Newsletter nr. 4: How To Make It In DeFi (Part 1 & 2)
In this newsletter, I will break down how to make it in DeFi. There's a lot of misinformation on Youtube/Twitter and other social media channels.
Ponzi schemes are framed as secure investments and you've probably experienced that it is easy to ape into something.
In this newsletter, I will publish the 2 threads that I've made on Twitter in full format for easier reading.
For the record. It will be 6 parts in total, so after reading this newsletter you will only finish part 1 and 2 (you're not done with me yet ;))
How To Make It In DeFi - part 1
The purpose of this information is to get you from knowing nothing about DeFi to becoming an advanced DeFi degen.
I know what you’re thinking anon, why get out of Coinbase and Binance where everything is safe and well-known?
If you’re happy with buying/selling and trading tokens, this may be enough.
But crypto is so much bigger now. Why not explore all the golden opportunities that are out there.
Why care about DeFi at all?
Let me present some of the opportunities in DeFi (maybe you don't understand everything now, but during my coming newsletters you will):
1. Use any token as collateral to borrow money
2. Stake your tokens (single-side staking) to earn APY, eg. stablecoins to get 20-120% APY
3. Yield farm your tokens (two or several tokens in an LP-pair) to earn APY
4. Lend your tokens to earn money
5. Buy NFT’s (which is way more than a jpeg), and you can stake your NFT to earn passive income
6. Send money to anyone in your preferred currency without using a CEX (centralized exchange) as a middleman
7. Buy tokens at a lower price than themarket price (liq. protocols)
8. Use stablecoins to buy stocks and commodities
9. Self-repaying loans
10. Buy real estate (digital and physical)
+++
(I could probably continue this list forever with all the possibilities).
But for now, let's focus on how to start out in DeFi.
Read on.
How to start?
You need online wallets like Metamask, xDEFI, Liquality, Phantom, Terra Station +++.
As a practical example, let’s use the most known, Metamask, for now.
Step 1: Go to http://Metamask.io and create a wallet.
Never share your seed phrase and password with anyone ( there are a lot of scammers on Twitter asking you for this).
And when I say no one, I mean it.
Not even Metamask themselves needs to know this.
Read eg. this guide for how to set up your wallet: https://blog.wetrust.io/how-to-install-and-use-metamask-7210720ca047
Step 2: Your wallet is automatically set up for the $ETH
network.
But on the top screen in Metamask you can see that you can change networks. Let’s say you want to use the Fantom Opera Network instead because you are bullish on $FTM and want to send some $FTM tokens from Binance to your Metamask.
Step 3: Switch network from Ethereum mainnet to Fantom Opera network. Copy your wallet address.
If you don't have the Fantom network in your Metamask already, read this quick guide on how to add it: https://docs.fantom.foundation/tutorials/set-up-metamask
Step 4: Go to Binance.
First, you need to buy $FTM.
Then go to wallet --> fiat/spot --> search for FTM
Choose to withdraw FTM.
Step 5: Paste your Fantom address. Choose the Fantom network
Step 6: Enter your amount and press send.
If this is the first time you do this, choose the smallest amount possible.
For some reason, a lot of people do this too quickly and end up losing their funds because they entered the wrong address or chose the wrong network.
The gas fees are very small on $FTM, so it’s basically free to send money through this network.
If you use another exchange, make sure that the exchange is sending your Fantom through the Fantom network.
Step 7: Your money should now be in your Metamask.
The transaction happens in seconds, but it’s the CEX (Binance) that uses the time to transfer the money.
If your money hasn’t arrived yet, check the status of your transfer in Binance.
Let’s just pause for a second now.
Because if you want to be in DeFi with more than $1,000 you should absolutely get yourself a hardware wallet.
Why? Because of security purposes.
If someone knows your wallet password, they could immediately transfer all your funds to themselves.
But if you use a hardware wallet you must connect this to your online wallet in order to transfer anything out of it.
You can read more about this here: https://www.ledger.com/academy/security/the-safest-way-to-use-metamask
The two most known hardware wallets are Ledger and Trezor.
Personally, I use Ledger, but in my opinion, they’re equally good.
The reason why I chose Ledger was that they support the Terra $LUNA network which I use a lot.
You can read more about wallets here and a comparison between Ledger and Trezor: https://www.investopedia.com/trezor-vs-ledger-5193580
Step 8: You now have $FTM in your Metamask and you’re ready to explore DeFi.
Step 9: I’ve already written a huge thread about $FTM and all the DeFi opportunities which I definitely recommend you to read before you move to step 10.
Link to thread: https://twitter.com/Route2FI/status/1463814714304212992?s=20
Step 10: Let’s just try one of the opportunities that I like which is the $FTM-$TOMB LP.
Go to http://reaper.farm, connect your Metamask to the Fantom network, and find the $FTM-$TOMB-pool.
If you read my $FTM-thread, you already know what $TOMB is.
Btw, you could use Beefy Finance and tomb.finance instead of reaper.farm
To enter this FTM-TOMB crypt you need an LP-token (liquidity-pair) which consists of 50% $FTM and 50% $TOMB.
You already have $FTM, but you need $TOMB.
Step 11: Go to http://spookyswap.finance, connect your wallet, and go to "Swap"
Step 12: Swap 50% of your Fantom to $TOMB. You have to confirm with your wallet and pay $0.5 in gas fee.
Step 13: You now have both $FTM and $TOMB in your Metamask. If you can't see your $TOMB yet, add the token from CoinGecko (screenshot)
Step 14: You need to pair your $FTM and $TMB together so it makes an LP-pair.
Go to: http://spookyswap.finance/add and choose 50% of $FTM and 50% of $TOMB
You approve first, then you add the supply. Confirm with Metamask and pay gas 2 times (max $1).
Step 15: You have now made an LP pair.
Go back to http://reaper.farm again.
Find the FTM-TOMB crypt, press max, and choose "Approve LP". Confirm with Metamask.
Then choose "Deposit". Confirm with Metamask again.
Congratulations, you are now in a yield farm!
If you think this was too advanced, NGMI.
Just kidding.
$FTM-$TOMB is probably some of the more advanced things you could do, but I'm 100% sure you can do this right if you follow the instructions.
Try with $10 the first time.
About risks in DeFi
This LP-pair ($FTM-$TOMB) has in my opinion a 6/10 risk.
Actually there was a protocol that was hacked yesterday on FTM where you could have $FTM-$TOMB in a LP pair. The site that was hacked was called grim.finance and you can read about what happened here: https://twitter.com/financegrim/status/1472357770846519312?s=20
Just to be clear here, it was not Fantom or Tomb that was hacked, but an auto compounding DeFi protocol called Grim Finance that was hacked.
Unfortunately, this is something that happens in DeFi from time to time...and without DeFi insurance there's not too much you can do.
Did I lose some money in Grim Finance? Yes.
Does it hurt? Yes.
But as I wrote in my thread last week
about FTM-TOMB:
https://twitter.com/Route2FI/status/1469647979212648448?s=20
 You should never go all in, if you do you will end up losing everything one day.
Okay, we have seen that things can go wrong in DeFi, it's about time we talk about risks.
How To Make It In DeFi Part 2 - What are the risks?
You've probably seen that there's a lot of new DeFi protocols popping up every single day.
But how do you know if you can trust a DeFi protocol? And how much should you invest?
It's about time we talk about risks and where to seek information in the DeFi space.
Now, let's talk about risks in DeFi and what you should look out for:
1) Smart contract risk: All small contracts can get hacked. This isn't something you can spot immediately. You should therefore look if it's audited by firms that are well-known (more about this later)
2) De-peg risks: This is very important for stablecoins (think: what if USDT/UST/DAI isn't worth $1?), but it's also important for tokens that are pegged to the native token (eg. FTM/TOMB)
3) Liquidity risk: Let's say you lend out your tokens to a DeFi platform, and then the DeFi platform lets people borrow your tokens. If you want to withdraw your tokens you can't (unless there are tokens available at the moment). Don't think this is a huge risk, but it's worth mentioning.
4) Bank-run risk: A bankrun happens when suppliers, suddenly anxious about a market’s stability, attempt to rapidly and simultaneously withdraw more funds than are available on the platform, causing further panic and distrust of the system. In extreme cases, the DeFi protocols reserves may not be sufficient to cover the withdrawals.
5) Admin key risk: Always be on the lookout for centralized admin controls that allow a developer or team to lock or move funds deposited into the DeFi app. Changes should only be allowed with approval from multiple parties or a DAO that governs upgrades and proposals.
All right, you're probably tired AF of reading theory about risks, right?
Let's have a look at how I gather information and what I look for in a new project:
The 8 steps to find out if a DeFi protocol is worth investing in:
Step 1 Social media: When I hear about a new project the first thing I do is to check their Twitter page and if they have a Discord/Telegram channel. Are the projects followed by many people on Twitter? And is their following good? I've been on Twitter for a while, so it takes me a max of 30 sec to spot if a project seems promising or not. Another metric I watch is how many of the people I follow are already following the project. If there's no one, then that's probably not a good sign.
Step 2 Whitepaper/roadmap: If the information I find through Twitter/Discord looks promising I check their website and the whitepaper. It's important that the project has a solid roadmap. If there's no roadmap/whitepaper I stop my process right there.
Step 3 Audit: Is the project audited?
Audits are the first line of defense when it comes to finding a safe staking/yield farm. But even if a project has been audited, your funds are never 100% safe (think Grim.finance).
You see, the auditing process is not equally good in all auditing companies. 4 things to think about:
1) Is the DeFi protocol really audited? There's a lot of protocols bluffing about this.
2) When a DeFi protocol wants to get an audit they can send the code that they're using, get it audited but then launch with a totally different code. The contract should therefore be on-chain, not on Github.
3) The DeFi protocol may hide some of the code (not delivering everything for an audit).
4) Quality of the auditor/audit company.
The most famous auditing companies: OpenZeppelin, Certik, PeckShield, Trail of Bits, Obelisk, Solidity Finance, Omniscia, Paladin, Hacken, and Consensys Diligence. There are a lot of auditing companies and the list could be longer. If you don't feel safe about the company, ask a friend you trust if it is legit.
Step 4: Find out more about the team. Are they doxxed with their full names? Or are the team anons? Anons are also good, but it's for sure easier to trust non-anons. At least try to find out more about what they've done earlier, what they've worked with etc. You can also send a DM to the team.
Step 5: Check DeFi Safety. It's a review of different protocols. Takes a while before new protocols are getting listed here, but for the protocols you want to put a lot of money in, they should be listed here. Also worth checking www.rugdoc.io to read more about the DeFi protocols.
Step 6: If the protocols are checking off on all the 5 steps, I feel safe about going in. I always buy a small sum first, just to check that the protocol works smoothly and that the staking/unstaking function works. On one occasion I put money in a protocol and there wasn't an option to unstake (money lost).
Step 7: Discuss with friends on Twitter about the protocol, if all your crypto-skilled friends are negative it could be a red flag.
Step 8: On several occasions, you're going to hear about DeFi protocols that don't check off on all these steps in terms of security. Personally, I'm not allocating more than a max of 5% of my total portfolio for these high-risk projects.
Let's have a look at 4 protocols I like and I'm going to rate them with a 1-10 risk.
A risk of 1 doesn't mean that it's risk-free, because you always have smart contract risk.
1.Anchor Protocol Earn Savings account:
I have already written about Anchor here: https://twitter.com/Route2FI/status/1442835869879181312?s=20 , but I'll quickly summarize it here:
Fully doxxed team with the CEO @stablekwon as the anchor of Terra behind them. The Terra ecosystem is built around Anchor Protocol which makes me trust this. Anchor Protocol is triple audited.
They have a bug bounty program that gives you several $10-$150K if you find errors in the code. A huge following on Twitter. The interest rate on Anchor has been between 19-20% since its launch.
Risk level 1.5/10 (low risk)
2.Wonderland ($TIME):
A $OHM fork made by @danielesesta (doxxed). Launched in September. High APY (80,000% which makes people think it's a scam). It's unaudited (as far as I know), but it's a fork of $OHM (which has been audited twice: PeckShield and Omniscia).
The platform itself is super-solid, the risk here is the tokenomics model (DeFi 2.0), which means it is as risky as $OHM, $HEC, $JADE++.
In order for $TIME to grow, we need more money into the system. My personal expectation is that $TIME and the other forks will perform well in bull markets, but have a hard time in consolidating markets and obviously bear markets.
Look at $TIME as an asymmetric bet that can make you money if you hold it long-term, but it's super volatile and in case we have a bank-run situation you may lose most of your holdings.
So this is a high-risk bet, which can make you a lot of money (or eventually lose it all). My personal allocation is 10% max. to DeFi 2.0 and tokens like $TIME.
Wonderland has a huge following on social media and Daniele is a rock-solid CEO who answers people's questions, no doubt he's called the people's maxi.
Risk level: 9/10 (because of the tokenomics, $TIME itself is solid)
You can read my thread about $TIME here:
https://twitter.com/Route2FI/status/1456275514889433091?s=20
3.FTM/TOMB:
I've written about the concept here: https://twitter.com/Route2FI/status/1463814714304212992?s=20
You could eg. use this strategy on Tomb Finance, Beefy Finance and/or Reaper Farm. These DeFi protocols are audited by Solidity. You get around 1,000% APY for having your $FTM and $TOMB 50/50 in a liquidity pool.
In this yield farm, you have no impermanent loss (read about impermanent loss here: https://academy.binance.com/en/articles/impermanent-loss-explained ), which is unique in terms of yield farming and that's why this strategy has become a favorite among lots of degens.
The biggest risk is if $TOMB totally de-pegs from Fantom. Then you're in a yield farm with a quality token (Fantom) and a worthless token, which makes you lose money.
The Tomb project is backed by Harry Yeh, and I feel confident that this project is solid. As a side-note grim.finance was not solid and got hacked. Impossible for me to answer if reaper.farm /beefy.finance and tomb.finance is safe, so never bet more into this than you can afford to lose.
Risk: 6/10 (because of advanced tokenomics).
4.Abracadabra $UST-$MIM Degenbox Strategy:
Abracadabra is an initiative by @danielesesta and @0xMerlin
Supersolid platform with lots of degen strategies.
You can read my step-by-step thread here: https://twitter.com/Route2FI/status/1458072000602202114?s=20
This strategy includes using $UST as collateral to borrow $MIM with leverage in order to maximize your stablecoin yield.
On Anchor Protocol you can get 20%, with Abracadabra you can get over 100%. The risk is liquidation. If $UST goes lower than your liquidation price, you will lose your collateral and it will be game over (at least for your money on Abracadabra).
Hard to give an exact number of risk levels here, because it depends on the amount of leverage you use.
Risk: 5-10 (depending on the amount of leverage).
There are a lot of DeFi protocols out there, and it's impossible to
monitor them all.
I think the best way is to focus on some ecosystems rather than to try everything.
I hope you learned something new in this newsletter. If I didn't answer all your questions, make a comment below and I'll try my best to answer it.
If you like my work, follow me on Twitter at @route2FI
Thank you for reading my newsletter!