Decentralised finance has experienced a huge boom in recent years. A new player in the market is Binance Smart Chain, which allows you to use smart contracts at much lower fees compared to the Ethereum network.
However, DeFi tokens have many weaknesses, drawbacks and are often structured to rip off investors. Robert, Co-Founder of the new GRANT token project, explains the five basic problems that most tokens have.
- Maximizing the Liquidity Pool
To an inexperienced DeFi user, it may seem that the higher the Liquidity Pool, the better it is for the ecosystem. However, the opposite is true. The larger the amount of a particular token in the Liquidity Pool, the smaller the amount of liquid tokens in circulation. This may lead to a situation when it is not possible to exchange in the Liquidity Pool because there are not enough tokens in circulation. For example, the SafeMoon token has this problem.
- Concentration of large amounts of tokens with Whales
The more fragmented the token distribution, the better for the market. The problem with a large number of tokens is that a large volume of tokens is sold off in the Pre-sale, creating a number of Whales (addresses holding a large volume of the total supply, above 2%). These addresses represent a ticking bomb, as these unknown entities can realize their profits at any time, selling tokens and sending the price down by tens of percent
Most token developers/founders are in the black or gray area of law. Many of them operate completely unregulated. They don’t keep accounts, they don’t pay taxes. Their operation is non-transparent. Another group are projects that operate in a semi-legal zone. They may have an existing legal entity, but it is incorporated in a tax haven. Less regulation then leads to more risks, as the founders may disappear at any time.
- Financial analysis
The financial model of most tokens is similar. It is a simple scheme, but one that simply does not work in terms of the monetary mathematics of the token. The founders rarely put in enough work and they rarely have enough experience to develop a smart contract and issue a token with rules that make economic sense. For example, the frequent 6% liquidity fee triggered right from the start of a project doesn’t make sense. Tokens artificially returned to the Liquidity Pool slow down the token price growth, which does not make sense especially in the early stages of a project.
- Transparent accounting
Most projects do not have a marketing budget. That is a big mistake. In our experience from past projects, $1 invested in marketing increases the market capitalization of a token by $5-400 depending on the stage of the project. Those projects that do have a marketing budget (token pool) do not keep any accounting or report to the community what the funds were spent on. Thus, token holders have no control over the spending of the marketing budget.
“Overall, DeFi is the wild west. So always research carefully when choosing a token. There is a high risk associated especially with meme tokens. However, it is still true that it is possible to multiply investments with DeFi. For example, investors investing now in our GRANT project will get an appreciation of 16.384 X when GRANT reaches market capitalization of 5M USD. And we are aiming towards a capitalization of USD 1.5 billion with GRANT.” says GRANT project founder, Robert.