Introduction to DeFi strategies: The best ways to earn through DeFi
- The DeFi sector was around for years, but it only went big in Q3 2020.
- Since this happened, DeFi started attracting massive numbers of people looking to make money.
- Today, there are numerous strategies that allow you to make money by investing in DeFi.
The DeFi sector of the cryptocurrency industry went huge in Q3 2020, with its TVL (Total Value Locked) going from $1 billion to the current $43 billion. The DeFi ecosystem suddenly became a massive hit, basically overnight, as it offered new ways to earn money, with significantly reduced risks than what trading or investing could have offered. In other words, you get to earn money while keeping your coins, and not selling them or trading them for another.
This attracted developers, who started a rapid creation of new DeFi protocols, participants who aimed to use their existing coins to make more money, and traders and investors themselves, who used fiat to buy new coins in order to earn from price changes, as DeFi tokens still remain as volatile as the rest of the crypto industry.
Today, however, we are interested in different trading strategies, such as staking, lending, liquidity providing, yield farming, and alike.
DeFi strategies explained
There are many ways to earn from DeFi tokens, and overtime, it is possible that many more might emerge. For now, however, the most popular strategy to earn with DeFi seems to be:
Lending is currently the biggest and most popular DeFi strategy, judging by DeFi Pulse. The website shows that the top 3 projects based on TVL are all lending projects, and those include Maker, Compound, and Aave. Essentially, lending is providing tokens to be lent to borrowers at certain interest rates. Similar to bank lending, where you are the bank — you get to offer your money to those who need it. Eventually, you will get your money back, plus interest, which is pure profit on your side of things.
So far, the lending rewards have been particularly high for stablecoins, which might be the best coins to invest in for lenders. Not only do they bring higher rewards, but as stable cryptocurrencies, there is no risk of their price dropping. As for rewards, it usually comes at 3%-20% APR, as opposed to lending ETH, wETH, or wBTC, where rewards go from 0.15% to 3% APR.
Staking is a very important strategy that can bring pretty good rewards also, and it revolves around investing in tokens and then locking them up for a certain period of time. In return, you get rewards, provided that you respect the terms of the deal, such as not withdrawing before a certain date.
Staking can be done for a variety of reasons, such as computation, participating in governance, asset collateralization, and alike. Staking ERC-20 tokens can bring different rewards, most of which range from 3% and more while staking Ethereum itself usually brings approximately 8% APR.
Liquidity has been a problem in the crypto industry quite often, especially when it comes to decentralized exchanges or DEXes. But, with the rise of DeFi, this is no longer such an issue, as a lot of people started participating in automated liquidity pools offered by these exchanges in order to facilitate swaps.
Similar to staking, users can lock up their assets and earn fixed fees and other rewards in exchange for providing funds to make trades possible. Fixed fee rewards are usually low, around 0.3% per trade, but they come from every trade, and they are only a portion of your earnings, as you can also earn plenty of rewards.
Lastly, there is yield farming, which can bring massive rewards — up to 100%’s APY. The way this method differs from the others is by involving compounding, meaning that participants have to claim their rewards manually to earn them, and then re-stake them to compound their interests. Some projects’ protocols claim the rewards for the user, but in its essence, yield farming removes or socializes the transaction fees in order to claim the rewards. This means that the earned interest gets continuously compounded, which increases the APR without the user having to repeatedly interact with the smart contract, which can get rather expensive on Ethereum.
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