Why/When You Want to Go Into a Den vs. Farm

krnel (80)in LeoFinance • 3 years ago (edited)

Markets anywhere are largely unpredictable. At any moment, without notice, the tables can turn. What was once going up, goes down. What was going down, can turn up. Sometimes there's a flattening period near a floor value or ceiling value, but it's all fickle.

The Herd

We observe and react much like a herd. If we see a lot of movement in one direction, we tend to think there will be more movement in that direction. When we join in that movement of the herd one way or another, we're helping to create a self-fulfilling prophecy. The more people who are influenced to join a particular direction of movement, the more that movement grows.

This plays out in the markets as trades that buy and sell. Whales -- those who have a large enough stake to make big changes or shifts in the upward or downward direction will send a loud signal to everyone else. Instead of being a small fish or one animal in the herd, the whale makes big waves that the smaller fish have a tendency to follow.

This is how the herd is moved, by large actions from whales or masses. People jump in to ride the wave. But at some point a reversal happens. They can be brief, but they happen because some see an opportunity to collect profit. If it's a wave going up, when want to sell at the top, or near the top, to collect profit from when you got your stake at a lower price.

Cycling for Profits

There are unit-biases at play as well in the psychology of when to make a move. This are certain numbers that mark a milestone, like multiple of 10. Look at BTC this year. When 40k hit, there was a sell off. Again at 50k. And multiple times now at 60k.

If you time it right, you take profit at what you think is a high, the current ceiling, before the unit-bias sell off kicks in. Then on the opposite side there are unit-bias floors that come into play. At the perceived floor, you buy back in, and ride the next cycle up again.

This can repeat, until it doesn't. So you could lose your assets. That's why if you play this gambling game, you don't go all in at either point. It's the smarter play. If you buy in at a perceived low, but it goes lower, well you could still buy in again lower if you want before things go back up again, potentially.

The alternative is you have to wait for things to go back up, or they may never go back up, and you are left holding the bag, as they say. At the top it's the same thing. If you sell it all at a perceived top/ceiling, but it keep going up, then you have nothing left and you miss out on larger profits later.

If you look at the past month, BTC has been bouncing around the 50-60k range over and over. People are trying to play this game of sell at the ceiling and buying at the floor, rinse repeat. It can work, until it doesn't. That's the risk in gambling in the markets.

DeFi Dens and Farms

The choices we make on where to put our stake is significantly based on what is happening in the market and where we think things will go. You can look at CubDeFi in a similar way when it comes to where to stake. A den, or a farm?

Dens

The den is the safest place to put anything. You don't lose anything to impermanent loss (IL) that farms have (having one token in a pair rise in price and get sold off to match the USD value of the other pair you hold in the LP).

The basic modality for the den is that it's best when the price goes up. As it goes up, the APR increases and you gain more earnings. If the price falls, you gain less since the APR falls. But none of the staked tokens are being sold off or bought at any point. It's just the safest bet.

Farms

If you want to maximize earnings, then the den is for when the price of CUB is going to rise. If the market goes up, the farm is not the ideal place to be due to the aforementioned IL.

For example in a CUB-BNB farm, as the price of CUB goes up and BNB doesn't move, the CUB you have in that farm will be sold off to buy BNB. If BNB goes up and CUB doesn't move, then your BNB is being sold off to buy more CUB. The inverse is true as well. If CUB goes down and BNB doesn't move, then your BNB gets sold off to buy more CUB. If BNB goes down and CUB doesn't move, the CUB gets sold off to buy more BNB.

With the BUSD farm you don't have to worry about BUSD going up or down. Since it's s table coin. But the direction of CUB will get you more CUB or less CUB. When you're in a farm that has tokens that fluctuate in price, then you are at risk of IL both ways.

Whatever token you want to have more of in a farm, you want the price of that token to stay sideways or go down. And you want the other token to go up or go sideways. For the example of a CUB farm, if you want more CUB, then you want CUB to go sideways in the charts, or downward. If the other token goes up, like BNB, then you're also getting more CUB faster.

If both go up at the same rate, they cancel each other out and you have no IL. It's virtually impossible but you can get close enough to have very little IL. If both go down at the same rate, it's the same thing.

The ideal for a farm is for both tokens to go up at the same rate, then you gain value in your stake, and earn with any IL.

TLDR

If you think the price action for a token will go up, then a den is the best way to accumulate more of that token. If you think the token you want more of will go down in value, then the farm is the best way to get more of that token, but it comes with the risk of IL. You can play the opposite token in a farm in the upward direction to gain more of the token you want as well.

I know many already know how this works. But many don't as well. I hope this was informative for some. Peace.