Crypto Earning and DeFi in the Ethereum Ecosystem Guide

by e1icz

Introduction

DeFi is the future of finance with equal opportunities. Despite being at its inception, with currently more than $40 billion in total value locked (TVL) [1], there exist already plenty of opportunities for you to make your idle crypto tokens do the hard work for you to earn some interest. Some of the strategies offer a high risk-reward ratio, whereas some are rather safer. Many people do not know where to start with DeFi because the term itself is a buzzword (e.g., similar to the term BigData) with ambiguous meanings that get people easily lost. DeFi encapsulates various decentralized financial services whose functionality is immutable and persisted on (Ethereum) blockchain, which simply means these services are accessible to anyone under the same rules and conditions, which is a huge difference from traditional financial (tradFi) services. DeFi offers various strategies and this extensive guide should outline and uncover the most common earning strategies—including advantages and disadvantages—in the Ethereum ecosystem. The strategies proceed from the more mainstream and community-approved ones to more advanced ones, concluding with inspiring platforms and trends.

CONTENTS

  1. Staking
    1. Staking ETH 2.0
    2. Staking ERC-20 tokens
  2. Lending
    1. Stablecoin lending
    2. wETH and wBTC lending
  3. Liquidity providing
  4. Yield and reward farming
  5. Miscellaneous: yield-bearing NTF´s, synthetic assets, future yield markets, self-paying loans
  6. Links and resources

1 STAKING

This is not DeFi per se, but to make the list complete, I will start with this, as ETH 2.0 staking is the most important strategy that can not only grant you passive income but also helps keep the network decentralized and safe. Also, the rewards compared to traditional finance are very appealing.

1.1 ETH 2.0 staking

rewards: ~8% APR

There has been written a lot about staking already, for those who are interested to read more, the best start is Etehreum official website [2]. Several variants exist (self, validator-as-a-service, stake pools, custody, exchange) each of which suits better for people at different skill levels or involvement.

[+] Ultimate HODL strategy[-] Tokens are locked indefinitely
[+] Low-risk strategy as this functionality is supported natively in the ETH protocol[-] Inactivity penalties (rather low) for offline time, risk of slashing for misconfiguration

1.2 Staking ERC-20 tokens

Tokens: Aave (LEND) [3], Synthetix (SNX) [4], Sushi [5], Curve (CRV) [6], Badger [7], The Graph (GRT) [8], and many others…)

rewards: various, ranging from 3% APR

There exist many tokens on Ethereum that incentivize users to lock their tokens to earn staking rewards for various activities: computation (e.g., verifying transactions), asset collateralization, governance—or no activity at all (~reward distribution tokens).

[+] Earning interest on your favorite coins[-] Risk of token price depreciation in projects that are not mainstream or that have a long-term token issuance scheme

2 LENDING

dApps: Compound [9], Aave[10]

You can provide your tokens to be lent to borrowers at (usually variable) interest rates. Some exchanges and centralized services offer these services as well. Lending rewards are typically low for leading crypto projects (ETH, wBTC) but are very interesting for stablecoins.

2.1 Stablecoin lending

rewards: 3–20% APR, up to 30% APY

You lock your stablecoins into a vault. All the tokens in the vault earn the same reward. The interest rate fluctuates depending on the demand. Usually, in bull markets, the APR is higher than in bear markets. The reward is around 3-20% APR but compounding these rewards can slightly improve the rates, supposing the provider offers in-built compounding solutions (otherwise it does not pay-off to pay the high TX fees to claim rewards repeatedly).

[+] Better rates compared to tradFi, but essentially on the same asset (dollars)[+] Low-risk strategy only depending on external factors (stablecoin losing peg)
[+/-] Stablecoins keep their price (disadvantage in bull markets, advantage in bear markets)

2.2 ETH, wETH, wBTC lending

rewards: 0.15–3% APR

Wrapped ETH (ETH is not ERC-20 token) and wrapped BTC (wBTC, renBTC) can be lend or staked to provide a yield that is in general rather low, but for holders with bigger stacks, it can be a very effective way to earn stable income on the two most mainstream cryptocurrencies.

[+] You HODL your crypto and you get a small additional income

3 LIQUIDITY PROVIDING

dApps: uniswap[11], sushi[12], 1inch[13], Loopring[14] (L2)

rewards: up to 100%´s APR (with rewards)

Decentralized exchanges (DEX) run automated liquidity pools in order to facilitate the swaps (i.e., exchange trades). Users can provide liquidity for a DEX-traded pair by locking both assets to the pool, at 1:1 volume at their current corresponding price ratio. By locking the assets, you are eligible to earn the fixed fees (around 0.3%) of every trade, proportional to your stake in the liquidity pool. It makes sense to lock assets that you want to hold anyways and in the long-term, e.g., ETH/stablecoin pairs. New pairs are very often incentivized in providing liquidity by offering rewards schemes.

[+] Acquiring a reasonable proportion of the pool that has high trading volume can generate interesting profits[-] Inter-pair token price fluctuations or decline to $0 lead to permanent and impermanent losses
[+] Many liquidity pools are incentivized by token providers or DEXes by additional token rewards that might severely boost the interest[-] Pools with low or no liquidity provide unstable ratios

4 YIELD FARMING

dApps: yearn[15], curve[6], badger[16], harvest.finance[17], alphahomora[18] (leveraged farming), and many others…

rewards: up to 100%´s APY

In typical staking, lending, or liquidity-providing scenarios, there is no compounding. In other words, you have to claim your rewards manually to earn them and re-stake them to compound your interests. Some of the farming protocols collect the rewards for you. Yield farming basically removes or socializes the transaction fees to claim the rewards, which means that your earned interest is continuously compounding which increases the APR (to APY) without the need of repeatedly interacting with the smart contract which is expensive. Some aggressive yield farming strategies focus on harvesting both yields AND rewards from various protocols and compound all of them, which can make them very profitable in short term.

[+] Very high rewards (100+% APY is not problem)[-] Some farmed assets cease to exist leaving you with permanent losses
[+] Farming aggregators (e.g., harvest.finance) offer multiple strategies and additionally offer interesting reward tokenomics[-] Many strategies are short term only and are not worth paying high TX fees

5 MISCELLANEOUS

There are many wonderful projects around that attract and deserve attention and offer plausible earning strategies.

a) Yield farming on non-fungible tokens (NFT)

dApps: Syncbonds[19], VeryNifty[20]

Reward generating NFT tokens. Cryptobonds[19] are tradable reward-generating NFTs that lock up interest-bearing liquidity tokens. You can emit your own bond, participate in emitting one with others, or buy already emitted bonds on the open market.

With VeryNifty[20], you can wrap your NFTS and turn them into vNFTs that earn you interest in the MUSE token. Careful, conditions apply that might burn your NTFs. There is a uniswap pool to stake and generate yields and trade HashMasks.

b) Synthetic assets

dApps: Synthetix [21], Mirror[22]

Synthetic assets are derivatives that are incentivized to hold the price peg to the underlying asset (stock, fund, commodity). The main advantage of “synths” is that anyone can get immutable exposure to any asset at any time (looking at you Robinhood traders). The disadvantage is that you do not really own the stock so you can not partake in ongoing short squeeze (looking at you GME apes). Ensuring the collateral to back up the synthetic asset pair with stablecoin can earn you good rewards while exposing you to the stock at the same time. The leading projects are Synthetix[21] and Mirror.finance[22] that uses its Terra UST cross-chain stablecoin.

c) Future yield tokenization

dApps: APwine[23], Syncbonds[19]

Imagine you can stake your tokens to gain future yields without locking the tokens and imagine you can sell these interest-bearing tokens INCLUDING its future yield in advance (for some discount, or even premium if you are lucky or smart). Sounds like a Matrix loophole. The markets are so far rather small, but the APwine[23] project is worth keeping eye on.

d) Self-paying loans – alchemix

dApps: Alchemix[24]

Alchemix[24] lets you take loans that do not generate debt for you but yield. You deposit a certain amount of crypto as collateral and you are able to withdraw up to its half as “a loan to yourself”. The other half is getting paid automatically by farming strategies.

6 LINKS AND RESOURCES

Related Articles

Leave a Reply

Your email address will not be published.