Thread by @CryptoEdgar_

1/16
DEX (Decentralised EXchange)

On June 10th @Stepnofficial announced their own DEX (

https://twitter.com/Stepnofficial/status/1535239610145484803

).

What is a DEX? How does it work? Why is it important to StepN? And how can you potentially participate and profit? 👇🧵

#STEPN #DEX #DOOAR #GST #GMT

2/
What?
Simply put, a DEX is a decentralised marketplace / exchange where you can trade your tokens in a non-custodial way (you never lose the control of your assets).
Remember: Not your keys, not your coins.

3/
How?
The earlier DEXes (think 2017-2018) were very much like a pinboard at school. Requests such as: "I sell 10 BTC for 10,000 USD, looking for a buyer!". Someone could respond and conduct a p2p transaction.
Nowadays they mostly work through the concept of Liquidity Pools.

4/
Liquidity Pool?
- A smart contract
- Relies on crowdsourced cryptocurrencies or tokens
- E.g. A typical Uni-V2 BTC-USDC LP (@Uniswap version 2 Liquidity Pool)
- If the pool contains 10 BTC (now worth $205,000), the smart contract needs to hold 205,000 USDC as well. 50/50 ratio

5/
Is the ratio always held?
- The balance can be interrupted in many ways (#BTC price rising/dropping, users buying/selling etc.)
- If the #BTC price drops, more #BTC is needed and less #USDC
- #AMM (Automated Market Makers) restore this balance through different processes.

6/
How does this benefit us?
- A #DEX incentivises users to provide liquidity by offering them a % of each trading fee.
- Everyone can provide liquidity (e.g. $205 $USDC and 0.01 $BTC) and thus own a small part of the pool. With the example from above, you'd own 0.001% of the LP.

7/
- If a user now traded through the DEX and paid $100 in trading fees, you'd earn $0.10 (as you own 0.001% of the liquidity pool). Thus the more liquidity you provide, the higher your share
- Important: When there's no trading, you don't earn
- Cool. Free money? Not exactly 👇

8/
Impermanent loss
- The constant rebalancing causes a fluctuation of held assets. If the price of #BTC goes down, you'll hold more #BTC and less #USDC. Almost as if you were constantly 'buying the dip'.
- Ask yourself. How much $ would I have if I just kept the tokens?

9/
- Impermanent loss is the difference in $ value of what you'd have if you just kept the tokens in your wallet vs providing liquidity
- Now the big question:
Will I earn more on the trading fees than what I'd lose on impermanent loss? If yes, provide liquidity. If no, stay out.

10/
Example
Token A & Token B (if $500 of A and $500 of B were held)
- Initially: A is $1000, B is $100
Have 0.50 A and 5.00 B
- Future: A is $1500, B is $100
Have 0.41 A and 6.12 B (in LP)

Value if held: $1,250.00
Value if providing liquidity: $1,224.74

Impermanent loss: 2.02%

11/
The concept of impermanent loss is sometimes a bit difficult to grasp.
I found the article of @BinanceLabs insightful: academy.binance.com/en/articles/im…

You can use tools to calculate your potential impermanent loss as well:
dailydefi.org/tools/imperman…

12/
There are many, many DEXes out there with slight changes.
- @SushiSwap introduced an extra token, $SUSHI to provide extra incentives to users
- @BalancerLabs works with different ratios & variety of tokens
- @CurveFinance aims to provide the best yield for stables
Etc.

13/
What with @Stepnofficial and their new DEX (#DOOAR)?

Afaik they won't bring anything new. Very similar to how @Uniswap and @orca_so work with a different fee structure.

I'll be digging into some historical data to estimate its earning potential.

whitepaper.stepn.com/decentralized-…

14/
It seems that the smart contracts for the DEX are slowly being deployed.

@ktrainUSA_STEPN indicated that @JupiterExchange is finding the #STEPN #DEX on @solana as a potential LP pool to perform a swap (

https://twitter.com/ktrainUSA_STEPN/status/1539849855559815168

).

15/
@JupiterExchange is an aggregator working on @solana. They try to find the best price for your trade with the lowest slippage throughout multiple DEXes.

Slippage?
The thread on "Slippage tolerance" by @Krit_STEPN provides some insights on this topic (

https://twitter.com/Krit_STEPN/status/1527192772746297344

)

16/
It's a complicated topic and much more can be said. I'll be sharing some insights and ideas on how we can potentially profit from other DEXes and #DOOAR in future threads. Feel free to ask any❓below.

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