CNBC-TV18
July 06, 2022 / 09:27 IST
Funding is one of the most important factors for developers trying to launch a new crypto project. In the beginning, initial coin offerings (ICOs) were the go-to option for developers looking to raise capital for a project.
However, ICOs soon became synonymous with rug pulls and other scams. A rug pull is when a fake project solicits funds through an ICO and disappears with the gathered capital, figuratively ‘pulling the rug’ from beneath the investor’s feet.
Even when the ICOs were legitimate, they often employed mechanisms that favoured large investors over smaller individuals. Since then, numerous crowdfunding models have cropped up as alternatives to ICOs, and one of them is the launchpool.
A launchpool is like a fundraising platform. It allows startups and other early-stage crypto projects to raise funds by inviting investors to deposit their crypto holdings into a capital pool. In return, the investors can earn interest on the amount of crypto they deposit. Therefore, it’s a win-win situation for investors and the project.
How do launchpools work?
It’s pretty simple, actually. Investors contribute to a collection of funds known as a liquidity pool. In return, they are rewarded with interest on their deposits. This interest is calculated on an annual percentage yield (APY) basis. Hence, the process of depositing tokens to a launchpool is also referred to as yield farming.
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APY is a type of interest calculation that uses the power of compounding. Unlike simple interest, compounding interest is calculated at regular intervals and immediately added to the balance. Therefore, with each interval, the balance gets a little bigger, and the interest paid also grows. It’s like farming for yield on your investment.
How do you earn?
Most launchpools have a lock-in period of 7-30 days, with rewards being calculated hourly. The rewards (new tokens) you receive are directly proportional to the percentage of tokens you contribute to the pool.
Some launchpools—like the one on Binance—allow the investors to trade the new tokens on the seventh day of farming. This means, after seven days, you can trade the tokens you have earned as a reward for staking. Your earnings are calculated every hour, and Binance has the option of letting you harvest pending rewards whenever you like.
Advantages of Launchpools
Launchpools are safe and convenient. They are usually organised by centralised exchanges that thoroughly vet the project before creating the launchpool. This significantly reduces the chances of rug pulls and other frauds.
Launchpools are also convenient; they offer all the benefits of staking without any associated pitfalls. For instance, there is no minimum deposit amount — you can stake as little as 0.1 of any token. For example, on Binance, you can stake 0.1 BNB to get started. And yes, there are no upper limits either; you can stake as many tokens as you like.
On the other hand, staking usually has a minimum investment threshold. For example, if you want to stake ETH, you must have at least 32 ETH, which is often a hefty amount for retail investors. While staking pools are an alternative, they significantly reduce your returns.
Plus, unlike staking pools, with launchpools, investors don’t have to go out of their way to invest in a crypto project. They could stake their holdings from the website or exchange app, saving hours’ worth of hassle.
An alternative to staking?
Staking is one of the best ways to earn a passive income. However, there are several drawbacks to it as well. As mentioned earlier, some coins, such as Ethereum, have a minimum investment threshold which can be cumbersome for some investors. While staking pools offer to bypass this hurdle, they provide lower returns and charge you a fee for their services.
Staking also requires investors to lock in their coins for an extended period, during which they cannot trade or use them for any other purpose. Keeping these pointers in mind, launchpools offer a lucrative alternative. They provide attractive returns thanks to their APY model. Some launchpools also allow you to trade or withdraw the accrued rewards at your convenience.
Moreover, a new coin always has the potential to grow substantially over time. Therefore, investing in a launchpool could bring you exponential returns in the future. Hence, they are definitely worth considering if you are looking for a more convenient alternative to crypto staking.
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