Pickle Finance has Pickle Jars for several different underlying protocols. The most common underlying protocols that Pickle helps users compound the rewards for are liquidity pools. These liquidity pools may exist on Curve, Uniswap, Sushiswap, or elsewhere, but these liquidity pools are often providing liquidity for very different protocols and tokens. Pickle Finance prefers to offer Pickle Jars only for protocols that we think are good ideas, have longevity, and are likely to succeed at growing their platforms.
There are a few main types of DeFi platforms that may be included in these liquidity pools. We will discuss these below.
Lending Platforms like AAVE, Liquidity, or Alchemix, lend out user’s deposits to generate yield, returning much of that yield to the user in one way or another. Pickle Finance may have Pickle Jars for compounding liquidity pools based on platforms like these.
A liquidity pool is a smart contract that acts as an Automated Market Maker (AMM), trading both sides of any pair of coins. Liquidity pools make money for their depositors when those tokens oscillate up and down in value, allowing the pool to collect trading fees over a long period of time. The user also profits if the value of the tokens goes up.
Liquidity Pools are a staple feature of Decentralized Finance, and are worth a deeper look into how they work. While there are a few different formulas in use for these pools, the general concepts are the same. A user deposits a ratio of two (or more) tokens (for example, Dai and Ethereum). The pool does not know an official price for the two tokens. The pool only knows that it currently holds some number of each token and that they are in some targeted ratio to each other. When the market prices of these tokens change on other exchanges, arbitrageurs will come and trade with the pool, either buying the tokens from the pool when the market price is higher than the pool price, or selling the tokens to the pool where the market price is lower than the pool price.
For example, if the price of Ethereum goes up on centralized exchanges, an arbitrageur will come and buy some Ethereum from the pool, paying in Dai. This adds Dai to the pool (the buyer has paid in Dai), and removes Ethereum from the pool (the buyer has purchased Ethereum). The pool recognizes the change in the ratio of its tokens and adjusts the price accordingly.
The important thing to note here is that as one of the tokens goes up in value, traders will come and buy that token from the liquidity pool. As a token drops in value, traders will come and sell that token to the pool. In effect, a liquidity pool will always “buy the dip” and “sell the pop”. It will buy more of the token that is falling, and sell more of the token that is rising.
Users should consider providing liquidity for a pool when they are neutral or bullish on all tokens in the pool, are uncertain which token will outperform the other, and accept that they will not achieve huge profits if only one of those tokens goes sharply up.
There are many other types of DeFi projects, with new classes entering the market almost every day. The majority of these projects will generate yield either via a lending platform, a liquidity pool, or a staking mechanism, but all of these options can include, depend on, or be exposed to tokens from almost any type of project.
One example of an asset class that Pickle Finance provides liquidity to are synthetic stocks, or “Synths”. Synths replicate real-world stocks on the blockchain, enabling them to be traded like any other token. With each new class of investment being created, users are encouraged to really dig down and do their research to determine whether the investment fits their personal risk tolerance.