Set Protocol

Set Protocol is one of the biggest index protocols out there, powering indexes like the DeFi Pulse Index. It allows for “tokenizing portfolios”. In Set Protocol, according to their docs, there are 3 different groups: asset managers, investors and developers.

Asset managers are those who create Sets and manage them, taking fees from investors. Investors are, well obviously, investors. Developers are people who use existing tools to build amazing stuff through code, using the Set Protocol as a base.

Set allows you to diversify your portfolio easily, such as with the DeFi Pulse Index (not run by Set but powered by it), or use structured products like Ethereum x2 leveraged tokens. It's audited and reputable, and it gives all the tools needed to developers to build cool things, for asset managers to manage assets, for investors to easily invest into another person's portfolio. It's the most feature packed protocol I know that does this stuff.

Use this if you're on Ethereum, Polygon or Optimism. If you're on Avalanche, you're out of luck and you'll have to use..

Cook Finance

Cook Finance is a smaller but still trustworthy protocol. Unlike Set Protocol, Cook Finance is specifically designed for index funds. It's been audited by CertiK and SlowMist and the project is generally pretty reputable.

There are 2 parties: Index Selectors (investors like you and me) and Index Creators. It isn't as permissionless as Set though, because you need to be approved by the DAO before you can become an Index Creator.

At the time of this post, it's the only option available on the Avalanche C-Chain. It has many different indexes to choose from, not as many as Set Protocol, but enough for most of us.

So which one do I pick?

You can pick whichever you want. In my opinion, I would choose Set as it's more polished, feature-packed and permissionless, however Cook's approval process for becoming an Index Creator filters out a lot of bad indexes and it's planning on entering Binance Smart Chain in the near future.

tags are here, because i dont wanna cram them into the post cuz it looks weird #defi #indexes #tokensets #cookfinance #diversify #investing

Inflation

Inflation is like a silent tax on your savings, where the central bank (like ECB) or an institution like the Federal Reserve prints more money quicker than the economy can grow, causing prices to rise as the value of your currency to drop over time. Generally, governments and central banks want to keep this at around 1% and 2% per year to stimulate the economy, incentivizing people to spend.

At the time of this post, the US Federal Reserve is having trouble managing inflation, with levels as high as 7% (according to CPI), and the European Central Bank is reporting levels of 5% inflation.

Savings rates are too low

We are at a point where interest rates on deposit-insured savings accounts are at a historic low, at 0.06% per year as the average in the United States, or even negative in the case of the ECB. Hell, even “high-yield” offers like checking accounts, certificates of deposit, money market funds return less than 2% per year. To really see how much of a slap in the face these current rates are, you can look at Bankrate's “best savings accounts”!

Taxes

And finally, taxes. When you earn interest, in the United States it is taxable income and the government takes a portion of it. I have nothing against taxes, I feel they're needed for a healthy society but this combination of factors on savings makes you go net negative.

So what do I do then?

There are many ways of safeguarding your money from inflation. I must admit I am biased against the current financial system, and so I will most likely favor decentralized systems over centralized banks and institutions. It really depends on your risk tolerance and I am in no way giving financial advice please don't sue me

DeFi lending platforms

And by DeFi, I mean decentralized finance, not just stashing your cash in Nexo or whatever and earning interest on it. Decentralized finance is a new sector of fintech, without human intervention needed.

DeFi lending platforms, even for stablecoins, generally have higher rates due to their efficiency and the free market nature of DeFi. Just stick with reputable, audited, battletested DeFi platforms like Aave, BankerJoe, Compound, Yearn, etc. and you'll generally be fine (Again, not financial advice! Don't sue me!)

However, DeFi comes with some risks. The biggest one is the fact that you solely are responsible for your money, and that can be a good and bad thing. There is no central authority to restore your money when you lose your seed phrase or get hacked, but there is also no central authority to stop you from doing things with your own money, and no central authority to abuse this power they have and take your money.

Another is smart contract risk, where your lending platform gets hacked or you get rug pulled (the developers take your money and run). This risk is very minimal with audited and battletested contracts.

The last major risk is that you have to trust the token you're lending. Generally, if you trust the dollar (too bad for euro gang, very little euro stables out there), you could choose a dollar-pegged stablecoin, whether it be Binance USD or USD Coin or even the shady Tether.

However, DeFi lending can give large rates compared to traditional finance, in the range of 5-30%. These rates do fluctuate time to time but are generally way higher than traditional institutions. Personally, I have a high risk tolerance but you might not. DYOR and NFA.

Treasury bonds

Treasury bonds are debt issued by the US Treasury and are effectively riskless ways of earning interest. They are only taxed on the federal level and pay semiannually. I don't know too much about these, just that the maturity of the bonds are really long, 20-30 years, but there are liquid secondary markets where you can trade them freely.

TIPS (Treasury Inflation-Protected Securities)

The value of the principal on these bonds adjusts with inflation (measured by CPI). The interest on these is low due to their ability to keep up with inflation. They can mature in either 5 years, 10 years or 30.

You can buy them from the TreasuryDirect website. or from your broker.

Investing

For new investors, it's generally recommended not to go chasing after the next moonshot and instead, just investing in an index fund. You can invest however you like, honestly. NFA.

I think you should buy either the DeFi Pulse Index or one of Cook Finance's indexes for exposure to crypto, or if you want to go the old-fashioned stock route, just get some SPY.

NFA, you may lose money. DYOR before investing.

tags are here as to not bother anyone: #defi #savings #taxes #lending #investing #tradfi #cefi #inflation

The main risk you've probably heard all around the place is the dreaded impermanent loss (😨), a mysterious part of how liquidity pairs work and can lose you tons of money! The thing is, impermanent loss is actually not that bad, and in fact can be good for you!

Liquidity Pairs (I'll shorten it just to pairs later) are composed of 2 tokens, token A and token B.

When you make an LP, you put 2 amounts of those tokens with equivalent value and you receive a share of the pool. These tokens are put into liquidity pools to help other people trade, and you get fees in exchange for doing so.

What is impermanent loss even?

Impermanent Loss (IL) is a term used to mean the difference between the value of holding 2 tokens in your wallet and holding 2 tokens in an LP.

Due to asset rebalancing (a trait of Uniswap-based LPs, keeping the market value of those two tokens equally balanced)*, you earn less than you would just by holding those 2 tokens.

Asset rebalancing can be used for DCA

Asset rebalancing is the cause of Impermanent Loss, but how does asset rebalancing work? The truth is much simpler than you might think. Let’s say you have an LP pair of BTC-BNB at a starting ratio of 50:50 at entry. The actual prices of the assets are not important when considering asset rebalancing, only their relative price to each other. So instead of 50:50, let’s simplify the ratio to 1:1. If BTC price rises 10% more relative to BNB price, then 1.1:1 becomes the new ratio before asset rebalancing. Now, the AMM needs to rebalance this into 1:1, so how does it do that? Simple: it sells BTC and buys more BNB, until the value ratio becomes 1:1. As BTC price continues to rise relative to BNB, the AMM continues selling BTC and buying BNB. When the price of BTC moves back down relative to BNB, the AMM does the opposite; it sells BNB and buys BTC. – AlpacaFinance

This is similar to a strategy for investing: dollar cost averaging! When BTC price goes up compared to BNB, the AMM is rebalanced by arbitrageurs and sells some BTC to put into BNB, and vice versa.

This is also a way of automatic portfolio rebalancing where you earn fees for doing so!

I'm going to provide liquidity now! Woohooo!

If you want to, do it! It supports your project of choice by giving them liquidity, it earns you fees (that usually outpace any IL) and if they have a farm for earning extra yield (sometimes platforms subsidize liquidity providers by giving them extra money), that's awesome.

However, you should be careful of massive yields from farms, as it is a sign of an inflationary token which is designed to go down over time. Exercise proper caution, DYOR, look for audits and use trusted platforms like Autofarm or Beefy.

Tips for beginners providing liquidity

• Pair it with a trusted stablecoin for easier tracking
• Enter pools with enough liquidity (>500K$ or so)
• Do your own research, especially look for audits
• Use yield optimizers like Beefy which compound farm yields
• Don't put in more than you can afford to lose
• Have fun!

Source

https://docs.alpacafinance.org/alpaca-academy/lesson-5-the-truth-about-impermanent-loss-and-common-misunderstandings

Footnotes

*originally said it was arbitrageurs balancing it, this is actually an intrinsic trait of uniswap LPs. arbitrageurs balance the price between 2 exchanges when there is a difference, that's arbitrage

tags here to not bother anyone: #defi #dex #uniswap #investing #liquidity #farming