A Beginners Guide To SLINK, Yield Farming, and Elastic Supply Currency
DeFi is all the rage in Crypto right now. Everyone is out shilling their favorite new project. Presales are happening every day. People are getting rich, other people are farming root vegetable coins, there’s all this complicated jargon, and no one has a real good explanation for any of it. This article takes a deep dive into the basics of DeFi, the mechanisms behind some of this new technology, and finally a value proposition for SLINK itself.
Yield Farming, Geysers, DeFi, oh my!
So what exactly is “DeFi”? Decentralized Finance is a relatively new disruptive technology. For generations, centralized financial institutions and markets were the only place an individual or business could go to request lending, raise capital, or transact any form of momentary value. Capital Markets, Investment Banks, Commercial Lenders all fall into this category. Many people stumble upon this small niche market we call “Crypto Currency” when they are fed up with the legacy system. Bitcoin in essence was a monetary paradigm shift, albeit a small one. For the first time in a long time people began to redefine money. Early Bitcoin evangelists broke through the glass ceiling and decided they didn’t need a government to tell them what money was. Satoshi created a permissionless, peer-to-peer, digital currency. The first step in a libertarian, “Opt-out” system. Yet Bitcoin, in and of itself, wasn’t enough. Bitcoin didn’t offer any form of revenue generation in stand alone form. DeFi looks to solve this.
Decentralized Finance takes the “Opt-out” system a step further. New projects are offering unique ways that crypto currency can generate revenue, this is what yield farming is all about. It started off in the form of staking, which essentially paid out a dividend similar to common stock in the legacy market. For years now projects have offered multi-coin dividend systems like NEO and GAS, VET and VTHO, ONT and ONG and many more. Staking has evolved into various forms of yield farming.
With Decentralized Exchanges like Uniswap doing massive amounts of volume, users can generate returns by providing liquidity on their favorite tokens. By doing so, users of these exchanges collect a % of the fees generated, this has made room for a new creation, the LP token. The way it works is relatively simple. Users provide liquidity for both a token and its corresponding pair, in this case SLINK/ETH.
Once a user has provided liquidity, their value essentially becomes locked. Since liquidity is provided equally to each side of the ratio, the total value locked into the LP token remains a constant, however the ratio of SLINK/ETH will continue to fluctuate as the underlying price changes. Now the question becomes, if value is locked, where is this Yield everyone keeps talking about? Figure 2 shows yield farming in action ~$2590 of value is currently locked into LP tokens. With the current APY (Annual Percentage Yield) the expected monthly income on that initial $2590 deposit is $410. This breaks down to a rate of return of~16% in month one. Much better then any yield investors would find in traditional capital markets.
**NOTE THESE NUMBER MAKE ASSUMPTIONS THAT ALL VARIABLES REAMIN CONSTANT THERE IS NO SUCH THING AS GUARANTEED RETURNS**
SLINK, Soft Peg, and Rebase
So what’s the deal with SLINK? Is it overvalued at $9 when LINK trades at $14? After all, the whitepaper says SLINK has a built in algorithm which will create a soft peg to the price of Chainlink at a 1 SLINK to .1 LINK ratio. To understand SLINK, users must first understand Elastic Supply Currencies and Rebases. Believe it or not, these two mechanisms aren’t knew ideas. They come from the traditional finance world and have been reimagined in the world of DeFi. Elastic supply and Rebasing are essentially the equivalent of stock splits. Look at a company like Tesla. As of market close today the stock trades at $2050 a share. Recently Tesla announced they would do a 5:1 Stock split on August 31st. Investors who hold 1 share of Tesla will receive 5 shares, this is essentially Elastic Supply. This doesn’t mean that Tesla shareholders are all of a sudden 5x richer though. That $2050 share price will be divided by 5 making each new share of Tesla equal to $410, this is essentially Rebase. The same results will happen on SLINK on a day to day basis. A user who currently holds 50 SLINK, at $9 each, has a total value of $450. When the rebase occurs an individual SLINK adjusts to that .1 LINK ratio. So at the current price of $14 per LINK, SLINK would be valued at ~$1.40. However those 50 original tokens would increase by ~6.43X. The result becomes a new balance of 321.5 tokens at $1.40 each maintaining a value of $450. The individual value of each SLINK token isn’t important, the marketcap is.This asset, like any, is still influenced by the basis economic principle of supply and demand.
“ SLINK has a built in algorithm which will create a soft peg to the price of Chainlink (1 SLINK = 0.1 LINK)”
The Bottom Line
DeFi is all the Game Theory, Behavioral Finance, and Psychology of traditional finance in a new arena. LINK has experienced Linear growth since its inception. Even during a strong bear market in Bitcoin and a majority of other Altcoins, Chainlink outperformed on a consistent basis. “The Soft Chainlink Economy” as outlined in the SLINK whitepaper, will create some what of a psychological correlation between SLINK and LINK. This would lead an analyst to assume SLINK will benefit from that Linear growth. At the same time it is not dependent on LINK for value appreciation. With APY on SLINK’s Geyser at 400%, a small distributed presale round, a current marketcap of $1,500,000, and a team quick to execute on their roadmap, the value proposition of SLINK is very clear.
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