Having made a big splash in 2021, the Safemoon project went radio silent during 2022. This ambivalence, partly due to the rise and then fall of the cryptocurrency market, has made Safemoon a highly controversial project. So much so that within the crypto community, two camps have emerged. On one side, those who think the project is still viable, and on the other, those who think it is just a highly speculative asset. This article’s purpose is to shed some light on the situation.
About Safemoon
Safemoon is a decentralised finance (DeFi) project launched in March 2021 by John Karony. The aim of the project is to solve the liquidity problems present in DeFi. But why the name Safemoon? Safemoon refers to a well-known expression in the crypto community. It comes from the English expression « to the moon« . Meaning that a cryptocurrency will rise so sharply that it will reach the moon. By choosing this name, Safe Moon is showing its confidence in the future performance of its token.
What’s DeFi?
For those who don’t know, the word « DeFi » refers to a concept describing financial services built on a decentralised network (in other words, a blockchain). DeFi thus represents a set of decentralised applications offering financial services that are far more advantageous than traditional banking institutions.
DeFi’s liquidity problems
What’s liquidity?
Liquidity refers to the fact that a financial asset can be bought or sold quickly, without necessarily having a major effect on prices. Whether on a centralised (CeFi) or decentralised (DeFi) market, the more liquid a market is, the easier, faster and cheaper it is to trade. Consequently, if a market is very illiquid, due to a major imbalance between supply and demand, it will find itself in a disastrous situation.
If supply falls drastically, for example, prices rise disproportionately. This deters buyers. Conversely, if the asset is no longer in demand, the price will fall sharply, forcing the seller to agree to sell at a derisory price in the hope of finding a buyer. Ultimately, an illiquid market is not at all advantageous for either party (buyers or sellers).
A constant need for liquidity
As a result, decentralised markets, by their very nature, always require liquidity, so that users can carry out their transactions without any problems. But as there is not always enough liquidity to meet demand, developers have created incentives for users to provide more liquidity to the DeFi market. This is known as « Yield Farming« .
The principle is simple. If a user provides part of their funds in cryptocurrencies and locks them in a protocol, thus making them accessible to a market lacking in liquidity, the latter will receive interest (8%, 12%, 50%, 130%, etc). The percentage of interest received is set according to the risk taken by the user in supplying liquidity to a market. The more reliable the market, the lower the interest. The more suspect the market, the higher the interest.
Interest, yes, but not without risk
Decentralised finance (DeFi) is made possible by liquidity pools. In other words, a pool of tokens that can be freely deposited in a decentralised marketplace to make it more liquid. But the challenge lies in finding the right incentives for users to maintain such liquidity reserves. Because even if the interest on offer is very attractive, there are still risks.
A decentralised market that is fed with liquidity represents a token (or cryptocurrency) based on a blockchain. To feed this market, you need to buy the token corresponding to that market (Solana, Bitcoin, USDT, etc.) and lock it into a protocol. You will then receive interest in the form of the same token.
However, if the token that you are supplying with liquidity is based on a blockchain that is still under development, the slightest computer error could cause the capital invested to disappear in the blink of an eye. Another more common risk is a fall in the value of the token. If the value of the token you are feeding falls drastically, the capital invested will disappear in a flash.
DeFi solutions from Safemoon
5% for everyone
Aware of the problems outlined above, Safemoon’s developers set out to find a better alternative to reduce risk and give users more incentive to provide liquidity. The automatic liquidity acquisition function turned out to be the ideal solution, compared with the traditional structures (yield farming) with which we are already familiar.
This function allows Safemoon crypto holders to earn interest on all transactions carried out on the network. With an interest percentage set at 5%, this function clearly encourages people to buy and hold Safemoon tokens. This encourages token liquidity.
But how is this possible? A commission of 10% is charged on all transactions made on the Safemoon blockchain. 5% is allocated to a liquidity pool and the remaining 5% is distributed to Safemoon token holders. The purpose of the liquidity pool mentioned above is to stabilise the token price.
A burn system
Again with a view to encouraging holders to keep their tokens, Safemoon has introduced a « burn » system. A « burn » refers to the mechanism by which units of tokens (or cryptocurrencies) are intentionally and permanently burnt, i.e. destroyed. In doing so, a burn reduces the circulating supply of a token in order to guarantee a long-term increase. It is therefore by regularly employing burns that Safemoon is able to persuade users to keep their tokens.
A short-term promise
As previously mentioned, Safemoon was a great success in its early days. So much so that shortly after its launch, the Safemoon share price literally took off. Within just 2 months, it had risen by more than 17,000%, with a daily trading volume of more than $162 million.
After benefiting from this spectacular rise, investors were optimistic about Safemoon’s future, particularly with its fixed yields of 5% and burn systems. Unfortunately, this joy was short-lived. As demonstrated by the graph below.
The failure of « to the moon ».
The promise of a token that would be sustainable and profitable over time, thanks to a burn system and a new liquidity structure, has not been fulfilled. Despite its rather interesting DeFi aspect, the Safemoon project has had an extremely low price for several months now. At the time of writing, the Safemoon crypto is worth €0.00000000532 and has a daily transaction volume of €1,219.
Because of its small size on the market and high volatility, Safemoon is considered by many to be a purely speculative asset. This makes this type of token quite dangerous for anyone new to investing. If so, can we say that the Safemoon cryptocurrency is a shitcoin?
What’s a shitcoin?
« Shitcoin » is a colloquial term used to describe low-quality cryptocurrencies (or tokens). Generally, these are projects that do not inspire confidence and whose token has a very low value on the market. This makes this type of cryptocurrency extremely risky.
Nevertheless, it is not uncommon for some shitcoin to perform spectacularly. They can easily exceed 1000% within a few days. In fact, a simple buzz or a particular piece of information can multiply the initial value of a shitcoin by 100 overnight. This type of cryptocurrency is therefore often subject to speculation.
Choose certainty over adventure
As you can see, all the elements described above give very little credibility to Safemoon’s potential. So it’s no coincidence that it’s considered by many to be a shitcoin. So much so that investing in it would be a terrible idea, especially for beginners. For speculators, it could be an opportunity to become a millionaire overnight.
But there’s still a fair degree of uncertainty surrounding this scenario. That’s because the token still has to explode one day and rebound by 17,000%. So if you still want to invest, it is strongly recommended that you do so in moderation, to temper your risk-taking. In other words, avoid investing a sum that you cannot afford to lose.
