Teaching Crypto to 7-year-olds again... pHBD/USDC Liquidity Pool Farming

What is a Liquidity Pool?

It took me a while to understand what "liquidity" is because every time I asked, my brother would just say "liquidity is liquid virtual cash". While that's actually what it is, I don't expect my 7-year-old to understand that.

WTH is liquid???

The easiest way I can explain this is "your money at hand". Liquidity can easily be likened to the money you currently have in your purse, wallet or even your bank account that you can spend right this moment.

It's called "liquid" because it can easily dissolve and well, not exist. It can easily be used in exchange for a product or service. That's the best explanation I believe I can give.

Examples of liquid are Hive and HBD.

The direct opposite of liquid is staked, that's Hive Power and to an extent, HBD in savings. These forms of money can not be spent immediately and they yield some interest after certain periods of holding.

I'll probably create another post to go into that in detail.

Now, a liquidity pool.

You probably already know what a pool is and you probably know a swimming pool is filled with water which is well, liquid. So, how does that have anything to do with money, you might ask.

Well, a liquidity pool is simply a lot of people putting their spendable money in one place so it can be available for people who need it.

This might sound like a charity situation but no, it's not. In a liquidity pool, two tokens are paired, for instance, Hive and USDT. When there's an exchange between those two tokens the liquidity providers receive a fraction of the transaction fee that is taken on that exchange.

In my head, that sounds a little complex. I think the only thing I didn't break down there is the fact that whenever you exchange Hive for any other token, there's usually a transaction fee that's taken from you. I believe that breaks it down some more, right?

pHBD/USDC... What is it, exactly?

pHBD is the "wrapped" version of HBD on the Polygon Network. That's the dictionary definition of it but basically, it's just the same HBD we have on Hive, they just added a "p" in front of it to indicate that it's on the Polygon Network.

I'll do some more research and try to properly explain how and why it works the way it does but for now, you'd have to manage that simple explanation.

USDC is a stable coin, just like HBD. Kindly refer back here for info on what a stable coin is.

pHBD/USDC simply signifies a possible exchange from HBD to USDC on the Polygon network. The pHBD/USDC liquidity pool farm contains HBD which is held in liquid form and is available for anyone who decides exchange USDC for HBD.

If this is confusing, please ask further questions and I'll break it down a little more. But for now, I think that's the best I can do.

How is this a solution to your problem?

If you read my previous post on HBD, then you know about the problem of scarcity that HBD faces. While the increase of the APR to 20% makes the demand for it high, there's not enough liquid available for people to hold and send to their savings.

In this post by @leofinance, they mentioned a bunch of words like slippage, entrance and exit liquidity, buying positions and selling positions and at first glance, I didn't understand but I did understand what the message was about in the end so I can explain it to you.

HBD is being sought out for and that's a good thing. However, there isn't a lot of it. So, when a person wants to buy it, they may end up buying it at a price higher than they initially budgeted for because it's in demand and there's not a lot of it available on exchanges so you might as well grab what you see.

That's already labelled as some loss on your overall APR you'll be expecting, and then when you decide to sell, you'd end up selling a little lower than you planned because you'd want to get out of the market as quickly as possible especially if there's a spike in price.

That's what low buying and selling position basically means. It places you at a loss. So while you'd be looking at a 20% interest, you'll end up losing up to 10% of that interest just from getting a good position just because there's barely enough liquidity.

Now, pHBD/USDC comes to the rescue because it's meant to always have liquid HBD. But the question is, what's the benefit? You gain 20% interest just by holding your HBD in savings, however, by providing HBD in the liquidity pool, you'll be getting about 57.98% interest.

That's a simple maths, if you ask me. Why get 20 when you can get up to 57!

Not only is this a sweet offer, you also get to help the entire HIVE ecosystem because by being a part of these people who provide liquid, you encourage some Defi whales to get in to the system to make some quick cash for themselves.

The lower their losses through buying and selling positions, the happier they'll be.

There are many advantages of picking this option over the saving option but I guess I'll have to handle that in my next post where I'll be sharing the pros and cons and giving a little tutorial on how to get you HBD into that liquidity pool.

Did you enjoy my tutorial? Do you have questions? Let me know and I'll be happy to explain further. I realised I learn better when I teach so please give me the opportunity to get smarter while I help you get smarter.

Posted Using LeoFinance ^Beta