Stop Worrying About the Dip and Make Easy Money in the Binance Smart Chain by Providing Liquidity

Since you are in /r/binance, you’re probably already using it as your exchange, if so why not take the next step and dive into the BSC ecosystem. This post is intended for Binancians new to DeFI with the aim of showcasing simple but profitable liquidity farming techniques in BSC.

A Layman Introduction to Decentralized Finance (DeFI)

When people talk about DeFI, usually it means they’re playing around with a chrome browser extension called MetaMask. MetaMask is a cryptocurrency wallet for EVM compatible blockchain like Ethereum, Binance smart chain, polygon and etc.

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https://preview.redd.it/fsjpb4i89v981.png?200&format=png&auto=webp&s=bf50017c6cb847bdde609cb474faf9cb6fa8917f

https://metamask.io/

There’s also a dedicated binance chain wallet,

https://docs.binance.org/smart-chain/wallet/binance.html

With easier integration to your binance account though it doesn’t yet have a mobile app version, so if you plan to interact mostly from your phone, stick to Metamask. Both wallets let’s you interact with smart contracts in the blockchain via frontend websites called Dapps/WEB3.0. You can do a lot of things in those Dapps like making bets, trading, saving/lending , staking and providing liquidity.

Providing Liquidity in DeFI

In a DeFI Decentralized Exchange (DEX) like Ethereum’s Uniswap or their BSC counterpart, Pancakeswap, there are no order books instead every trade you make happens against a liquidity pool provided by liquidity providers (LP). The mechanism is called Automated Market Makers (AMM), in which liquidity providers stake an equal value of paired tokens, ETH-USDT for example, and in return for facilitating trade receives a LP/Flip token and ~ 0.17-0.25% of the trade volume that occurs in that pool.

https://finematics.com/liquidity-pools-explained/

Introducing Binance Smart Chain (BSC), the 2nd most popular destination for LPs

As Ethereum gas fees (the cost to make a transaction in the blockchain) has risen to hundreds of dollars per Tx, it has driven a lot of retail investors to BSC. BSC currently holds the top position in number of transactions per day and wins in ease of use due to the smooth integration of it’s bsc wallet with binance.com. Being a much younger ecosystem compared to ETH there are still plenty of opportunities in BSC to get high passive income returns measured in annualized percentage yield (APY) however the low barrier to entry has also made it into a “rug pull central” of sorts for scam coins and projects.

How to tell if a BSC DeFI project is a scam/Ponzi

Ok this is important to know before you go diving into BSC and it’s not only about all the dog and moon coins out there but plenty of other projects that looks very formal and solid but is actually a Ponzi/scam. Technically speaking, A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors. In my view, in general, a coin or a Dapp needs to provide some other functions besides playing tricks with liquidity to not be considered as a Ponzi. For example, Pancakeswap facilitates coin trading in BSC, Venus provides crypto savings/lending and Chromia is a SaaS for games. You can tell those are not Ponzi as they provide actual utility while the Ponzi ones usually starts with a variation of the following statement

“Why is bitcoin considered to not be a Ponzi …. “

Then will go on to explain why similar to bitcoin, their coin/project is also not a Ponzi due to the belief from a large group of people and some convoluted explanation on how their advanced algorithm maintains liquidity. Of course it usually has some crazy high APYs like 1,000,000% for staking and do a lot of rebasing. Rebasing is the practice of reducing and or increasing the supply of a token, including the ones already in your wallet to achieve a certain price target. So for the token creators to let’s say increase the price by 1,000%, rather then buying the tokens in the liquidity pools he could just reduce the supply by 90%. Obviously in this process no real value is created as it’s just a liquidity shell game which would have to collapse at some point.

Nonetheless there are plenty of genuine gems in BSC

Like Pancakeswap (PCS) for example, they are the leading DEX in BSC and have surpassed Uniswap in both transaction count and volume since a few months ago. PCS provides farming rewards for liquidity providers which means in addition to receiving LP fees from the trading pool, Liquidity Providers can also stake the LP tokens in PCS farms to receive rewards in CAKE token. This reward is often more lucrative then the trading fees it self as it can reach hundreds of percent APY depending on the amount of liquidity in the pool. A popular LP pair for investors in PCS is the CAKE-BNB pair which earns great rewards while not being too volatile.

Calculating Liquidity Providing Profit in Pancakeswap

You can use a google sheet I created to model Pool value and profit vs changes in the underlying token prices. ,

https://docs.google.com/spreadsheets/d/1h0uzbnpO7SP1mPw3tj2w-CJ2wKsx7P4DCHgKflgJWoY/edit?usp=sharing

So for example, to model the BNB-BUSD liquidity pair, from PCS analytics info we know that the LP fees ,the estimated transaction fees APR this pool will receive, is about 15% and the farming rewards is 20%. From Binance website we see that if you stake BNB you’ll earn about ~9-10% a year and for BUSD it’s about 3%.

Based on the above info, assuming we provide liquidity for a year, we Input the following parameters to the sheet

https://preview.redd.it/hg0uxwec9v981.jpg?1008&format=pjpg&auto=webp&s=9351cc4486661c42a0273fbf11428954c087b620

And it will generate the following charts

https://preview.redd.it/l484idzd9v981.png?873&format=png&auto=webp&s=10db2bd76b70ebc6cc3c3313ed04f08f1672ee26

The horizontal x axis is the % change of token A (BNB) while the y axis is the profit % of LP or Staking single coins.

The above profit profile present the benefits of holding a LP pair vs staking single tokens, as it provides massive downside protection while still giving you good upside performance since Pancakeswap farming rewards mitigates the impermanent loss affect.

Use LP autocompounding smart contracts.

To further maximize your profit and minimize risk, best to put your LP into an autocompounding smart contract. Those vault contracts automatically retrieve your farming rewards in CAKE, convert them to LPs and redeposit it back into PCS farming pool, effectively compounding your principal and boosting your APYs. For autocompounding vaults, I’d like to recommend happyhippo.farm, made by yours truly, the place where hippos are happy and everything is awesome, like the lego movie theme song. To help new traders settle in, hippo has a convenience Zap function that allows you convert directly from BNB/BUSD/BTCB/ETH/DAI to your desired LP pairs.

Summarizing,

To make easy money in BSC DeFI, follow these steps

1. Pick a Pancakeswap LP pair you like which has tokens that hopefully won’t go to 0 in less then a year. Use the google sheet to model P&L if needed.

2. Deposit those LPs into an autocompounding vault.

3. Don’t give your private key/seed phrase to strangers

4. Profit !