OVERVIEW

Before Bitcoin, There Was… 🤔 

Hello there, this is your Litepaper author, Jon. 👋 

The Litepaper will look a little different for a few days because I’m doing husband and dad stuff with my family (which is mostly me cursing at water because it’ll probably be another year of zero walleye).

The content this week is all about DeFi. 

We’re going to talk about Liquidity Pools and Liquidity Providers (LPs), Automated Market Makers (AMM), Decentralized Exchanges (DEX), Lending, and rewards vs risks in this space.

There is also some useless knowledge such as the pre-Bitcoin ideas that led to Bitcoin, the top 10 biggest hacks, crazy crypto facts you never knew, and more.

Peace! 🫡 

DEFI

Why DeFi? 🤔 

Decentralized Finance (DeFi) is beast. DeFi is branching out into so many new areas of focus, it’s like when crypto was just Bitcoin, them the first memecoin (DOGE), then Ethereum, etc. 🐂 

A lot of crpyto is focused on either speculation or investment. People like memecoins for the chance of basically wining the lottery, others like to hodl BTC for it’s massive groth, and others like Ethereum, Cardano, or Tron for their technology and use case(s).

From a principles standpoint, DeFi is all about getting rid of centralized finance and big money control. But the ‘where is the money in this’ perspective, is all about one word: income. 💵 

Also, DeFi is exploding in size. In 2018 it’s estimated TVL (total value locked, think of it like market cap) was $300 million. It is roughly $90 billion right now, and was nearly $200 billion last year (2024). 😱 

DEFI
Plunging Into Liquidity Pools 🥽

Liquidity pools are the backbone of decentralized exchanges (DEXs), powering token swaps without relying on traditional order books or middlemen. These pools are basically smart contracts holding pairs of tokens that traders can swap against. 🎪 

This has democratized market making – anyone can deposit assets and become a market maker earning fees, a key reason DeFi protocols like Uniswap and PancakeSwap saw an explosion of volume and liquidity.

Let’s dive into how liquidity pools work, explore their benefits and risks, and highlight some recent developments (Uniswap v4, PancakeSwap’s growth, Base network, etc.) that show how far liquidity pools have come. 👁️ 

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DEFI
How Do Liquidity Pools Actually Work? 🤽

At its core, a liquidity pool is a pairing of two assets in a smart contract that traders swap . 🤝 

Instead of matching a buyer and seller, trades go through the pool: if you want to trade USD for SOL, you swap with the pool, which automatically gives you SOL and takes in USD.

To set prices and facilitate these swaps, the pool uses an Automated Market Maker (AMM) algorithm rather than an order book.

Note: Later this week we’re going to dive heavy into the different AMM’s and why it critical to know which is which.

For example, Uniswap’s AMM uses the constant product formula (again, we’ll get into the specifics later) to maintain a price . Whenever someone trades, the ratio of tokens in the pool shifts, and the price moves accordingly.

This design means liquidity is always available for a trade, though large trades will incur slippage (price impact) if they significantly change the token ratio.

Liquidity providers (LPs) are the users who fund these pools. As an LP, you deposit a certain value of Token A and Token B into the pool - typically in equal value terms (for a classic 50/50 pool, if you add $100 of ETH you’d also add $100 of USDT the paired token).

If you’re a liquidity provider, you are a market maker. And anyone can be one.

In return, the smart contract issues you LP tokens that represent your share of the pool. Whenever trades happen in the pool, a small fee is taken and distributed to LPs in proportion to their share. 

You’re making money on the number of trades happening. 💸 

DEFI
Understanding Impermanent Loss 😕 

Before we go any further, it’s important to understand this confusing as hell and drunken-slurred speech sound thing called impermanent loss. 📉 

Impermanent loss (IL) is often confusing at first, because it’s not immediately obvious why providing liquidity could make you “lose” money you would have had by doing nothing.

The core reason for IL is that the AMMs forces you to sell high and buy low, which isn’t always what you want. When one token’s price rises significantly, the pool automatically gives you less of that token and more of the cheaper token in exchange.

Conversely, if one token’s price falls, you end up holding more of it (since people are selling it into the pool and you’re effectively buying the dip).

The result: your asset allocation shifts to hold more of the losing asset and less of the winning asset, compared to just holding your original amounts outside the pool.

Several important notes about impermanent loss for Liquidity Providers (LPs):

• Stable vs Volatile Assets: Impermanent loss is negligible when the two assets in the pool remain at a stable relative price. Pools of stablecoins (e.g. USDC/USDT), because the price ratio doesn’t move.

• IL vs. Fees: It’s possible to still profit overall despite impermanent loss – or even have a negative IL (gain) – if the trading fees earned plus any extra rewards outweigh the loss. High-volume pools or pools with generous liquidity mining incentives can compensate for IL.

• “Impermanent” is Misleading: The loss becomes permanent once you withdraw your liquidity at a changed price. If you keep your funds in and the market swings back, the loss can reverse.

In practice, crypto prices may or may not revert – so treat impermanent loss as very real. It’s a risk you take on for the privilege of earning fees.

In a nutshell, impermanent loss means you might have been better off HODLing your tokens than providing liquidity, especially in volatile markets.

It’s not actually “loss” in absolute terms (you don’t lose principal unless things really go haywire), but it’s opportunity cost lost compared to holding. 🧠 

DEFI
Benefits of Liquidity Pools 💰️ 

After reading about impermanent loss, you might be wondering why the hell anyone would every become a Liquidity Provider (LP). Let’s talk about the benefits.

• Earn Trading Fees (Passive Income): This is why LPs love being LPs. Liquidity pools provide a way to earn yield on your assets. Every time a trade occurs, LPs earn a fee (e.g. 0.05%–0.3% per swap, depending on the platform and pool). In high-volume pools, these fees can accumulate significantly, offering a steady return for liquidity providers. In fact, even pools exposed to impermanent loss can remain profitable if trading volume (and thus fee revenue) is high.

• DEXs Will Reward You Extra: Many DeFi platforms also offer additional $$$ incentive rewards to LPs, boosting potential earnings. This fee-driven income is a primary lure for users to “put their assets to work” in liquidity pools instead of just holding them idly.

• Permissionless and Inclusive Participation: Liquidity pools are open to anyone - there’s no need for approval or a large capital requirement to become a market maker. This permissionless access means any user can add liquidity to existing pools or even create a new pool for any token pair (as long as a smart contract for it exists).

• Always-On, Efficient Markets: Liquidity pools provide continuous liquidity and enable 24/7 trading with no need to match buyers and sellers directly. As long as the pool has reserves, a trade can execute at some price. This makes markets more efficient. 🔄 

DEFI
Popular DeFi Platforms for Liquidity Pools 😎 

Uniswap 

The pioneer AMM and the largest DEX on Ethereum. Uniswap popularized the 50/50 two-token pool model and is often the first place new tokens get a liquidity pool.

Uniswap v4 (launched this January (2025)) is the latest iteration, bringing features like “hooks” (customizable smart contract logic within pools), unlimited fee tiers, and a single-contract “singleton” architecture that greatly lowers gas costs.

PancakeSwap

PancakeSwap started in 2020 as a fork of Uniswap but has since grown into a DeFi ecosystem of its own. And it has boomed in activity recently. PancakeSwap’s May 2025 volume was higher than Uniswaps giving it roughly 60%+ of DEX market share.

Curve Finance

Curve is a DEX designed specifically for stablecoin trading and other low-volatility assets. Its liquidity pools typically contain different versions of the “same” asset (e.g. various USD stablecoins, or ETH and staked ETH, etc.) so that the prices stay in a narrow range.

Curve, while not as ‘cool’ as UNI or CAKE, remains a critical piece of DeFi infrastructure for stablecoin liquidity, and it has even expanded into providing its own stablecoin (crvUSD) to deepen its ecosystem. 💹 

DEFI
Safe Swimming: Tips and Latest Developments 🏊

• Do Your Research: Understand the pool parameters (fees, token volatility, past volume) and the platform’s reputation. Be cautious of pools offering abnormally high returns and to-good-to-be-true yields.

• Start Small: If you’re new to providing liquidity, begin with a small deposit to get a feel for how the pool behaves and how impermanent loss and fees might affect your position.

• Monitor and Manage: Some platforms offer automated position managers to help with this, but ultimately the responsibility is on you as the LP. Remember that you’re not set-and-forget earning; you are actively taking a market-making position. AMM doesn’t mean walk away and make free money.

• Stay Updated on Developments: The DeFi AMM space is rapidly innovating. Newer layer-2 networks like Coinbase’s Base are offering cheaper, faster, and safer environments for liquidity pools. Other Layer-2s (Arbitrum, Optimism) and alternative chains have growing DEX ecosystems, meaning liquidity is fragmenting (and also multiplying) across chains.

My personal experience as an LP on Uniswap, Minswap, and PancakeSwap is to just park and bark. My purpose for being LP there isn’t to catch big moves to buy and sell - it’s to make money off the trading.

Because that’s what the big boys do. 💪 

CRYPTO 101
Before Bitcoin, There Was… 🤔 

Bitcoin didn’t just appear fully formed from the internet’s forehead it wasn’t like God inspired Satoshi Nakamoto to write the original whitepaper.

There was a whole messy history of attempts to build digital currencies and cut out those meddlesome central middlemen. 👨‍💻

Crypto Before Crypto Was Cool 🚨

Public-Key Cryptography (1976)

• Who: Whitfield Diffie and Martin Hellman

• What: Invented a cryptographic system using two keys, public and private, to securely share info without secretly meeting in parking garages.

• Why It Matters: You can’t have crypto without cryptography. Simple as that.

RSA Encryption Algorithm (1977)

• Who: Ronald Rivest, Adi Shamir, and Leonard Adleman

• What: Created a method of encrypting and digitally signing messages based on the maddening complexity of prime number factorization.

• Why It Matters: Without RSA, digital transactions would be as trustworthy as your cousin’s "investment" tips.

Blind Signatures (1982)

• Who: David Chaum

• What: Invented a way to sign digital info without revealing what you're signing, enabling anonymous digital transactions.

• Why It Matters: Anonymity matters, especially when digital money and privacy meet. Or when you're buying questionable NFTs.

Early Digital Currency Dreams: From IBM to Hashcash 💸

IBM’s Financial Crypto Research (1980s)

• Who: Um, IBM.

• What: IBM explored cryptographic techniques for secure, reliable electronic transactions.

• Why It Matters: IBM set the stage, even if they didn’t exactly drop a digital dollar.

Hashcash (1997)

• Who: Adam Back

• What: A proof-of-work system designed to annoy email spammers by forcing their computers into overdrive.

• Why It Matters: Became a foundational concept for Bitcoin’s own proof-of-work, solving real problems like spam and fake scarcity.

Digital Currency Prototypes: Almost Bitcoin but Not Quite 🧩

b-money (1998)

• Who: Wei Dai

• What: Imagined decentralized, anonymous digital currency with a distributed ledger maintained by multiple users.

• Why It Matters: Satoshi gave it a shout-out. 

Bit Gold (1998)

• Who: Nick Szabo

• What: Proposed decentralized digital money secured by solving cryptographic puzzles.

• Why It Matters: Pretty much Bitcoin’s older sibling - minus the actual implementation.

The Almost Famous: DigiCash 💳

DigiCash (1989–1998)

• Who: David Chaum (yep, him again)

• What: First significant digital currency using blind signatures to keep transactions anonymous and private.

• Why It Matters: DigiCash crashed spectacularly, but showed the world digital cash could work, paving the way for something bigger (cough, Bitcoin).

So yeah, Bitcoin wasn't just magic internet money conjured overnight. It stood on the shoulders of earlier ideas, questionable experiments, and plenty of outright failures.

That’s innovation for ya. 🌟

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