High Crypto Yield Innovation And Acceleration

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Disclaimer: Crypto is a fast-paced economy and things change quickly. Information on this post might be outdated even if written today. Do your own due diligence and stay safe. I might get affiliate commissions for purchases made through links in this post. Read the disclosure.

Alpha Gained:

Yield Farming & Staking Mechanics

Yield farming might sound complicated or something that is out there and not approachable. Yield farming in its purest form is just having an asset and setting it to a smart contract that generates yield on a daily basis and hopefully in an auto-compound way. The earliest DeFi yield farming opportunities were presented by the centralized exchanges or platforms like BlockFi, however, the real yields are not made on those platforms, not even on crypto.com or in Celsius Network.

While the average consumer more than likely will stumble upon these centralized platforms mentioned before, they are better off just getting into the real DeFi side and start earning the real yields in a decentralized manner.

The easiest way to start earning yield is probably by buying some USDC from crypto.com and then just start staking (“locking funds into a smart contract”) that. However, there are so many more lucrative ways for you to get yield for your hard-earned money. One of them is liquidity pools, others are protocols like Anchor for UST staking and concepts like liquid staking.

Staking in its simplest form is to lock up your funds to receive rewards. The staking concept was born from the Proof of Stake consensus mechanism, where you lock up your funds (stake) to secure the blockchain network and support its operations. And by doing that, you are rewarded usually by the same token you locked up, and thus you get yield for the token or coin.

Centralized Yield Farming

Crypto.com, BlockFi, Binance, KuCoin, Celsius Network, Voyager, etc. all offer staking rewards or a platform for you to “earn” tokens/money by giving them your tokens for further investing or staking.

However, the interesting thing is that while the yield that they offer is enticing, in the form of earning “8% yield on stablecoins, etc.”, the reality is that the centralized finance offering is a joke compared to the offering you get by jumping into DeFi world. The centralized offering is more of a business to them, rather than securing a blockchain or anything that sort. Thus you get a smaller yield.

When you compare the 8% APY (annual percentage yield) yield to a traditional dividend stock investing and get a dividend of 3% for a given stock, you might think that you’ve hit a jackpot. However, the fact is that 8% is the bare minimum you would get in DeFi, and that’s for the stablecoins.

Example For Centralized Yield Farming

Initial Investment: $10,000
APY: 8% (With Daily Compounding)
Investment Period: 365 D
Investment After Period: $10,832.78
Profit: $832.78

Decentralized Yield Farming

The jump into decentralized yield farming is a big one if you are completely new to the topic. This is also the reason why a lot of people are using services like BlockFi or Voyager, thinking that there can’t be a better yield than 8% for your stablecoins.

The reality is that DeFi is still in its infancy and it means that it’s full of opportunities, but it needs a little bit of courage and understanding, but when that happens, it opens up a whole new world to explore.

Anchor protocol is a prime example of DeFi yield. In Anchor protocol, you can earn a massive 19,5% yield on your stablecoin (UST) and that means that by investing 10,000 today, after a year, you would have roughly 12,000 UST. That’s passive income and for one of the best stablecoins in the crypto market.

Another prime example is the Trader Joe DeFi platform, where you can earn roughly 50% for AVAX/MIM trading pair. Meaning that you would have to deposit e.g. $5,000 worth of AVAX and 5,000 MIM to a pool and you would get a yield of 50% in a year for that pair. If AVAX would for some reason hit $1 value ( which is more than likely impossible at this point) you would earn 2,500 MIM which would be equal to $2,500 in a year.

You see MIM is a stablecoin in the Avalanche blockchain and having an AVAX/MIM trading pair means you are only locking up one coin that fluctuates in price. You also have to understand the impermanent loss concept and the way it affects the gains you can make through a liquidity pool.

From these two very simple examples, you can see that the potential in DeFi is at least 5-10X compared to CeFi, but it requires a bit more knowledge and bravery on your part.

AVAX/MIM Liquidity pool mechanism visualized

Example For Decentralized Yield Farming

Initial Investment: $10,000
APY: 50% (With Daily Compounding)
Investment Period: 365 D
Investment After Period: $16,481.57
Profit: $6,481.57

Yield Farming For Stablecoins

Stablecoins are one of the best and safest ways to grow your wealth in DeFi. Stablecoins are always pegged to USD, but not always backed by USD. This means that almost every stablecoin in DeFi tries to keep the value of token 1:1 with the value of USD. UST for example is an algorithmic stablecoin that is one of the best the crypto industry has seen or experienced. UST is always valued 1 and is always worth $1 USD. 

When you are yield farming stablecoins, you can almost always “rely” that the price of the stablecoin stays at 1, and thus you do not suffer from the market fluctuations like you would by staking or owning a non-stablecoin coin. When a BTC suffers a flash crash, your stablecoin stays at 1, and you can be worry-free and earn that stable passive income through stablecoin yield farming.

Currently, Anchor (at the time of writing) is considered to be the best of the best yield farming opportunities for UST. However, you can do yield farming for stablecoins in many forms. One is token/stablecoin trading pair farming.

In trading pair yield farming you are securing trades inside the blockchains DEX (decentralized exchange). Liquidity pool is the name of the game, and in this scenario, the most secure trading pair for every DEX is always the major stablecoin inside the blockchain and the main coin of the blockchain for example ETH/USDC, AVAX/MIM, AVAX/USDC.e. FTM/USDC, FTM/DAI, BNB/BUSD.

When the other pair of the trading pair is stable then you only need to worry about the other pair and if it will suffer a price decrease or not. If that is a concern after the yield is covering the small fluctuations in the price.

Example For Stablecoin Yield Farming

Initial Investment: $10,000
APY: 20% (With Daily Compounding)
Investment Period: 365 D
Investment After Period: $12,213.36
Profit: $2,213.36

Abracadabra Degenbox Strategy

Abracadabra Moneys’ Degenbox strategy (image source)

When we are inside DeFi and want to get the most yield for our assets, the rabbit hole goes a long way down. DeFi is innovative and the people developing DeFi can create some wicked solutions for yield farming one of those strategies is the Degenbox strategy created by Danielle Sesta and his amazing team of wizards.

In Degenbox strategy you deposit your UST to a cauldron to either borrow MIM or leverage your position. We are focusing on the leverage side of this strategy. After depositing your UST to the degenbox, you can select leverage for your position. And while leverage is something not to be played around with, we have to remember we are talking about stablecoins here and that little fact changes the game completely. UST is one of the best stablecoins out there and getting leverage for that is downright insane. 

Without getting into the nitty-gritty of things, the idea is to cycle your UST through Anchor protocol with leverage and thus you can get a yield of roughly 80% for a stablecoin and that is just nuts. However, this is a bit riskier yield strategy as you are borrowing against collateral. Liquidations can happen if the price drops to a certain level (depending on your leverage), but MIM, as well as UST, are both algorithmic stablecoins and thus pretty safe investments.

Example For Degenbox Strategy Yield Farming

Initial Investment: $10,000
APY: 80% (With Daily Compounding)
Investment Period: 365 D
Investment After Period: $22,235.94
Profit: $12,235.94

Liquid Staking

Liquid staking is something that has surfaced as people don’t want to lock up their funds, but rather use those funds after staking them, thus making the tokens liquid. The main idea is to release the locked-up funds through liquid tokens to be used elsewhere, thus providing more liquidity for the user to use while still holding the original staked token. LunaX and Lido are a few solutions that bring liquid staking to crypto space.

Liquid staking allows you to stake your “real” asset, get the yield for the asset, but you also get a kind of a derivative of the staked asset e.g. stETH (Lido) that you can then use, store, transfer, or trade to a regular token. 

Liquid staking is a kind of staking, while still using the asset elsewhere for other purposes. Lido, LunaX (StaderLabs), Nexus (Pylon Pool) are the few that offer liquid staking.

Written By Juha Ekman

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