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title: How It All Ties Together
tags: [docs, ' proposed']

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tags: docs, proposed
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# How It All Ties Together 
Doc Proposal: [AppletonDave's tweet](https://twitter.com/AppletonDave/status/1298935170616004609?s=20)

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*Anyone please add and edit freely*

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I am a total newbie to this. I am purely tech / coding.

In response to being asked a load of questions, I had to jump in and mess with it all in order to understand it to teach others.

This is a summary of what I am discovering. Some of it is probably wrong.

I am just brainstorming fast and am probably making lots of stupid mistakes.

Please add comments.

Dave.

## Basic Sources of Income in DeFi

### Arbitrage

This is an extremely basic way to make money, to find an asset with two different prices in different places so you buy cheap and sell high. The simplest places to buy and sell are decentralised exchanges.
This needs capital to make it worth while. If you do not have capital borrow it!

### Loans

If you can offer a loan, you can charge interest for that loan. Under normal circumstances you will also get collateral worth more than teh value of the loan

### Exchange

An exchange makes money on each trade passing through it.

## Secondary Level

### Loan Liquidity Pools

The loan mechanism allows investors to deposit capital from which loans can be drawn down. Just like exchanges, each pool may have a specified kind of collateral (e.g. LINK, LEND, PaxGold etc)

### Exchange Liquidity Pools

Recent exchanges bootstrapped without huge amounts of capital. They get investors to supply liquidity in exchange for a share of the trading fees.
(you get a token representing your stake in exchange that you use to redeem the investment) Liquidity pools usually take an asset pair. Be warned, the asset ratio of your stake could change over time.

### Management Tokens

Mangement Tokens may be
* Sold (ICO tokens converted to management tokens)
* Earned by being an active participant of investment in an exchange or loan pool (or anything that follows hereafter)

Management Tokens have to be staked in a management contract and need to vote to earn rewards.

**Problem**

if you only have a few tokens, the rewards are less than the gas cost of voting

**Solution**

Management Token Pools (each pool has a particular aim)

By pooling your tokens you share the voting costs. Guess what? You get a pool token in exchange.

The effect of management contracts / staking pools is to reduce the circulating supply of the token, while increasing the value
hence multiplying the demand/supply ratio => price

Guess what? Like everything else, you get tokens to represent your stake in the management pool.

They are not *designed* to have financial value but owing to their ability to alter your returns from your investment they often gain value.

In fact, if you can redeem your base tokens/stake with the management tokens, they get a multiplied value.