The friction costs that erode your investment portfolio

In investing, there are countless ways to lose money, and decentralized finance (DeFi) makes these methods more accessible. However, the real issue is not the technology itself, nor the majority of participants or protocols; rather, it lies in various structures, inefficiencies, and habits that can unknowingly lead to significant losses.

While most traders accept the risk of losing money from the outset, the unfortunate reality is that the issues we discuss in this article affect not only investors but also everyday users. If you frequently swap tokens in your daily life, whether for gaming, purchasing content, or trying out dApps, you may want to continue reading.

Understanding Liquidity

Liquidity is a core component of any trading environment—whether in DeFi or traditional finance. Simply put, it refers to how easily one asset can be exchanged for cash, stablecoins, or other assets. In traditional centralized environments, liquidity is assessed through order books, where traders list buy and sell orders at prices that suit them. In decentralized environments like DeFi, automated market makers (AMMs) are the standard for decentralized exchanges (DEXs); they also operate based on supply and demand principles, but prices are determined by token pairs.

These are known as liquidity pools, and almost anyone can provide liquidity for these token pairs. Traders simply use these pools to swap tokens, and prices adjust accordingly. Considering some limitations, such as tokens always appearing in pairs, the technical limitations of blockchain and smart contract technology, and issues with cross-chain interoperability, we can already identify some inefficiencies.

In DeFi, the amount of liquidity is often determined by the popularity of digital assets, as this indicates that liquidity providers have enough confidence in a certain token to purchase and lock it up for an uncertain period. Given the number of projects in this industry, you may begin to realize that acquiring sufficient liquidity for a large number of assets is a challenging task, making swaps outside of the most popular tokens very difficult and expensive.

The Friction Costs of Small Amounts

Under normal circumstances, this might not be considered a problem; after all, a few cents difference in large transactions is negligible. Indeed, for those who rarely swap, this may seem trivial… but what about everyday users? What happens if these inefficiencies frequently appear in a person's trading habits? How do these few cents accumulate, and how much time is spent switching between different decentralized exchanges?

It is worth emphasizing that the value we measure in a few cents is merely a practical issue. In fact, when we make swaps, we pay in tokens, not fiat currency. These could be network tokens or project tokens, sometimes both. Other times, due to liquidity and slippage-related reasons, the prices on the decentralized exchange used are higher than those on other exchanges, resulting in us paying more. However, the obvious implication is that, given the volatility of digital asset prices, losses can occur much faster than users initially expect—especially for project tokens in an upward phase.

Combining various ways to make your crypto assets work, such as staking, providing liquidity, governance, etc., these losses reveal some unrealized promises, with some preferring to see these promises rather than excessively high swap fees. This seems like a subtle incremental process, but it can ultimately add up.

This not only harms traders but also hinders everyday frequent usage. It makes the process longer, more expensive, and more complex, ultimately damaging the reputation of an industry that is trying to make ambitious changes in the world.

Save More with 0xGen!

0xGen integrates numerous different liquidity aggregators into a user-friendly application platform. With an easy-to-use and intuitive user interface, 0xGen meets the needs of most exchangers while providing them with the best quotes in a vast and liquid market. The protocol also protects users from attacks related to gas fees and slippage, selecting the best routes for multiple swaps to save costs on multiple levels.

Additionally, 0xGen stands at the forefront of AI technology, incorporating AI in many aspects of the protocol. For example, by using AI and machine learning, 0xGen can provide users with the best trading routes, offering significantly reduced fees and faster transaction speeds. Another noteworthy AI feature is AI-driven trading signals, which not only provide users with high-quality information but also allow them to seamlessly execute these signals within the same application.

When it comes to user personalization, 0xGen also offers tailored services based on users' trading intentions and preferences. This is achieved by using AI to analyze user trading data and contextualizing it through specially designed Q&A forms to understand each user's unique needs, ultimately assisting traders in asset allocation and risk management, helping them avoid uncontrollable environments and external factors.

The best part? The technology of 0xGen is easy to integrate into other dApps, expanding its accessibility and utility, attracting a broader user base! It offers open-source AI algorithms and large language models (LLMs), inviting developers to collaboratively train and utilize them. This approach benefits not only the project itself but also has implications for the entire industry, meaning that ultimately, 0xGen will almost become a standard, protecting users from inexperience and inefficiencies, and helping them save a significant amount of tokens in the months and years to come.