How to DeFi with SmartBCH DEX MistSwap
SmartBCH is one of the hottest smart-contract networks right now. An EVM-compatible sidechain to Bitcoin Cash, offering the functionality of Ethereum smart contracts in a cost-efficient approach.
We expect smartBCH to increase significantly in developments, volumes, TVL, and userbase throughout 2022.
While some VCs have heavily invested in projects like Polygon, Avalance, Solana, Terra, we have witnessed some of these networks struggling with high capacity and often even going offline for hours.
For beginners in the smart contracts universe, I recommend reading a previous my article to understand the purpose of smartBCH, and learn how to be part of this revolutionary new network:
SmartBCH For Beginners: Start Here!
With this guide, we explore the next step, how to DeFi on smartBCH after having finished the first mandatory steps of creating a smartBCH wallet (with Metamask) and funding this wallet with BCH.
We begin by explaining how yield-farming works.
What is Yield Farming?
You may have heard that yield farming is passive income. We invest and we reap the rewards by harvesting.
DEXs (Decentralized Exchanges) use an AMM (Automated Market Maker) process which adjusts liquidity in trading pairs.
APR (Annual Percentage Rate) increases when more liquidity is required to match the pairs. As liquidity is added, usually APR drops. The rewards of yield farming are subtracted from the fees. Basically, with LP (Liquidity Providing), we become a market maker in an automated process and share the trading fees with the DEX.
As a process, it is an investment for the user. We provide two tokens to a DEX to cover liquidity demand and expect rewards. This is the APR (Annual Percentage Rate) the exchange gives us for providing liquidity in the various trading pairs it offers.
APR is basically the annual interest we expect to receive in one year from now. Our tokens are not locked in a contract when we provide liquidity (unless we select such an option when it is available). We can proceed with lower time-frames and just provide liquidity for one month, one week, or even an hour.
Exchanges prefer trading pairs with high volumes since this is where the most trading fees are produced. However, as liquidity providers in these pairs are increased, the yield (APR) will usually drop significantly from the heights it was in the beginning. It depends on a series of calculations by the DEX to keep providing the maximum APR to the liquidity providers and also profiting in the process.
The success of a DEX relies on trading volumes and TVL (Total Volume Locked).
DeFiLlama tracks smartBCH DEXs and provide real-time data on TVL:
Already seven DEXs are active on smartBCH and tracked by DeFiLlama.
smartDEX - Approach with caution. DYOR (example)
Farming on MistSwap in Five Steps
MistSwap is currently the second smartBCH DEX in terms of TVL. BenSwap is the top one by a thin margin, and the third one is TangoCash.
Step 1: Selecting a Farm on MistSwap
DEXs offer multiple farms with different APRs. Each farm involved different risks which investors should calculate beforehand. Cryptocurrencies are volatile, and the model of some tokens is based on fundamentals that often are not easy to locate.
In my example, I used the native token of MistSwap (MIST) and Bitcoin Cash (BCH). I expect both these assets will not lose value this year, but will probably appreciate instead.
In this example, we select MIST/BCH farm.
WBCH stands for Wrapped Bitcoin Cash, although, there is no need for any action since the DEX uses our BCH from Metamask and does the wrapping outside of our wallet. We don't need to swap BCH into WBCH to stake LP in this farm. Just BCH from our part.
There are multiple farms to choose from, and each one offers has different risks and different rewards. Selecting a farm for passive income requires an understanding of the risk of prices and APRs changing.
Step 2: Swap 1BCH into MIST
Now, we have 20414 MIST that equals roughly 1BCH.
We can’t just add MIST in liquidity, though. The meaning of providing liquidity is to provide both two pairs at the same size.
Step 3: Adding Liquidity
So, to add liquidity, we will provide 20414 MIST and 1BCH as well. The total of this investment is 2BCH. If someone wants to invest just 1BCH, then the split should be 10207 MIST and 0.5BCH.
After the transaction is confirmed we find our added liquidity in the trading pair BCH/MIST.
We received LPs tokens that we can use for yield farming which was the main reason to proceed with the above steps.
Step 4: Start Farming (Stake the LP tokens)
When we perform any DEX action for the first time (swap, stake, etc) we interact with a smart contract and approve its protocol. This extra action is only performed once and requires a transaction that includes fees.
Fees in SmartBCH are insignificant and depending on the contract requirements it can vary between $0.03 - $0.10 or a little higher.
Unlike Ethereum where fees for a simple Uniswap interaction often cost more than $100, users of smartBCH don't calculate the fees since this is only a few cents at all times.
Our transaction gets processed in seconds and our farm is now operational and rewarding us with MIST tokens:
And that's all. We are now yield farming in DeFi smartBCH.
*Notice that after we begin farming with our LPs, in the tab pools, our liquidity won't be visible anymore. It will be visible again when we unstake the LP tokens from the farm. It is how the process works in all DEXs since we now use our liquidity for farming MIST tokens.
We did our part to set our MIST/BCH farm and we now have some more options available.
i) Unstake: It is the reverse of the process described above. Any time we decide, we proceed with unstaking our LPs, harvesting our MIST, and proceed with removing liquidity from the pool.
ii) Harvest: We can harvest our MIST anytime we want, sell them for BCH, flexUSD, or another token, or we can stake our MIST and get an extra yield from this.
Step 5: Stake MIST or Sell The Harvested tokens for BCH/flexUSD
MistSwap also gives us the option to stake the native token and receive an extra interest as a bonus.
The staking rewards for MIST are currently at 1.75%, and this is also a value that is not stable but may rise or drop in the future.
It is reasonable to assume the current low APR of staking MIST derives from investors' expectation that MIST price will appreciate with time. Investors are staking MIST hoping smartBCH DeFi will attract more funds in the future.
MistSwap analytics gives the yearly average staking reward at 3.74%.
What We Should Expect
i) Impermanent Loss
This is the loss we suffer in our main position when providing liquidity. It is the cost of opportunity. Meaning what would have been if we just held the two tokens without adding them to a DEX liquidity.
As prices are changing either to the upside or the downside, our position will rebalance.
We expect the APR of the farming pair and any kind of bonus after staking to provide profit in total.
As the price drops the loss when just holding the tokens would be far more, but when we add the rewards from farming, it gets less.
When prices are rising, impermanent loss means we make less than just by holding the two tokens in our wallets. There are many calculators online that explain the concept of impermanent loss, I suggest using this one after first watching this video that covers the basics.
ii) The 79.30% APR in this example is not a fixed rate
This is not a stable APR, but it is fluctuating and may rise or drop. As explained above, the DEXs become successful when attracting high liquidity. When liquidity drops, the APR rebalances at higher rates to attract more liquidity. However, these mechanisms also include trading volumes, where the profit for the DEX and the LPs come from.
iii) Native token price appreciates (or depreciates) depending on volumes.
Perhaps, though, we only look at the short term and do not realize the vast potential native DEX tokens have.
Native tokens supply is inflating, and new are minted daily to cover for APR rewards.
However, the current TVL and volumes on smartBCH are still relatively low when compared to other networks. Odds suggest smartBCH will become trending in investors' circles and funds will begin entering on a massive scale.
I don't think MIST's price will drop dramatically in the future, and looking at the charts of MIST gives more confidence to this asset.
Uniswap token for example, increased by more than 1000% as volumes on the DEX increased. Same that happened in almost every DEX native token in 2021.
In Conclusion
I expect MistSwap volumes to keep increasing throughout 2022 and have the same thoughts for most of the rest of smartBCH DEXs. BenSwap and TangoSwap are doing an amazing job as well.
The example in this article was meant to explain how to farm yield in smartBCH and should not be considered investing advice.
As prices change when we withdraw the LPs, we may have less BCH and more MIST than those staked (or the opposite, less MIST and more BCH), but we also expect the rewards we receive from the APR to profit us more than by just holding the tokens.
The above was only an example and not my whole DeFi position or strategy. However, concerning the MIST/BCH pair, I selected a pair that I find offering reasonable APR, and I will keep this investment open for as long as it keeps delivering.
This is how we DeFi in smartBCH. Some with a long horizon expecting a passive income, while other investors hunt high APRs and new DEXs that may come with a higher risk.
Almost identical is the DeFi approach on the rest of smartBCH DEXs. MistSwap is also developing lending capabilities on its DEX that will further enhance our DeFi options available and probably boost investing in smartBCH.
Cover Photo by, StockSnap on Pixabay
Image 2: KnowYourMeme
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