Defi Manual: Part 3 - Financial Weapons

Defi Manual: Part 3 - Financial Weapons

By xuanling11 | Crypto Learning | 15 Sep 2021


Here is part 3 of the Defi Manual. You can reference part 1 here and part 2 here.

Both Cefi and Defi system has their own niche to beat the market. You think the market is unbeatable after all. There is a weapon to beat the market hard enough to make profits. However, they are risky and may require sophisticated knowledge to operate and facilitate such trades. Some may even be illegal.

 

Cefi’s weapon: HFT

HFT is short for High-Frequency Trading. It utilized computer trading speed as leverage to transact a large number of orders in fractions of a second to get in and out of the market quickly. The faster the speed, the higher profits you can gain.

 

HFT is only for the rich

They are highly regulated and the only handful of players that successful in the field. However, they made up 56% of equity trade in 2010.

 

You can win big in a volatile market 

On May 6th, 2010, one mutual fund company makes a single trade of $4.1 billion on that day.

 

You can also lose big in the market

HFT is no room for mistakes. Knight Capital was lost $440 million in just 45 minutes due to algorithm errors in 2012.

 

Defi’s weapon: Flash Loans

A flash loan is a loan initiated and repaid within a single, atomic blockchain transition that the borrower performs: 1) requests loans from the lending pool, 2) free to use borrow loans, and 3) repay loans plus interests to the lending pool.

 

Benefits of Flash Loans

It helps the liquidity pool to eliminate the monetary risks of holding upfront assets by providing arbitrages and liquidations so that the liquidity pool is active. Similar to HFT, it fuels the market with liquidity in case of a market crash that is short of money.

 

Flash Loans Attack

Flash loans can also be used to attack liquidity pools. Such attack costs a $100M loss of Defi in 2020. Someone can enter a liquidity pool with large upfront capital and lower the barriers of entry to let others enter then suddenly withdraw without any warning.

 

Mark Cuban incidence

Mark Cuban is a Billionaire who advocated Defi so hard that he invested much in Defi’s project Iron Titanium. The project got flash loans to attack with instant withdraw of large funds from liquidity pool to tank the token to near zero value. It turns Mark Cuban from pro-Defi to pro-regulated Defi.

 

In conclusion

Cefi or Defi, there are pros and cons. They both got their secret weapons but both weapons have double edges that may harm players. 


Photo by Intricate Explorer on Unsplash

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Disclosure: The article was written by a delusional author who is possibly a nut job without any questions whatsoever about expertise in the subject matters. You should not believe any words this author wrote or you may experience similar symptoms or even possibly become a nut job.

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