DeFi: what is it and how you can make money on it (Part 3)
The entire DeFi ecosystem operates with smart contracts on assets represented as ERC20 tokens. However, some assets are initially tokens of this standard and some assets are not, or are not tokens at all. In this case for an asset to be used in the DeFi ecosystem it must be represented as an ERC20 token. In this case each token should be backed by the original asset at a ratio of 1:1.
The process of generating of such tokens secured by the original asset is called wrapping of the asset, the reverse process is called unwrapping. The token itself is called a wrapped asset.
Vivid examples of wrapped assets are WETH (Wrapped Ether) and WBTC (Wrapped Bitcoin).
How to make profit: a protocol that provides wrapping/unwrapping earns on commissions for these operations…
All tokens involved in smart contracts are potentially vulnerable and attract hackers who want to make a profit. Although the code of most projects has been audited,we never know if their smart contracts are safe. There is always a possibility of hacking, which can lead to losses. These risks make it necessary to buy insurance especially if you operate with large amounts of money.
How to make profit: on difference between insurance charges and payouts for insurance events.
Arbitration is a series of logically linked transactions aimed at making profit from the difference in prices between identical or linked assets at the same time in different markets (spatial arbitration), or in the same market at different points in time (time arbitration).
How to make profit: as in the case of classical arbitration earnings are usually based on the price difference of the same asset on different exchanges. This may include combined arbitrage between centralized and decentralized exchanges.
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