DeFi 1.0 presented us with a powerful way of investing in liquidity pools and securing decentralized coin and token swapping beyond centralized exchanges. DeFi also introduced staking as part of the proof-of-stake consensus mechanism presented for blockchains. DeFi brought innovation the like of never seen before. DeFi 2.0 if there’s such a thing, brought even more innovation by introducing high APY projects and decentralized reserve currencies. DeFi3.0 and DeFi 4.0 will bring even more innovation with liquid staking, protocol-owned liquidity pools, DaaS offerings, possibly even 100% feeless trading, and fast limit order books.
DeFi has just started and we are early in the party, but being early has its benefits. In this article, I’ll go through the many ways you can do yield farming and passive income from crypto.
Liquidity pools are the easiest ways to make passive income in crypto, but they are not the best way to make money in DeFi. Impermanent loss is one thing to note, but another thing to note is the constant change in narrative and the fast pace in crypto.
One coin might be worth a lot today, but in the next year or so, might not be worth anything anymore. When investing in liquidity pools, you are betting on the fact that the coin will be around after a year or so.
Because with liquidity pools, the APR or APY might not be as high as you might want it to be, so you will have to wait a lot of time (year(s)) to get an edge over the impermanent loss. The fact is that the moment you enter a liquidity pool, you will start to lose money, and the only way to get an edge is to wait for the rewards to pay for the losses in value change.
- Easy access
- Relatively good reward yields on the DeFi side
- Good offering, multiple pools to be a part of
- The more participants in the pool the longer it will survive
- You only need to track the coins/tokens price
- A coin or a token might become worthless over a long period of time
- Impermanent loss (in the majority of pools)
- APR/APY drops the more participants in the pool
Staking And Liquid Staking
Staking was one of the first ways to invest in DeFi alongside liquidity pools. Staking is when you lock your tokens/coins to a smart contract and by doing so, you usually secure the blockchain and make it more stable and decentralized.
Staking can be done in decentralized finance or in centralized finance, but the truth is that decentralized offerings triumph over centralized offerings by a wide margin. In DeFi you honestly get staking rewards that make staking worthwhile.
Liquid Staking on the other hand is a bit newer concept but is something that is on the rise and becoming more and more popular over the months. In liquid staking you kind of lock tokens, but actually, get another token for example staking AVAX in BenQi Finance, you will get sAVAX in return. Now, this sAVAX that you just received is liquid (note resemblance to liquidity) and can be moved around and you can use that in for example Anchor Protocol to make further investments.
Liquid staking enables you to get a double benefit for one asset. You get the initial ROI from staked AVAX and you get another benefit when using sAVAX as collateral in Anchor.
There are also staking as a service platforms if you are interested, however, in this article that offering is left out as they do not give good enough yields.
- Easy to start experimenting with it in centralized exchanges (CEX)
- You get the same token as a reward for staking (locking)
- You need special equipment to stake your tokens and coins
- The reward yields are usually a bit low compared to other offerings in DeFi (but especially in CEX)
- Can require a fixed time to lock your tokens/coins
- Unstaking can take time or be immediate
Pros Liquid Staking
- You can move the asset across the network
- You can use the asset in multiple ways (collateral, staking, lp)
Cons Liquid Staking
- The offering is limited as it’s a new innovation
- Limited transferability across different blockchains
High APY’s And DAO’s (DAO Forks)
Olympus Dao (OHM) was a massive innovation when it introduced decentralized reserve currency and an APY of 100,000% (at the very early stages). With an incredible 100,000% APY and token price that seemed to go only up, people got excited and pumped the price even further. Ultimately the project suffered a lot (price-wise) and the high APY was seen as unsustainable and now sits at roughly 1,000% (varies). While the price has tumbled down, it’s hard to say what will happen to the project going forward.
However, even though OHM currently isn’t showing that much success when looking at the tokens’ price, the protocol gave birth to the massive development of high APY DAOs (decentralized autonomous organizations). Wonderland, Hector DAO, Rome DAO, Titano are a few examples all in different chains (Avalanche, Fantom, Polkadot, Binance Smart Chain, respectively).
All of the mentioned projects are pretty successful in their own regards, and they all offer some nice yield percentages but the main thing to notice with high APY is the sustainability factor. How long can that 100,000% yield survive? Yes, you will get a lot of tokens, but if those tokens do not hold any value, you basically own nothing at the end.
Also what is worth mentioning is that pretty much all high APY projects (Titano is an exception) are about staking. You buy the token and you stake it to the project and you will get high rewards for doing that. You can think of the high APY project as a sub-category of staking.
- High-yield brings high rewards
- If the project survives for a year, you will become a millionaire
- The community determines the strength of the project
- The longer the project is alive and well, the stronger it will become
- Most projects are highly unsustainable
- The community determines the strength of the project
- Needs a lot of use cases to make the token keep its value
- It’s a gamble which high APY project survives the longest
Fantom Foundation has a problem where almost all of the FTM coins are staked, leaving the CEX and DEX short on FTM coins. Fantom chain works with FTM coin and when there’s not enough available the blockchain gets into trouble and becomes unusable. Luckily the fees are low and in that regard, you don’t need a lot of FTM coins to your wallet to use the chain for years.
Tomb Finance saw this problem and decided to innovate the space by introducing an FTM-pegged stablecoin called TOMB (usually you see dollar-pegged stablecoins). TOMB is pegged 1:1 with FTM and aims to become the currency to be used in the FTM chain. However, we do have to remember that while Fantom could start to use TOMB instead of FTM to validate transactions, that happening is pretty small.
However, these little things noted, it didn’t stop Tomb Finance to thrive and become a massive money printer in the Fantom ecosystem. And this yet again ignited a massive flood of TOMB forks to different chains and Fantom chain too, implementing the same concept for different coins. Avalanche has Grape Finance, where GRAPE is pegged to MIM, Binance Smart Chain has Dibs Money, where DIBS is pegged to BNB, etc. There is a multitude of different TOMB forks out there, having roughly or precisely the same code as Tomb Finance has.
So the only question left to ask is why these projects exist? Tomb Finance has some kind of idea of why it exists, but all the other projects in all the other chains do not have any reason to exist.
- Massive yield in some projects
- The printed token might not have any value or the value is constantly dropping (in multiple chains)
- Pretty much all TOMB forks have no reason to exist
- Mechanics can be confusing for a newcomer
Nodes As A Service
A bit newer offering in the crypto space is Nodes As A Service (NaaS). NaaS offers the ability for you to buy real nodes without actually investing in expensive servers or other hardware to keep the nodes active and generate revenue for you. StrongBlocks is one of those projects that offer you to create nodes to the Ethereum network.
With the rise and success of StrongBlocks, the NaaS offering went crazy and now there are NaaS projects popping up left and right. However, there are not that many true and real NaaS projects out there even though the project’s website might say so.
Flux is a real service where you can buy nodes and run them with relatively minimal effort. However, PowerNode on the other is not a true NaaS service. While you are buying nodes, you are not buying real nodes. You are buying a concept of node, but buying that you are not securing any network like you are doing in StrongBlocks or with Flux.
However, usually what these node projects do is in fact invest in real blockchain validator nodes, so in that sense, the nodes as a service do mean real nodes for you and for the project through your investment.
- True node projects usually aren’t DAOs
- Token/Coin could hold value a bit better than most yield farming projects
- Can be expensive (ETH transaction fees or money needed to buy a node)
- Can be confusing for a newcomer
- Limited offering
Defi As A Service
Defi As A Service (DaaS) is probably what the DeFi 3.0 or DeFi 4.0 narrative is all about. Running your own Kadena, Ethereum, Avalanche, Constellation, or any other node might not be that easy and might require a bit more knowledge on blockchains than what you are willing to go for.
DaaS offering gives you access to different, yet powerful DeFi offerings out there. Rather than you doing the research, token analysis, staking, or anything really, you can just buy the project token and get access to the varied offering they have.
DaaS and NaaS go hand in hand as the terms are usually used interchangeably. Kind of the “fake” node projects are really about DaaS. VaporNodes, PowerNode, THOR Financial are all about nodes, but in reality, what they offer is DaaS.
The benefit of investing in these projects is that the investment decision is made by the community (in most cases), so it’s a joint effort from multiple people when it comes to investment decisions. There’s no single entity making decisions where to invest, as the decisions are made by the community and for the community.
DaaS can be part of different staking services, they can set up nodes, buy expensive nodes like Fantom nodes or Avalanche nodes. Something that the average investor does not have enough money for. The key factor with NaaS or DaaS is the sustainability of the project.
You are usually if not always rewarded with a project token, and if that token is distributed too often and with too high quantities then the project and the value of the token might go down in value. These projects can quickly become victims of the high reward rate and collapse the project before it gets strong enough.
- Good user experience
- Access to varied investment vehicles
- Good or sometimes even massive yield
- Daily rewards can become a superb passive income source
- Good or sometimes even massive yield
- You need to know a few key metrics before entering any project
- Projects token value might constantly go down, making you lose your initial investment completely
- Sustainability is still an issue in most node projects
Farming As A Service
Farming As A Service (FaaS) projects might not be the most known projects out there. Degen players and DeFi enthusiasts do know very clearly what reflection projects or FaaS are, but for the newcomer, these are probably the most unknown form of yield farming.
As with every project, there are multiple different projects for multiple different chains, the most used chains (when it comes to DeFi investing and forks) are Ethereum, Avalanche, and Fantom (because they share the same smart contract programming language).
Avalanche chain has Alpha Nodes, Ethereum has Multi-Chain Capital and Fantom has Scary Chain Capital. All of the mentioned projects are FaaS projects and ultimately do the same thing. Farms tokens and coins, with the exception that Alpha Nodes farms node projects. These projects pay rewards in their native token (MCC, SCC, ALPHA) but depending on the project can also give rewards straight from the treasury.
One nice strategy could be to follow on what projects do the FaaS projects invest in and then invest in those projects, rather than buying the MCC, SCC, or ALPHA token.
- Exposure, get access to different farming protocols by owning one single token
- The tokens price does not affect the performance of the project
- Usually depends on transaction volume, without that, treasury won’t grow
- Some projects might not have a quality investment strategy or team of investors
- Sometimes token shilling needed to grow the transaction volume
Yield Aggregator / Yield Optimizer
When you see a yield project or a new yield protocol popping up for a chain, there’s a high chance that you can see it on a yield aggregator or a yield optimizer. A yield aggregator is a platform that takes the liquidity pool (LP) token and compounds that, instead of getting token rewards, you get LP rewards.
This concept is pretty darn powerful because you are getting double benefit with a yield aggregator. Instead of using for example CRA-AVAX liquidity pool in Trader Joe that gives you roughly 65% APR, you could use a service like Beefy Finance and get LP tokens at 129% APY.
With this strategy, you would get a lot more LP tokens and when you remove LP tokens in Trader Joe, you will get a lot more of the underlying tokens. It might not make a lot of sense to just go to a liquidity pool and get those LP tokens when you can go and compound those LP tokens on Beefy Finance for extra income.
- High APY rewards
- You get a lot more of the underlying tokens
- You make use of the LP tokens you receive when going for a liquidity pool
- Very good yield for stablecoins
- The high APY fluctuates a lot
- There are multiple steps to get the high APY/APR from a yield optimizer