Right before the start of the last bull run I had fallen ass backwards into more than a few profitable trades and airdrops, one of them being Uniswap which I sadly sold off right away.

As much as I regret that, one thing that came from it was an introduction to liquidity mining via the whole Sushiswap vampire attack on Uniswap.

Along with Uni and Sushi I had been looking at other Decentralized exchanges. One I had been looking into was Bancor, they had announced a new liquidity mining program that I wanted to take part in but I was nervous to risk a lot of money in it.

After taking profits on a few trades I was feeling good and decided that opening a small position with some of my profits first to test the waters was the best plan of action because the interest rates where so high that if it did work out I could actually make some money on even a small amount and if I lost it, its nothing I would loose sleep over.

What is liquidity mining ?

Liquidity mining is kind of similar to staking or lending out our crypto in a smart contract but much riskier.

You start out providing liquidity to a decentralized exchange like Uniswap, Sushiswap, Curve, Balancer or Bancor. Obviously there are many many more but I am not going to list them all, these are some of the more popular ones.

Traditionally when you enter a liquidity pool you provide two tokens (although this is not always the case anymore), in this post we will use ETH x DAI for an example.

You provide an equal amount of each coin initially but as the market moves your coins will shift, think of it like a scale going back and forth. The big thing you need to look out for is impermanent loss (more on that later).

When I opened this position double sided liquidity pools where the thing and Bancor's gimmick was that you would never suffer impermanent loss in their pools. BNT (their native token) was used to make liquidity providers whole should they exit the pool with less than they entered with.

When you first open your position you normally receive LP tokens that represents the pool you have a stake in and while things work differently on Bancor now (although I guess it may still be considered an LP token just more complicated), at the time this was true.

To earn rewards from liquidity mining you then stake your LP tokens in a smart contract.

So basically it is like simply staking a token but instead of just a token your putting up your position in a liquidity pool and you remain exposed to that liquidity pool, for better or worse. You are also still earning your share of the fees on top of the interest from staking.

What is impermanent loss ?

The issue, as I stated above is impermanent loss. I am not going to deep dive on how decentralized exchanges work but I have linked plenty of articles throughout this post for the people who would like to read more. Below I will give two simple examples of what can happen.

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• Say your providing ETHxDAI and right after you join the pool ETH starts tanking hard. Your position will start to weigh very heavy on DAI and the faster it falls the lower the eth in your pool sells for. This can obviously lead to you ending up with much less than you actually entered the pool with unless you can wait long enough for eth to start climbing back up and hopefully above the price you entered at.

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• In this second example we will talk about a much more dangerous scenario ... Shit coins. If you decide to enter a pool of ETHxSHIT because shit is all the rage lately and ShitDex is offering 2000% APY you might find yourself asking what can go wrong with that kind of return! First, like in our previous scenario if SHIT token tanks your position will start filling up on SHIT only in this scenario it is very likely that SHIT may never increase in value again making your impermanent loss very permanent. In fact, it is not uncommon for people holding high risk positions like this to check on their position after a rug pull only to find all they have left is SHIT token which is now worth jack SHIT. What about the rewards ? Most of the time LM rewards are paid in the native token of the platform which is how they can afford to give these insane returns.

The idea with these positions is that you make enough from the rewards and fees that you never care about impermanent loss but the riskier the position the less likely this becomes to actually happen, it is not uncommon for platforms to come out of nowhere, completely unheard of and offering APY in the thousands. They can do this because what they are giving you is a token they created out of thin air, alot of times these may be governance tokens which allow you to vote on the future of the platform but if the platform rugs and the token goes bust you end up holding the bag. This is not to shit on governance tokens entirely, there are plenty of governance tokens that are great ... it just happens to also be a thing that is often used to scam people because it is extremely easy to create and sell.

Sushiswap did this before they went on to become the platform they have today but that is a whole other story in its own, they are now a reputable platform but they almost went down as one of the most infamous rug pulls in history. You may ask why people would ever willingly do this and the real answer is that a lot of people who take on these high risk LM positions realize it is a scam/rug or at least a very high risk of being that and just want to earn as much as they can and then pull out before it all comes crashing down. They are taking a gamble because if you can manage to pull out and sell before the hype dies and the token price crashes or the platform rugs, you can make a lot of money BUT you should never attempt to do this with money you can not afford to loose.

When it comes to reputable DEX's there are also a lot of different strategies one can implement to help mitigate impermanent loss such as using two tokens that tend to move in the same direction or entering during a planned period of time and attempting to ride out a curve although this is obviously NEVER a sure thing because if it was we would all be rich.

Also I should add that there have been other advancements one of the bigger ones being Uniswap's pools that allow you to accept swaps only at certain price ranges.

We return to our regularly scheduled program

So I had decided to test out Bancor, they where far from the unknown platforms I spoke about before.They had been around since the start and still are today and where actually the first exchange to implement an AMM. They where not offering thousands of percent APY but they where offering over 100% although I cant remember exactly how high it was. I decided to enter BNTxLINK with $200 worth on each side and a plan to add more if I still liked it in a few months.

When I entered BNT was about .80 USD and I think LINK was somewhere around $12, I was a strong believer in Link (still am) but what I was really banking on is that BNT would explode like it did last cycle (chart below) and I would score big since rewards where paid in BNT as well.

I ended up being right and I honestly gained so much value that I never added more to the position. At the height of the bull run my position was worth about $4500 less than a year after opening it.

This is where I fucked up.

I was hyped on the release of Bancor 3 and that combined with ETH gas fees costing the price of a ps5 I decided to cancel my exit strategy. This is the only time I have done this and I will never do it again. I decided to do this when BNT was at its height but of course I did not know that then or I would have pulled out like a virgin on prom night.

This was a huge mistake as I also became emotionally invested in this trade going forward, the price kept sinking and Bancor kept failing. I think the only project I have ever seen with more delays is Pi, yeah the free one that you mine with your phone.

By the time I started to come around my position was down to about $1,000 and by the time Bancor 3 came out it was even less.

Bancor 3 brought in a lot of new changes but one of the big ones was single sided liquidity for liquidity pools, This single sided liquidity also still had the same protection from impermanent loss and all swaps would also now be able to take place in a single transaction which was huge for fees. It is still like this now and while they have done a lot of work to recover and keep things rolling I am sure most users have the same sour taste in their mouth as me.

Shortly after Bancor 3 went live the FTX debacle happened which destroyed the price of BNT to the point where Bancor stepped in and paused BNT distribution which meant that people withdrawing their funds would in fact suffer from impermanent loss which was the whole thing Bancor was claiming to stop. This of course caused more panic and large holders still chose to withdraw even though they would suffer massive losses beyond just dollar value.

As you can imagine this did nothing good at all for the platform and my position is now actually worth less than it was when I entered and I am at more than a 50% loss on BNT even though I have almost 4x the amount of BNT in the pool than I did when I started.

I actually never lost on my LINK as I got it so cheap, the LINK I put in the pool had first been purchased when it was around $2.50 and swing traded many times making the actual cost even less than that as I had taken profits on it several times before entering the pool far exceeding my cost basis. When Bancor V3 released I only transferred my BNT since dual sided liquidity was no longer a requirement.

They have since enabled BNT distribution and Bancor lives on today although they have now geo restricted the United States which can easily be circumvented with a VPN although US users are supposed to be only able to withdraw.

I will continue to hold my position because obviously its not worth the gas it would cost to exit it, might as well just let it go and hold on to it HODL in case they make an immaculate recovery, even so shit tends to rise with water so who knows.

Below is a weekly chart I provided so you can see how BNT has performed over the years, I entered my BNTxLINK position just before that first leg up during the last cycle.

T.L.D.R - I made a pretty awesome return on a small amount invested in a liquidity pool but failed to take profits resulting in me actually losing money. I also discuss liquidity pools, decentralized exchanges and Liquidity mining while providing tons and tons of links for anyone wishing to read more.

https://preview.redd.it/09dhkjnz83ab1.png?2195&format=png&auto=webp&s=dc710da14a288b8eb74ead4bcdb4e55ec636c0c8