DeFi Explained: Web3 Financial Tools on Trader Joe

Hey there! Welcome back to the IGIN newsletter. Thanks to the 16 new IGIN readers that have joined us this past week. That puts us at 151 people who can now impress their friends at a dinner party with their knowledge of web3, the creator economy, and the internet. Congrats. You get it now. 

Nothing is worse than going grocery shopping when you can't find all of your ingredients at the same store. We all want a one-stop-shop. 

With that principle in mind, some web3 developers set out to create a one-stop-shop for DeFi... and they called it Trader Joe.

Before we dive into it, first let me give you some background: Whenever we talk about web3, blockchains, and cryptocurrency, its important to know that each project is built on a network. The largest currently is the Ethereum network. However, other chains have also grown in popularity recently, including the chain that Trader Joe is built on — Avalanche Network.

There is a lot of benefits to building applications on Avalanche for both developers and users, but what's most important for today is that I feel like it's a great place for new web3 users to get acclimated to the crypto world. (also important to note, the main cryptocurrency of this network is called $AVAX. You will see this a lot in today's post)

So in summary, Trader Joe is a decentralized finance project that is built on Avalanche. Now I'm sure you're wondering what can you do with it...

Let's talk about it:

• Trade.  Swapping one token for another.

• Stake. Locking up your tokens for rewards.

• Lend. Becoming the bank and earning interest.

• Pool. Provide liquidity for trades to earn rewards.

• Farm. Earning extra rewards on your pools.

Before we get started, I just need to clarify a few terms, so that you can follow along more easily.

• If I say token or coin, that simply means a cryptocurrency. All three words are pretty much interchangeable.

• Another important term is your cryptocurrency wallet. Similar to how a real-life wallet is where you hold cash, a wallet is simply where you hold your cryptocurrency.

• Whenever you do a transaction with cryptocurrencies, that information is written onto the blockchain (which is a really high-tech inventory tracker). In order for the blockchain to confirm your transaction, you will have to pay a gas fee. These fees are paid to the network of computers that run the blockchain. Importantly, Avalanche network has very inexpensive gas fees compared to Ethereum network.

• Whenever we talk about web3 projects, they each run on a set of code. This code that governs an application is called the protocol. For example, Trader Joe is a protocol.

That should be enough, so let's get started.

Trade.

Everything in DeFi can be traced back to this very simple operation — swapping one cryptocurrency for another. Whether you hear the terms trading, swapping, or exchanging, it all means the same thing.

The goal of the game — get whatever cryptocurrency you want into your wallet.

The way it works is simple. 

Let's imagine you wanted to buy the $USDC token (this is a stable-coin that's value stays at about $1). Simply go to the trade page and choose the two tokens you wish to swap between. As you can see above, at the time of writing this, I could exchange 1 $AVAX token for about 112 USDC tokens.

I simply click the swap button and pay the gas fee along with a small fee (0.30%) to Trader Joe. 

After waiting a few seconds for the transaction to process, your wallet will suddenly have swapped your 1 $AVAX for 112 $USDC. That's it. That's all there is to trading.

Stake.

If you've been keeping up with this newsletter every week, you might remember the concept of staking from some of our past issues (Wonderland Staking or Sushi Staking). 

Staking functions a little bit differently in different protocols, but the idea is always the same for users. If you stake a token, you lock it up inside of a protocol in exchange for earning rewards on that staked token.

The Trader Joe protocol has its very own token fittingly named $JOE. Owning this token gives you partial ownership of the protocol. 

So, how does the protocol reward you for having ownership? Staking.

When you stake you Joe tokens in the Trader Joe protocol, you are locking them up. In exchange you receive the protocols interest-bearing token, $xJOE. 

As you can see above, $xJOE is currently earning about 34.2% APR. That means if you staked 100 $JOE for an entire year, you would earn an additional 34.2 tokens over that time period. How can the protocol afford this?

Well, do you recall that 0.30% fee that everybody pays when they trade cryptocurrencies on Trader Joe? Well 0.05% of that total is paid out to $xJOE holders. That's it. Super simple. No matter what, you always end up with more $JOE than you started with after staking. 

Two things to keep in mind. First, that APR percentage changes daily. It is completely dependent on the amount of trading fees paid out each day. Secondly, on Trader Joe protocol, there is no lockup period, deposit fee, or withdrawal fee (this isn't the case for all protocols). You only pay gas fees when staking and unstaking, and you can choose to unstake at any time. 

Lend.

If you're familiar with how banks works, you will understand the concepts of lending and borrowing.

You are lending money to a bank when you add money into your savings account. In return, they pay you a measly interest percentage. 

You can also borrow money from a bank. You pay an interest rate to borrow this money. However, you usually have to jump through hoops to secure that bank loan.

In DeFi, you can also lend and borrow (but with no hoops to jump through). On this protocol, the system is called Banker Joe.

Here's a look at the Banker Joe interface. As you can see, the protocol is holding just over a billion dollars worth of crypto assets and lending out about $560 million worth.

So how does this work? Simply deposit your chosen tokens through a click of a button (and a small gas fee). Then BOOOM... you are now earning interest. As you can see, there are two percentages applied to each token. The Deposit APY is the interest paid out in the token you deposited. If you deposit AVAX tokens, you receive AVAX tokens as interest.

The Rewards APR is a nice added bonus that Banker Joe offers to incentivize you to use their protocol. This is paid out in $JOE tokens. So guess what you can do with that reward to earn even more? If you guessed staking those tokens... I'm proud of you. You get it now!

So what next? Well, you can then use your deposited cryptocurrency as collateral to take out a loan. No paperwork. No appointments at a bank. Just a click of the button. 

The borrowing APY is the percentage interest you pay to have that loan (it is negative to signify you are paying it). Believe it or not, when you take out a loan, you also get a rewards APR, paid to you in $JOE tokens. Once again, that's Banker Joe's way of saying thanks for your business!

Pool.

I hope you know how to swim because pools are when this gets a bit tougher to follow.

Pools is short for liquidity pools, or LPs. So pools are a place for you to provide liquidity.

Think back to trading. Trading allows you to swap between two different cryptocurrencies. But how did that work? Someone needed to be willing to take one of your tokens in exchange for the other. Pools let you be that facilitator. 

To take on that role of facilitator, first you decide on a pool to join. Let's stick to the $USDC and $AVAX pair from our trading section. To join a pool, you need to own an equal value of each token. So if we use our numbers from earlier, for each $AVAX token, you need 99 $USDC tokens.

Once we trade some of our assets for an equal value of the chosen tokens, then we simply add them to the liquidity pool with the click of a button (and a gas fee...there's always a gas fee). In return, the protocol will give you LP tokens that you can store in your wallet. These token represents your share of the Liquidity Pool. Now how do we make money from this?

Well, remember how that 0.05% trading fee is used to pay out $JOE stakers? That other 0.25% trading fee is used to pay out the liquidity providers. So once again, another way to make your crypto earn more crypto. You can see the APR's for each pool listed and the amount of fee's the protocol generated over the past day in the image above.

Zap — Making it easier to get in the pool

Trader Joe recently added another tool to their DeFi toolkit. It's called zapping.

Basically instead of going through the entire process I just described for entering into a pool, zapping does this all in one step. It's the easiest way to get in to a liquidity pool.

For example, if I wanted to provide liquidity to that $AVAX/$USDC pool, I simply go to the zap section of Trader Joe. Select that LP token, and zap one of my cryptocurrencies into the LP token. In that one click of a button, I saved myself 3-4 steps, and now I'm earning rewards.

RISK ALERT:  There is one very important concept to be aware of in pools — impermanent loss. I could write a whole article trying to explain this concept, but here's the big takeaway. If the prices of the tokens you are providing to a liquidity pool change (which is very likely), when you redeem your LP tokens, you will receive a different quantity of each compared to when you started. 

Impermanent loss doesn't necessarily imply that you lost money. It just means that you might end up leaving the pool with less value than if you had simply held on to the two tokens in your wallet without providing liquidity. This is completely separate from the rewards you are earning. Those rewards will still be earned regardless.

It's complicated. I know. If you want more info, read this article.

Farm.

We've made it to the end of our shopping trip at Trader Joe. This is the last DeFi tool that Trader Joe currently offers. It's called yield farming. 

In simple terms, you farm by staking your LP tokens. So, it's really just a combination of some of the other tools we have used so far. 

Let's take a look at some familiar tokens — $xJOE and the $AVAX/$USDC LP token.

Imagine that we've already staked our $JOE. We now hold some $xJOE in our wallet.

We also already added some liquidity to the $AVAX/$USDC pool. We've got some LP tokens.

We could then stake (lock up) both of these tokens in their respective yield farms. On top of the earnings these tokens were making before, we now will earn an additional 21% APR on our $xJOE and 20.6% APR on our LP tokens. This percentage will be paid out in $JOE tokens (which we could then stake again and use to farm even more... or sell to get involved with other tokens — the possibilities are endless). 

Very importantly, when you put your assets into a yield farm, you no longer see your rewards accruing on the other pages. If you farm your $xJOE, you can only see those rewards. You won't see your staking rewards until you take it out of the farm. However, you are still earning those staking rewards. Don't worry, the blockchain tracks it all.😏 

DeFi tools allow you to take just about any asset and turn it productive, and many of these tools even let you take your productive assets and make them double productive.

Double Productive Assets. Pretty cool stuff. 

The DeFi ecosystem is still very new, and it's evolving very quickly. Trader Joe does not have every tool available, but it is a great place to get acclimated to all of the different options. I recommend taking a look around on their website regardless of if you actually want to get involved. I've interacted with a lot of DeFi projects, but the simplicity of this protocol's interface makes it stand out as a great place to learn the ropes.

I hope all of these web3 pieces are starting to fit together in your head. Maybe today is that day you can say the phrase we've all been waiting for — I get it now. 

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Thanks for reading! Always feel free to hit reply if you want to give me feedback or just have a conversation about any of these topics. If you liked what you saw, go ahead and give this a share. I'm willing to bet that you know at least one person who'd find this interesting. And if you reallllly liked it, go ahead and click that button below. I'll see you there😉

-Levi

I do my best to explain how it all works in these letters, but I won't be able to outline all of the risks. So if you read this and want to get involved, make sure you do your due diligence. For full transparency, I am involved in some of the tokens mentioned in the writing. This letter is not financial advise.