Investment Pools: What They Are and How Sentient Uses Them
You’ve heard of liquidity pools — smart contracts that enable investors to provide liquidity in return for trading fees — but have you heard of Sentient’s investment pools? While in large part a machine-learning and AI-assisted trading algorithm that does most of the investors’ work, Sentient also offers a host of features, utilities and ways to interact with the protocol.
But what exactly is an investment pool, and how is it used in the case of Sentient?
Investment Pools Explained
Investment pools and liquidity pools share a few commonalities, chief among them being the fact that a deposit of certain assets or asset pairs is made by an investor in return for rewards — which are of course proportional to the amount provided. That is where the most similarities end, however, and where differing characteristics are observed.
Unlike liquidity pools — which can be utilized by virtually anyone for swapping digital assets — investment pools are utilized by the protocol in which they’re deposited. The protocol in turn uses those assets in a manner that is based on its design and purpose, in order to achieve a certain goal or function.
The depositor would, as it is in the case of liquidity pools, receive tokens that represent and reflect their share of the investment pool. In most cases, these tokens act as a basis to earn rewards, and more importantly, can be used to verify and withdraw their deposited assets.
Sentient’s Dynamic Investment Pools
Precog Finance supports dynamic investment pools that are integrated with the trading environment through Chainlink’s oracle network technology. The assets and pairs are generally added by the team, and investors can choose any one of said assets to deposit. Currently, ETH, USDT and USDC are supported; however, there are no strict limitations as to what can be added, only criteria that helps prioritize them based on their overall utility and reach in the greater DeFi ecosystem.
Upon making a deposit, the investment pool will signal the trading environment, informing it about the new deposits in order to transfer them to the trading wallets where they will be utilized in trades. The pool will simultaneously mint iPCOG tokens for the investor; these tokens act as LP (Liquidity Pool) tokens for the user, and can be used as collateral for different DeFi protocols.
Following a successful deposit, investors can now withdraw a relative portion of the profits generated by the Precog protocol in the form of the PCOG token. The investment pool, on the other hand, will buy back these tokens with the generated profit and allow the user to withdraw it at any time.
What Does This All Mean?
Although similar in concept to liquidity pools, in practice, investment pools have different implications for crypto assets. For instance, most protocols require users to stake their LP tokens to earn rewards in the form of the platform token, whereas Precog Finance’s investment pools reward users in PCOG directly — which in and of itself has a variety of use-cases in the Precog ecosystem.
Another major difference in utility lies in who has access to said pools. Almost all liquidity pools are readily and publicly accessible by those who have connected their wallets to the network, whereas Sentient’s investment pools are only accessed by the protocol itself — which as mentioned above, uses them to execute trades. To some degree, this protects the deposited assets from the actions of the public, but more importantly, it ensures the assets are being utilized where possible. The benefit of the latter point is further highlighted upon looking at how Sentient functions; as not only does the algorithm execute trades it knows are profitable, but it also constantly improves thanks to its machine-learning AI.
Sentient’s dynamic investment pools offer considerable utility for otherwise idly-sitting assets in the hands of those that are not too fond of impermanent loss. The seamless process enabled by Precog Finance’s user-friendly UI makes deposits and withdrawals feel like a breeze, and the rewards that follow flow in despite the user not having made a single trade themselves.
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