If you haven’t read Part 1 and Part 2 of this Compendium yet, I encourage you to do so first.
- Part 1: https://learncryptocenter.com/en/knowhow
- Part 2: https://learncryptocenter.com/en/knowhow-p2
You already know how to distinguish a correction from the end of a bull market. You also know how to detect market manipulation by observing the behavior of big players and miners.
This e-book will give you a much better understanding of how blockchain-based projects work and why actually everyone says it’s the future.
At the same time, you will learn to use these projects to your own advantage so that you earn passive income, up to 20% per year!
That’s right, it is impossible in the world you know.
In the world where we use intermediaries like banks or brokers who take the lion’s share of our profits.
DEFI – decentralized finance allows for passive investment of funds without any intermediaries.
We don’t have to pay for the maintenance of huge skyscrapers, thousands of employees or cover the costs of marketing.
Thanks to decentralized finance, all profit goes directly to us.
In this e-book you will learn how to use these solutions
These solutions will make your stablecoins earn not only while waiting for the next correction but also during a bear market!
Below is a list of topics that will be covered.
Table of Contents
How does Ethereum work?
From Part 2, we already know how blockchain technology works.
As a reminder, a blockchain is a container for data in which nothing can be changed without the consent of the entire network. This fact makes the information about how many bitcoins we have safe and nobody can change it without our consent.
The creator of Ethereum, knowing that we finally have the technology to create a data container (in which nothing can be changed without the consent of the appropriate person), thought to take it a step further.
Namely, he came up with the idea of storing in the blockchain not only data about the amount of a given cryptocurrency in the wallet but also the source code of any programs.
We already know that when it comes to the blockchain network, no one can change its rules. Not even the creator of Bitcoin himself can add 1 million Bitcoins to his wallet out of thin air.
Likewise with Ethereum, once programs are written and uploaded to the network, they can never be changed again. Not even their creator can do that!
Imagine the possibilities it offers
A developer creates an application with a specific function, e.g., allowing trading between two people. Then he uploads the code to the blockchain and everyone can see it.
If people like the way it is written, and there are no loopholes that can make the author cheat, then a lot of people will start using it.
This lets us enter various types of contracts without any intermediaries and at the same time it is 100% safe for both parties.
In the traditional setting, the law makes sure that both parties keep to their agreements. If either party breaks the written terms, they may face a trial in court and other consequences.
In contrast, for contracts concluded through programs written on the Ethereum network, we do not need any other contracts, courts, or anyone to control it.
Everything is controlled by the program code without any middlemen.
If both parties to the contract fail to comply, we do not have to prosecute anyone. Simply the code will not be redeemed and the contract will be void.
Neither party will lose anything.
These contracts are called Smart Contracts
Programs written on Ethereum are Smart Contracts.
These programs have different functions. They can be compared to those found in a vending machine. In the machine, we can select one of the available drinks, but we are not able to select one that is not served by the machine.
So, for example, person A would like to exchange AAVE cryptocurrency for UNI cryptocurrency.
To do so, it activates a function in the given program (Smart Contract). If there is person B who wants to make such an exchange, the contract is automatically executed and the exchange takes place.
No one has to control it, because it is programmed in advance.
If no such person is found, and we prefer to cancel the exchange, we can call a function at any time that returns the funds back to our wallet and the contract is cancelled.
In no case was there a situation here where someone could cheat us, even though no third party was supervising it.
Centralization vs. decentralization
When such an exchange would take place through a company that is centralized; i.e., has one particular owner, the situation is a bit different.
Currently, practically all businesses are centralized and whether we use the services of a given company depends solely on our trust in it. If the company is new, we are afraid to trust it. On the other hand, if a few friends recommend its services to us, our confidence increases.
The problem is that a centralized company always poses some risk.
Example 1
Person A sends their cryptocurrency to a particular company to exchange for another. Nonetheless, that company has stated that it is packing up the business, declaring bankruptcy, and stealing our funds.
Example 2
Person A has stated they would be selling products on Amazon. They agreed on a margin with a wholesaler and after calculations it has turned out that they could make money on it. Suddenly, Amazon has announced that it is raising the commission to such a level that the entire business is no longer profitable.
As you can see, if something is controlled by one specific person or group of people, we are completely dependent on them. They dictate the terms of the game.
In contrast, if something is decentralized and no one can change it, we know in advance what the rules are and will always be. We can feel confident that no one will thwart our plans along the way.
Decentralized computer
You could say that the Ethereum blockchain is like a big decentralized computer.
The problem is that if everyone started using it for free and running functions in unlimited numbers, the entire system could quickly become overloaded.
In order to limit the number of functions, you have to pay to run them.
Let us return to the example of the vending machine
This machine is actually a Smart Contract in the real world. It is preprogrammed and the rules are predetermined.
If we select a drink (function) and insert a coin, we get a drink. It works automatically.
There is no person standing next to the vending machine with a contract which states that if we put in $1 into the vending machine, this person will give us a drink. It happens by itself and no one has to watch over it.
Everything would quickly fall apart if there was no need to insert a coin in the vending machine and anyone could pick up just any drink just by clicking a button.
The machine would stop working because it would run out of drinks.
For Ethereum, it works exactly the same way
In this case, Ether is the coin, more precisely – gas (gwei).
As we know, Bitcoin and Ether are divisible to 8 decimal places.
In the case of Bitcoin, the value:
- 0.00000001 BTC is 1 Satoshi (from the “name” of Bitcoin’s creator)
- 0.00000023 BTC is 23 Satoshi, etc.
On the other hand, in the case of Ethereum:
- 0.00000001 ETH is 1 gas unit (gwei)
- 0.00000051 ETH is 51 units of gas (gwei), etc.
So when we want to run a function, we first have to insert a coin (gas).metamask
MetaMask is used to run these functions, which I will describe later.
Current gas prices can be checked here: https://ethgasstation.info.
There is a table at the bottom that shows which Smart Contracts use the most gas. This will enable us to have an overview of projects with the largest number of users.
Thus, the cryptocurrency behind the project may have growth potential.
Ethereum scalability
As we know, the problem of Bitcoin is the very high cost of transactions when there are too many of them in the queue (Mempool).
Each block has a limited capacity, so miners prefer to take the transactions that offer the highest commission to the block. This way, the cost of a transaction increases because nobody wants to be constantly pushed to the end of the queue and everyone is made to pay more and more for their transaction to be completed.
The Ethereum network has the same problem. This is because it works like Bitcoin on the principle of “Proof of work” consensus, so before we add another block, the puzzle must be solved first.
Solving the puzzle generates a considerable energy cost, so it is natural that the miner expects to be paid as much as possible in return.
There has been a situation where the Ethereum network has grown so much that the cost of a transaction is almost unimaginable, reaching amounts in the range of $50–$100 per transaction.
As a result, Ethereum 2.0, which will use the “Proof of stake” consensus, is currently under development.
Proof of stake
In 2011, on the forum: https://bitcointalk.org/index.php?topic=27787.0 a user QuantumMechanic came up with an idea to make it possible to add a new block without having to solve any puzzle.
In the case of Proof of work, the penalty for cheating (i.e., wanting to attach a block containing false information) is lost energy.
Everyone prefers to get 6.25 BTC + reward from transaction fees rather than messing around, using a lot of electricity and getting nothing.
Meanwhile, in Proof of stake, the penalty for fraud is the loss of some of your pledged funds.
Specifically, in this case, we stack any amount of your cryptocurrency for a certain period of time. Then the blockchain automatically selects the person that will add the block. The more of a given cryptocurrency we stack, the greater the chance that we will be selected.
If we were chosen and we would like to cheat by trying to attach a block with false data, we will lose some of the funds that we stack as a penalty.
In this situation too, we prefer not to cheat, because in case of fraud, we will lose more than we would gain by acting by the rules.
Due to the fact that Proof of stake does not require power, automatically the transaction cost can be minimal.
Ethereum 2.0 aims at moving to Proof of stake (so no more mining), and thus the cost of transactions will be significantly reduced.
Binance Smart Chain (BSC)
In response to the problems with Ethereum scalability (i.e., transaction cost), a blockchain created by the Binance exchange called BSC was created.
This is an exact copy of the Ethereum code but with the process of adding blocks changed from Proof of work to Proof of authority.
Proof of authority
In a nutshell, blocks are accepted only by 21 validators who have been selected by first meeting the appropriate conditions.
The conditions are, for example, having a huge amount of BNB cryptocurrency and adequate computing power.
This makes us unable to talk about full decentralization in this case.
After all, the control of adding blocks by just 21 “people” is far from being decentralized. In Ethereum, blocks are attached by so many miners around the world that it is impossible to influence them in any way.
Nevertheless, at the moment BSC has gained immense popularity as the transaction cost is less than $0.2.
Meanwhile, for Ethereum it is as much as $10–$100 depending on the day.
Hence, there have been a plethora of projects using BSC that are copies of their Ethereum counterparts.
You can find them here: https://www.coingecko.com/pl/categories/binance-smart-chain.
Certainly, these projects have the potential to grow, at least until Ethereum 2.0 is released.
Ethereum 2.0 will likely not be released during this boom.
In the BSC network, the gas is the BNB cryptocurrency, which is increasingly used, which bodes well for its growth.
You can buy BNB cryptocurrency on the Binance exchange. Links below:
- For US citizens: https://www.binance.us
- For other countries: https://www.binance.com
Token vs. cryptocurrency
Before we move on to the next chapter, I would like to briefly explain the difference between a token and a cryptocurrency.
- Cryptocurrency is a project that has its own network such as BTC, ETH, BNB, etc.
- Token is a project that uses an already existing network.
By comparison, a cryptocurrency is a “company” that has built power poles across the country to sell electricity.
On the other hand, the token is a “company” that uses the existing ones instead of putting them back. These poles may belong to, e.g., Ethereum or Binance Smart Chain.
Both tokens and cryptocurrencies are displayed in the same way on https://www.coingecko.com.
For example, UNI and AAVE are tokens based on the Ethereum network, and CAKE is a token based on the BSC network.
So when it comes to pure trading, it doesn’t matter to you whether it’s a token or a cryptocurrency.
However, it will be useful in the following chapters when we will use the BSC network for passive earning.
MetaMask
MetaMask is a wallet for various tokens based on the Ethereum network (and not only), allowing us to use decentralized projects (e.g., decentralized exchanges).
It is simply a plugin for your browser that we can find here: https://metamask.io/download.html.
After installation, we create a new wallet by following all the steps MetaMask will take us through as soon as it’s installed.
After the setup, it should look like this:
How to check if the token we want to send is supported by the Ethereum network?
For this purpose, we open the CoinGecko website, already known to us, and select the token that interests us. For example, I chose Uniswap (UNI): https://www.coingecko.com/pl/waluty/uniswap.
At the top of the page, we see two things that interest us:
Explorers
Here you will see which network a given token is operating in.
If it says “Etherscan,” it means you can transfer it using the Ethereum network (ERC-20).
If it says “BscScan,” you can transfer it using Binance Smart Chain (BSC).
If it says both “Etherscan” and “BscScan,” it means that the token can be sent to both the BSC and ETH wallets:
After configuring the wallet, you will only see ETH in it, like here:
MetaMask works in such a way that even if you sent some token running in the ETH network to this wallet, you wouldn’t be able to see it anyway.
In order to do this, you first need to add such a token to the program. There are two ways to do this.
The first way
We just click on the brown MetaMask icon on Coingecko:
Then MetaMask will show the following:
Where we click on “Add Token.”
That way, we already have two tokens added:
The second way
We copy the contract address by clicking on the copy icon:
Click on the MetaMask icon to the right of the address bar:
Then click “Add Token”.
We choose the “Custom Token” option and paste the contract address that we copied earlier.
Then click on “Next” and “Add Tokens.”
The second method takes more time, but it will be useful if you do not find a given token on CoinGecko, and you have the address of its contract.
A little digression
If we first send a given token to MetaMask and then add its contract address to the application, there is no problem.
If we send the token to your wallet address, it is on the blockchain anyway. Adding a token in MetaMask is only information for the application to display it.
Wallet address
By clicking here in MetaMask:
our wallet address will be automatically copied to the clipboard. We can send any tokens based on the Ethereum network (ERC-20) on it. For example, my address is:
0x447c0628ca29449Afa05A169C52A5785aA7655A8
It may surprise you, but all tokens (even with different names and symbols) are sent to the same wallet address.
It’s just one wallet with slots for different tokens.
To see what tokens we have at the address of your MetaMask wallet, you can go to the website: https://etherscan.io and paste your MetaMask address into the search engine.
We will find all the tokens in our wallet there:
MetaMask – BSC configuration
MetaMask was created strictly for the Ethereum network. However, as you already know, until the upgrade to Ethereum 2.0 comes out, the transaction fees will be very high. So much that, there is absolutely no point in making such transactions if you only have a small amount of capital.
Nevertheless, the Binance Smart Chain (BSC) network was created, whose source code is a copy of Ethereum but on the Proof of Authority consensus (there are only 21 validators), which makes it much faster and cheaper than Ethereum.
We are able to easily add BSC support to MetaMask so that we can use decentralized services without paying high commissions.
Let’s start by expanding the MetaMask view to a new tab by selecting: three dots > Expand view:
On the new tab, click “Ethereum Mainnet” in the upper right corner and select the last item “Custom RPC”:
A window will appear, which we fill in with these data:
- Network name: Smart Chain
- New RPC URL: https://bsc-dataseed.binance.org/
- ChainID: 56
- Symbol: BNB
- Block URL: https://bscscan.com
After filling it in, it should look like this:
Then click on the “Save” button.
From now on, our MetaMask supports both the BSC and ETH networks. The network can be changed here:
By choosing “Smart Chain.”
Thus, after selecting the Ethereum network, we will only see our Ethereum tokens, and after selecting Smart Chain, only tokens from the Smart chain network.
On the website: https://bscscan.com/ you can paste your MetaMask wallet address and see all the tokens you have in it.
The most interesting thing is that the MetaMask wallet address for Ethereum and BSC networks is exactly the same.
The only difference is the network you will use for the transfer.
For example, if we want to send a Sushi token from Binance (in Binance.us it may be a bit different), we set it up as follows, where the address is our wallet address copied from MetaMask:
Then select the network:
If we choose BEP20 (BSC), the sent tokens can be found in MetaMask in the “Smart Chain” tab (which we have created).
On the other hand, after choosing ERC20 we will see our tokens in the “Ethereum” tab.
As you can see in the above screenshot, the cost of sending via BSC is only $0.17, while the cost of sending via ERC20 is as much as $36.54.
This clearly shows that there is no point in using Ethereum at the moment and that is why BSC is getting more and more popular.
Transfer of BNB cryptocurrency to MetaMask
For both Ethereum and BSC, we must have gas to perform an operation (run a function).
The BNB cryptocurrency is the gas for the BSC network.
Therefore, we first copy the wallet address from MetaMask and send BNB to it via the BSC network from our Binance account.
You don’t need to send large amounts of BNB. The equivalent of $10 is enough for you to handle various transactions for a long time.
Decentralized exchanges
The largest decentralized exchange operating on the ETH protocol is Uniswap (UNI): https://app.uniswap.org/#/swap.
Nevertheless, due to high transaction fees, it is definitely better to use exchanges based on Binance Smart Chain.
An example of the largest exchange is PancakeSwap (CAKE): https://pancakeswap.finance.
Why use decentralized exchanges?
Not all tokens are available on the Binance or Coinbase exchanges.
Sometimes by chance, we can find out about a token that has a lot of potential. Another time we come across information that a given token is going to be added soon to a large exchange, such as Binance.
For example from the official Binance Telegram: https://t.me/binance_announcements.
Suppose we learned that the QUAI cryptocurrency is going to be added to Binance (so its price may increase in a few days): https://www.coingecko.com/pl/waluty/quai-dao
I don’t know this cryptocurrency and I haven’t read anything about it. I have only found it as an example for this e-book.
After going to the “Markets” tab on CoinGecko, we can check on which exchanges it is already available. As it turns out, we can buy it on the PancakeSwap exchange:
Connecting MetaMask to a decentralized exchange
On the website: http://pancakeswap.finance/ choose: “Connect” and in the window that will appear “Metamask”:
Then we accept the connection. From now on, the exchange will see the funds that we have in our MetaMask wallet.
Trade on PancakeSwap
To trade on: https://pancakeswap.finance, we choose Trade > Exchange:
We select the cryptocurrency we want to spend in the upper field, and the one that we want to buy at the bottom.
For example, I would like to buy 0.12 CAKE for 2 BUSD.
Then click on “Approve BUSD” and confirm in MetaMask.
Then click on the “Swap” button.
This way, we started a function (paying BNB worth a dozen or so cents), in which an exchange took place between you and the liquidity provider.
On liquidity later on.
Stacking on a decentralized exchange
If we have the CAKE cryptocurrency (it is in the top 50 of the largest cryptocurrencies), we can stack it on the PancakeSwap exchange for a fairly large percentage.
The advantage of this solution is that we can take out our stacked CAKE at any time, and we will still get all the collected profit.
Therefore, if we buy CAKE after correction for BTC, we can safely send them to MetaMask and start stacking at a high percentage.
On the other hand, if we feel that a correction is coming and we would like to slowly realize profits, we simply stop stacking CAKE immediately and send it back to Binance to sell.
Currently (June 16, 2021) CAKE is not on Binance.us (in the US), however you can buy CAKE on https://pancakeswap.finance as I showed you in one of the earlier chapters.
How to stack CAKE?
Select “Pools” from the menu on the left on the PancakeSwap exchange:
We will see a lot of options there for different percentages:
Remember that the interest rate tells us about how much CAKE we get, not dollars. If the price of CAKE goes down, we may not earn anything on it; i.e., we’ll have more CAKE, but they’ll be worth less.
However, we bought CAKE after the Bitcoin correction and we know that the bull market will continue (based on on-chain data), so we are not afraid that the price will fall.
The first two blocks mean stacking CAKE to get CAKE.
The others, on the other hand, allow us to stack CAKE, but we will get other tokens in return.
Manual CAKE – (the second block from the top) means that if we stack, for example, 100 CAKE and earn 5 CAKE as a result of stacking, only 100 CAKE will be stacked all the time, and the earned 5 CAKE will be idle.
Auto CAKE – This option has been created recently and is the best solution because the script will automatically add the earned CAKE to the total stacking pool, so compound interest will work here.
We obviously choose “Auto CAKE” by clicking on “Enable” and then accepting everything in MetaMask. Then press the “Stake” button that will appear and we accept everything in MetaMask again.
This way, the exchange will take our CAKE (and, as usual, a few dozen cents in BNB) from the MetaMask wallet and put it into stacking on the exchange.
After some time, we can return to the same place and stop stacking by clicking the “Unstake” button, and the funds will return to our wallet within a few seconds.
We do not need to have any account on this exchange because the number of stacked tokens is assigned to our MetaMask account.
At any time, we can log in to our MetaMask wallet on another computer, and after entering the PancakeSwap website, we will immediately see our stacked tokens.
How do decentralized exchanges work?
Decentralized exchanges do not have a single owner who earns a commission from trading on them. All of the commission is earned by those providing liquidity to the exchange.
What is liquidity providing?
If every time we wanted to make a trade there had to be a person on the other side, it would take an awfully long time and thus the trade would not be liquid.
This is why decentralized exchanges pass all of the commissions from the trade to the liquidity providers.
Earning money on adding liquidity
Adding liquidity involves making available two cryptocurrencies that form a pair.
Let’s take CAKE–BNB as an example.
Adding liquidity to CAKE–BNB means that we make our CAKE and BNB available for the same dollar value.
Thus, every time someone buys CAKE for BNB or buys BNB for CAKE, you receive a commission.
How to earn on adding liquidity?
When we add liquidity to a pair, we get a token that represents that pair.
For example, if we add liquidity for the CAKE–BNB pair, the same amount of CAKE and BNB is taken from our MetaMask wallet.
If the price of 1 BNB is $200 and the price of 1 CAKE is $20, then to add 1 BNB to the liquidity, we also need to add 10 CAKE.
In return, we get a CAKE–BNB LP token, which we can stack.
So we earn from:
- Exchange commissions on the CAKE–BNB pair.
- From stacking the received CAKE–BNB LP token.
Whenever we want our CAKE and BNB back, we stop stacking CAKE–BNB LP at any time. Thus, this token returns to our wallet.
Then we remove our liquidity. As a result, the CAKE–BNB LP token disappears from our MetaMask wallet and the CAKE and BNB tokens appear.
Benefits of adding liquidity
The main two benefits are:
- The interest rate is very high.
- The possibility of withdrawing funds at any time, but we do not lose the profit that has been accumulated.
“Impermanent loss”
In general, I hardly ever use the addition of liquidity on two non-stablecoin cryptocurrency pairs like CAKE—BNB.
This is because, while we earn a commission every time someone exchanges CAKE for BNB and vice versa, we are exposed to the risk known as “impermanent loss.”
As you know, when adding liquidity, we are made to add BNB and the exact dollar equivalent of CAKE.
So we add to the liquidity, for example:
- 1 BNB worth $200 ($200 each)
- 10 CAKE worth $200 ($20 each)
Together, we added $400 in equal proportions (1 BNB is equal to 10 CAKE at the time of addition) to the liquidity pool.
Decentralized exchanges operate on the principle that the price of an asset changes at the moment the proportions change.
They are 50/50 when the liquidity is added.
More precisely, if someone buys 1 CAKE and pays 0.1 BNB for it, our liquidity pool will be:
- 1.1 BNB worth $200 ($181.81 each)
- 9 CAKE worth $200 ($22.22 each)
By making the ratio change, the price of one cryptocurrency has increased and the other one decreased.
Now 1 BNB costs $181.81 instead of $200, and 1 CAKE costs $22.22 instead of $20.
No problem
It doesn’t matter to us that the price of one cryptocurrency has gone up and the price of another has gone down, since after pulling them out of the liquidity pool and selling them on a regular exchange (such as Coinbase or Binance), we will still receive $400, which is what we paid in.
Plus, of course, the commission we have earned as a reward for providing liquidity.
The problem arises when on a regular exchange like Binance the price of CAKE goes up by 1%, and the price of BNB stands still.
Let’s see what it looks like now
What we added to the liquidity pool:
- 1 BNB worth $200 ($200 each)
- 10 CAKE worth $200 ($20 each)
In turn, the price of CAKE on Binance increased by 10%, so:
- 1 BNB costs $200 ($200 each)
- 10 CAKE costs $220 ($22 each)
At this point, someone can spot the opportunity and immediately buy CAKE on the decentralized exchange for $20 and sell it for $22 on Binance.
So someone buys 1 CAKE and pays 0.1 BNB for it, and our pool changes to the ratio:
- 1.1 BNB worth $200 ($181.81 each)
- 9 CAKE worth $200 ($22.22 each)
As we have calculated before.
Theoretically, nothing has changed, but has it?
If we now take our funds from the liquidity pool, we get 1.1 BNB and 9 CAKE.
- 1.1 BNB can be sold on Binance for $200 apiece (because its price on the regular exchange has not changed), so we will get $200 * 1.1 = $220 for it.
- We can sell 9 CAKE on Binance for $22 each, so we’ll get $198.
Together we have $220 + $198 = $418.
So we deposited $400 and withdrew $418
Now let’s see what would happen if we didn’t put cryptocurrencies into the liquidity pool but keep them on the cryptocurrency exchange.
So the proportions between our cryptocurrencies would not change as they did by adding them to the liquidity pool.
That way, we would just have 1 BNB and 10 CAKE instead of 1.1 BNB, and 9 CAKE.
So we would sell 1 BNB for $200 each, which is 1 BNB * $200 = $200.
Additionally, we would sell 10 CAKE for $22 apiece (because the price of CAKE increased by 10%), so 10 CAKE * $22 = $220.
Together we have $200 + $220 = $420.
What is the result?
As you can see, when we put our tokens in the liquidity pool, we got $418 after selling them. However, by doing nothing, we would have tokens worth $420.
The $2 difference is impermanent loss.
However, I am still omitting two important facts in these calculations.
The first
If the price of one cryptocurrency from our pair on Binance increases, and the other one remains the same, impermanent loss will only occur if we want to withdraw funds from the liquidity pool right now.
If we wait a few hours/days, it may turn out that the proportions return to the original ones and such loss will stop.
The second
As you know, you receive commissions for all transactions completed on a given pair for adding liquidity. These commissions can more than cover the potential impermanent loss and generate a profit.
Taking this into account, if we want to make money by adding liquidity, it is best to choose pairs that are highly correlated with each other, such as CAKE—BNB. There will be no big impermanent loss on this pair as their price rises/falls at a similar pace.
Personally, I try to be as safe as possible with everything. Therefore, I simply put my CAKE on stacking on: https://pancakeswap.finance/pools where the interest rate is very high (it was as much as 132% per annum on May 30, 2021) and additionally there is no risk of impermanent loss.
However, there is a situation where I use liquidity addition a lot.
We can also add liquidity in stablecoins
The moment we realize our profit and wait for a correction, we can put our stablecoins at high interest rates, just adding liquidity to the decentralized exchange.
Why is it safe?
This is safe as there is no impermanent loss with stablecoins.
As a reminder: impermanent loss occurs only when the value of one token changes in relation to the other.
This is not the case with stablecoin pairs like BUSD–USDT, as each stablecoin is always worth $1.
Thus, we earn commissions from trading by exchange users and on stacking liquidity tokens without incurring the risk of impermanent loss.
Adding liquidity in practice
Let’s start by checking which pairs of stablecoins generate the highest profit.
Open: https://pancakeswap.finance, select “Farms” from the menu on the left:
A page opens where we type “BUSD” in the search engine to find all pairs for this stablecoin.
At the top there will be BUSD pairs to unstable tokens, which we are not interested in.
However, if we scroll all the way down, we’ll see pairs of stablecoins:
We can see that the UST–BUSD pair gives the highest interest rate; i.e., 13.97% per annum.
If we are not sure if something is a stablecoin, a list of all stablecoins can be found here: https://www.coingecko.com/en/stablecoins.
Transfer of BUSD to MetaMask
Let’s start by sending BUSD from Binance to MetaMask. We already know how to do this from the previous chapters.
We just add the BUSD token to MetaMask and send BUSD to the wallet address via the BSC network.
Of course, we also need to have small amounts of BNB on MetaMask for transaction fees.
Purchase of UST
As we know, you need both cryptocurrencies to add liquidity. In this case, UST and BUSD.
At the moment we only have BUSD, so we have to buy UST for half the money.
To have the same amount of BUSD and UST in your MetaMask wallet.
To do this, while in PancakeSwap, go to the Trade > Exchange tab and purchase UST for half of the BUSD.
If we have 100 BUSD, we buy 50 UST, etc.
Then click “Approve BUSD” and then “Swap” accepting everything in MetaMask.
Remember to add the UST token to MetaMask to see it in the program, as I described it earlier.
Adding liquidity
In the Trade > Exchange tab, select “Liquidity”:
Then press the “Add Liquidity” button and complete this way:
In my case, I am adding around 2 BUSD and 2 UST to liquidity, so around $4 in total.
Then click on “Approve BUSD” and then on “Approve UST” accepting everything in MetaMask.
After a while, the “Supply” button should light up. When that happens, we click on it.
We can immediately click “Approve BUSD,” approve in MetaMask and press “Approve UST” straight away. It will take a while, so in the meantime, the same “Approve” buttons may appear in blue again, as if something went wrong and we would have to click on them again.
However, if we have already clicked on each of them once and approved everything in MetaMask, we do not click on them again, even if they turn blue again.
We just wait for the “Supply” button to unlock.
You should see a screen that summarizes everything:
We click “Confirm Supply.”
When everything is ok, we will see confirmation like this:
We click on “View on BscScan” where we can see our transactions:
If we accidentally click “Close,” we can reach the same place by selecting the “Activity” tab in MetaMask:
Then choose “Add Liquidity”:
Then click on the small arrow in the corner.
Thus, we come to the very same place we are interested in in this section:
As you can see from my wallet:
0x447c0628ca29449Afa05A169C52A5785aA7655A8
2 BUSD and 1.99 UST were sent to the liquidity pool:
In return, I received the Pancake LPs (Cake-LP) token:
We click on this token and in the next window we copy the contract address:
So:
0x05faf555522fa3f93959f86b41a3808666093210
Then paste it into MetaMask as I showed you in the previous chapters (by pressing the “Add Token” button) to see the liquidity tokens received.
Removal of liquidity
At any time, with the liquidity tokens in MetaMask, you can go to the Trade > Exchange > Liquidity tab where you will see the liquidity you have added:
Click on UST/BUST to expand this tab:
Then, in order to remove the liquidity, click the “Remove” button.
This way we will get our BUSD and UST back, and the Cake–LP token will disappear from our MetaMask.
If for some reason PancakeSwap did not automatically detect your liquidity token, you can click the “Import it” button and set the tokens to which you have added liquidity:
Farming our liquidity tokens
Having the liquidity tokens, we can go back to the “Farms” tab, where we expand the BUSD–UST pair and click on “Enable,” accepting everything in MetaMask:
Then press the Stake LP button:
On the screen that appears, click on “Max” to stack all liquidity tokens and “Confirm.”
Once approved, it will look like this:
That’s all!
From now on, our stablecoins earn commission on transactions between BUSD and UST on the exchange and additionally we earn the CAKE cryptocurrency for storing a liquidity token.
At any time, we can return to PancakeSwap (we do not need any account, everything is saved on the blockchain and associated with our MetaMask) and click the “Harvest” button to collect the collected CAKE.
If we want to get our stablecoins back, all we have to do is click the “-” button here:
We choose our liquidity tokens by clicking on “Max” and “Confirm”:
Once the tokens show up in MetaMask, we simply go back to Trade > Exchange > Liquidity and remove the liquidity by returning the liquidity token and receiving BUSD and UST along with the profit from the commission we earned on the transaction.
Auto Farming
To optimize the process of earning on your liquidity tokens, we could collect the acquired CAKE daily by clicking the “Harvest” button.
Then we could sell them for BUSD and UST and add all of them to the liquidity pool to generate compound interest.
But this presents two significant disadvantages:
- We have to pay the transaction cost in BNB for each operation, which makes it completely unprofitable. As a result, we would have to perform these operations, for example, once a week (and not every day!) for it to make financial sense.
- It just takes time.
Therefore, blockchain-based platforms have been created to facilitate this.
One of them is: https://autofarm.network.
This platform allows for the automation and optimization of these activities.
More precisely, instead of stacking (farming) liquidity tokens directly on PancakeSwap, we add them to autofarm.
Autofarm actually stacks our tokens on PancakeSwap but in combination with everyone else’s tokens on this platform.
Each time when operations are carried out:
- Collecting CAKE (Harvest),
- Selling CAKE on BUSD,
- Purchase of UST,
- Adding BUSD and UST to the liquidity pool,
- Add Cake-LP token for stacking,
they are done in bulk on huge amounts of tokens that are stacked by all other autofarm users.
In this case, the cost expressed in BNB for each of the above 5 operations is spread over hundreds of thousands of users, so it is negligible.
AUTO token
Additionally, all autofarm users receive an AUTO token: https://www.coingecko.com/pl/waluty/auto.
This token is going to be distributed until October 2021, and its maximum number that will be in circulation is only 80,000 (hence its high price—around $1,300 per coin on May 31, 2021).
Of course, you can also sell it (e.g., on Binance) and treat it as an additional profit.
How to use autofarm?
We add liquidity on PancakeSwap like we have done before. However, the obtained liquidity token is not added to the “Farms” tab on PancakeSwap.
Instead, we go to the site: https://autofarm.network/,
then enter BUSD-UST in the search engine:
and we choose the pair that has appeared.
As you can see, the interest rate here is 20.20%, while on PancakeSwap it was 13.68%. This is due to the optimization performed by autofarm.
We go to the window:
where we click on “Max” and then “Approve,” and accept everything in MetaMask.
Then we click “Deposit”:
After depositing, the screen should look like this:
On the left at the top, we can see the amount we have deposited in tokens and dollars.
While in the table at the bottom we can see what amount in LP tokens we will be able to choose after 1 day, 1 week, etc.
The more LP tokens you have, the more BUSD and UST you will get back later from PancakeSwap when you remove liquidity.
Additionally, on the right side of the table you can see how many AUTO tokens you will receive.
In my case, I will only get a little bit after a month, but remember that I only deposited $4 to show you how it works. Your profit will be generated much faster with larger amounts.
Security of decentralized platforms
You are probably wondering who actually checks the code of a given platform so that you know there are no vulnerabilities.
Audits are commissioned to companies that deal with it professionally.
Links to audits can often be found in the imprint of a given project. If there are no such links, you can google “audit project name.”
One of the reputable companies involved in auditing on Binance Smart Chain is https://www.certik.org.
Here you will find the PancakeSwap audit: https://www.certik.org/projects/pancakeswap
Here’s autofarm: https://www.certik.org/projects/autofarm
In addition, here you can find a written audit for autofarm: https://github.com/autofarmnetwork/autofarm_audits/blob/main/CertiK%20Audit%20Report%20040521.pdf
Remember never to use projects that do not have any audit.
To be more confident about the platform you intend to use, make sure it is on this list: https://www.defistation.io. There you can check the number of users of a given platform and other statistics that will allow you to assess how large a particular project is.
The greater the number of users, the more trustworthy the project is and the more people have tested it.
Summary of strategies from all 3 parts of the compendium
Finally, I would like to summarize the strategy of the 3 parts, so that we can put everything together in our heads. I appreciate there is a huge amount of information and it’s hard to understand everything the first time round.
There is a correction of the BTC
First we check the on chain data. If the data does not show that this may be the end of the bull market, then we are until the price stops falling and consolidation begins
We invest 50% of our capital during consolidation.
If we like security, we can also divide the capital into 3 parts and invest 33% each.
If we have a very large capital to invest, we divide it into two parts:
- 80% of capital for investment in BTC and ETH (equally),
- 20% of capital to invest in 5 different altcoins (including BNB).
Of course, we are talking about the distribution of the first 50% of the capital. The other half is waiting for a possible deepening of the correction.
If we have small capital to invest, we divide it into 5 different altcoins (including ETH and BNB).
With little capital, we skip BTC.
I would definitely buy:
- ETH – because it is the second largest cryptocurrency, very safe and with the potential for huge increases (especially after the introduction of ETH 2.0).
- CAKE – because it is a token of the largest BSC-based exchange and its stacking on PancakeSwap gives a very large percentage. If you live in the US, you can buy this token on PancakeSwap as I showed in this e-Book.
We choose the other altcoins ourselves, at our discretion. However, I will mention a few that we should read about.
If we do not have time, we buy the ones from the list below that have suffered the most in percentage terms from the correction. The more their price has fallen, the greater the potential for big growth.
- Polkadot (DOT)
- Polygon (MATIC)
- Chainlink (LINK)
- Solana (SOL)
- Cosmos (ATOM)
- Terra (LUNA)
- 1Inch (1INCH)
The price starts to decline further after consolidation
For the remaining 50% of the capital, we buy exactly the same cryptocurrencies that we have bought earlier (but at lower prices).
If the price doesn’t start falling but rising, we keep our 50% capital and do nothing.
If we see that the train has left the station, we put half of the uninvested funds into autofarm and we earn 20% per year on the deposit.
There are conditions for profit-taking
We gradually (10–15% per day) realize profits from cryptocurrencies that are above their ATH or from all of them if BTC is above its ATH.
If more capital is raised, we put half of the deposit on autofarm.
Half because diversification is always important. In addition, we want to have funds at hand on the cryptocurrency exchange if we want to make quick purchases after a correction.
That’s all!
We pursue this strategy until we see on the on chain data that this may be the end of the bull market.
What’s next?
The next e-book is going to be about using our stablecoins during a bear market so that they passively earn a large enough percentage.
I will show you how to use other platforms such as autofarm or PancakeSwap, which will ascertain appropriate diversification and security of your funds.
We will also address the issue of investing in gold through cryptocurrencies.
If you have any questions, please feel free to ask them in the comments.
I also encourage you to subscribe to the newsletter to be the first to know about the next e-book.
Update June 6, 2021
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Thanks for your time!
