DeFi Basics

What is DeFi?

Decentralised Finance (DeFi) refers to financial services built on blockchains — trading, lending, borrowing, earning yield — without traditional intermediaries like banks or brokers. Smart contracts replace the middlemen.

Swaptain uses DeFi infrastructure (THORChain's liquidity pools) to power your swaps. Understanding the basics helps you make better trading decisions.

Liquidity Pools

A liquidity pool is a collection of tokens locked in a smart contract that enables trading. Instead of a traditional order book (buyers matched with sellers), trades happen against the pool.

How They Work

Liquidity providers deposit paired assets (e.g., ETH + USDC) into a pool
Traders swap one asset for the other, changing the pool's balance
The price is determined mathematically by the ratio of assets in the pool
Fees from trades go to liquidity providers as rewards

Why Pools Matter for Your Swaps

The size of a pool (its "depth") directly affects your trade:

Deep pools (lots of liquidity) → better rates, less slippage
Shallow pools (little liquidity) → worse rates, more slippage
Popular pairs (BTC/RUNE, ETH/RUNE) tend to have deep pools
Niche pairs may have less liquidity

On THORChain, every pool pairs an asset with RUNE. So a BTC-to-ETH swap actually goes BTC → RUNE → ETH (two pool hops). Both pools need sufficient depth for a good rate.

Slippage

Slippage is the difference between the expected price and the actual execution price. It happens because your trade changes the pool's balance, which changes the price.

Why Slippage Occurs

Imagine a pool with 100 ETH and 200,000 USDC. The price is 2,000 USDC per ETH.

If you buy 1 ETH, you barely change the ratio → minimal slippage
If you buy 30 ETH, you significantly change the ratio → noticeable slippage
If you try to buy 50 ETH (half the pool), the slippage would be enormous

Slippage Tolerance

Your slippage tolerance (set in Swaptain's Settings) is the maximum price movement you'll accept:

If slippage exceeds your tolerance, the swap is cancelled
Default in Swaptain: 3%
Higher tolerance = more likely to execute, but potentially worse rate
Lower tolerance = better guaranteed rate, but may fail in volatile conditions

For most trades, the default 3% slippage tolerance works well. Only increase it for highly volatile tokens or decrease it for large stablecoin swaps where you expect minimal price movement.

Price Impact

Related to slippage, price impact is how much your specific trade moves the market price. It depends on:

Your trade size relative to the pool
Pool depth (more liquidity = less impact)

Swaptain shows you the expected output before you confirm, so you can see if the price impact is acceptable.

Reducing Price Impact

Streaming swaps — Swaptain's "Best Price" mode breaks large trades into smaller pieces, reducing per-trade impact
Smaller trades — splitting a large trade into several smaller ones
Popular pairs — major assets like BTC, ETH have deeper pools

Automated Market Makers (AMMs)

AMMs are the smart contracts that run liquidity pools. Instead of matching buyers with sellers (like a stock exchange), AMMs use mathematical formulas to price assets based on supply and demand within the pool.

THORChain uses a Continuous Liquidity Pool (CLP) model — a variant designed for cross-chain swaps. The key property: the fee increases with swap size, incentivising smaller trades and protecting the pool from large, market-moving swaps.

Common DeFi Terms You'll Encounter

| Term | Meaning | |------|---------| | TVL | Total Value Locked — the total value of assets in a protocol's pools | | APY/APR | Annual Percentage Yield/Rate — estimated earnings for liquidity providers | | Impermanent Loss | A temporary loss LPs may experience when asset prices diverge | | Yield Farming | Providing liquidity or staking to earn rewards | | DEX | Decentralised Exchange — a platform for swapping tokens without a centralised authority | | CEX | Centralised Exchange — traditional exchange like Coinbase or Binance | | Swap | Trading one token for another | | LP | Liquidity Provider — someone who deposits assets into a pool |

As a Swaptain user, you interact with DeFi through a simple interface. You don't need to understand every concept deeply — but knowing the basics helps you understand why rates vary, why large trades cost more in slippage, and why some pairs have better rates than others.

How Swaptain Uses DeFi

When you make a swap on Swaptain:

Quote — Swaptain queries THORChain's pools for the current rate (determined by pool depth and your trade size)
Execution — your trade goes through the liquidity pool, changing its balance slightly
Fees — the liquidity fee goes to pool providers; the platform fee (1%) goes to Swaptain/SwapKit/referrer
Delivery — output tokens are sent from the pool's vault to your wallet

You get the benefits of DeFi — decentralised, permissionless, native-asset swaps — without needing to interact with smart contracts directly.