantly reducing the cost of operations.
Concentrating Liquidity and Liquidity Providers
Concentrated liquidity refers to the ability of liquidity providers to select a particular range along the price curve to provide liquidity. Concentrating liquidity around the current price is an effective strategy aimed at maximizing profits, exposing much less capital to the risk of asset devaluation. Without liquidity, we will not be able to buy or sell a token, and this negatively affects the reputation of the project.
What’s more, the liquidity pool can be considered as a set of cryptocurrency assets enclosed in a smart contract that can be used for exchange, loans, and other applications. The liquidity pool is needed so that users can easily exchange one token for another.
Liquidity Mining: When a user adds liquidity to Uniswap, they are given a token called a UNI-V2 token that represents their share of the liquidity pool. These UNI-V2 tokens have addresses that are specific to each market on Uniswap. Liquidity Mining allows users to stake these tokens and earn Token X as a reward, which incentivizes users to add liquidity to the Uniswap market.
Staking: Similar to Liquidity Mining but more general. A user can stake any token and earn Token X or any other token as a reward.
Staking/Farming Ratios: The amount of each currency that the user must add to farm. Uniswap is always 50:50, but any ratio is possible
Liquidity provider tokens are tokens issued to liquidity providers on a decentralized exchange that operates under the protocol. These tokens are used to track the deposits of individuals in the general pool of liquidity and correspond proportionally to the share of liquidity in the general pool.
In simple words, this is a pool into which token A and token B are added so that then the exchange's clients can freely exchange between these tokens. For the fact that you add liquidity to this pool, the exchanges share with you the commission that is taken for exchange operations within this pool. LP tokens are created by merging two tokens in equal proportion relative to the current exchange rate to USD.
At the most basic level, LP tokens work according to the following formula:
The total value of the Liquidity Pool / Circulating Stock of LP Tokens = The cost of 1 LP Token
And how to generate NFT LP Tokens?
NFT is used to represent unique assets that are difficult to separate. Because of a special combination of encoded characters, all the necessary information is recorded in this kind of token, which will vary from person to person. That is, it will be individual.
A unique NFT representing your position in a particular pool will be generated based on the pool and the parameters you selected in the liquidity provision interface. As an NFT owner, you can change or redeem a position at any time. LP NFTs have been generated automatically, so users need to follow some instructions, and then the V3 smart contract mints the NFT representing your funded position and sends it to you. After providing liquidity in V2, you will also automatically receive your LP token.
As a development team, we have experience launching products similar to the ones described above. For example, the Tokena project has put a combo of all options for manipulating liquidity together. You can learn more about the project on our blog.
Tokena allows projects to expand their overall liquidity on decentralized exchanges such as Uniswap, Sushiswap, and Balancer. Projects can create a staking or liquidity mining pool and put their tokens into the smart contract. The project’s users stake certain tokens in the pool and farm out the project’s tokens with some commission taken by the platform.
Projects of this kind usually contain such features:
A user can create either a staking pool or liquidity mining pool;
The platform allows a user to create a staking pool for any token at no cost, with the only fee coming from the emissions.
Projects have their pages, so if they use liquidity mining, farming, or staking, everything they have created appears on this page.
The interface shows the pools that have the highest value. It has a sort function, and pools can also be sorted by the number of unique stakers in the pool or other parameters too.
Blockchains available for implementation:
Binance Smart Chain
Any other desired one
The businesses implementing the newest technologies and following the latest trends need reliable creators and operators, but what’s also significant is having a reliable developer at the very beginning. We thank our partners for their trust and offer you to create a product with us. Our team offers a package of services for complex development and any technology deployment. We have enough experience to bring any of your ideas to life.
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