Anyone showing interest in cryptocurrency and DeFi tokens has a lot of potential hurdles to overcome. A growing number of scammers are targeting this space, and things will not improve on their own. Obtaining a degree of insurance or protection will become more crucial than ever before.
The Pros and Cons of Providing Liquidity
Trading platforms will never succeed if they don’t have the necessary liquidity to accommodate sufficient trading. That liquidity has to be sourced from market makers. If there are enough assets offered on one side of the spectrum, there will eventually be more people looking to diversify their investment portfolio. It is a very straightforward system that hasn’t evolved all that much over the past few years.
As the focus now shifts to decentralized finance and decentralized trading, the concept of liquidity takes on a different form. Especially for those on the market maker side, as they expect incentives for putting their wealth at the disposal of others. More and more platforms provide such incentives, either in the form of earning interest or by offering “LP tokens” that can be used elsewhere to farm yields through DeFi solutions.
While this concept seems to work quite well, it also introduces new risks. Relying on liquidity providers introduces a certain level of trust that can be abused. More specifically, a nefarious liquidity provider can easily collapse an entire market if they pull out the funds. This is known as a “rug pull”, a type of incident that seems to occur a lot more often than people are comfortable with.
Leveraging Insurance Solutions
Traders who value their funds will acknowledge solutions need to be found to avoid these “rug pulls” altogether. That is easier said than done, especially where decentralized trading solutions are concerned. Uniswap, one of the bigger DEXes, allows anyone to create tokens and provide liquidity without any form of verification or consequences. It is evident that, while initially a good idea, this situation is no longer sustainable.
Solving this problem will pose a fair few challenges. Finding an insurance provider who has a workable solution that is both affordable and easy to integrate may take some time. The Liquidity Dividends Protocol – or LID – is one particular option to explore. Its main focus lies with providing cryptocurrency projects with an option to force the locking of liquidity, ensuring no “rug pull” can be orchestrated by nefarious actors. One recent example is the SushiSwap incident, which created a lot of dismay among investors.
Moreover, the LID concept holds a lot of other merits too. Liquidity will be locked in a trustless manner through Uniswap and a social staking system. Holders of the native LID token will receive bonus rewards for providing staking support. This helps build a supportive community. As more people learn about this solution, it is a matter of time until this type of “insurance” becomes the norm automatically.
Introducing such a new standard will help give exchanges peace of mind as well. OKEx is one of the centralized exchanges trying to capitalize on DeFi tokens that are in high demand. For companies like this one, it is equally beneficial to have more projects to explore the LID insurance option. In the eyes of many investors, tokens derive legitimacy from the exchanges they are listed on. However, it is time to turn that aspect on its head. Token projects are the ones who need to legitimize themselves prior to exploring exchange listings.
Investors Need to put Their Foot Down
Dabbling in cryptocurrency and DeFi token markets is exciting, and offers tremendous potential to make money. However, it also introduces a lot of responsibilities for investors. If something happens to one’s funds, there is often no way of getting it back again. This will only fuel the overall demand for more secure solutions. If trading platforms themselves cannot implement such features quickly enough, the attention needs to shift to the people responsible for creating a new project or token.
Due to the decentralized nature of Uniswap and similar platforms, it is evident that they will not be able to offer much help right away. Investors need to be a lot more vocal about these things, assuming they want things to change for the better. Every cryptocurrency investor will benefit from token issuers adhering to solutions such as Liquidity Dividends Protocol. It ensures the tokens being issued can be trusted, at least from a liquidity point of view. Given the growing number of scams and other issues, this is no unnecessary luxury either.
Through its native solution, LID introduces a very powerful system that brings more legitimacy to the cryptocurrency space. Maintaining the aspect of trustless investing will require being able to buy tokens from reputable decentralized platforms without worrying if all the liquidity will be removed in the future. The current system is extremely unfavorable for investors, Uniswap, and traders alike. The only ones benefiting from the “rug pull” are scammers who can make a quick buck.
Projects not adhering to an insurance-based standard will certainly face their share of struggles. It will require some funds to create a reputable project, but that initial cost will pay itself tenfold once investors are confident the token can be trusted. Credibility should never be given in the cryptocurrency world, but always earned. Those not willing to go through the necessary channels to display their legitimacy are best left ignored, regardless of the profit potential.
Now is the time for investors to not only look at profits but also usher in a new era of cryptocurrency trading. With the focus on decentralized platforms clearly increasing, it is time to look at the protection side of the spectrum. More specifically, it is crucial to ensure investors are insured at all times, especially in this volatile industry. For companies going down this route, getting a “license” from LID is crucial. Distinguishing oneself from the growing number of scams is always the better option.
Disclaimer: This is a paid post and should not be considered as news/advice.