Decentralized finance (DeFi) has been gaining significant traction in the crypto market, offering users the opportunity to earn yield through various strategies. According to a report published by IntoTheBlock, it is crucial for investors to stick to straightforward strategies that focus on only a handful of different primitives. One of the most popular ways to earn yield in DeFi is through AMM Liquidity Provisioning. By depositing assets into AMM pools for different trading pairs, users can earn yield from trading fees every time a user swaps between two assets using that pool. However, the volatility of assets in those pairs can lead to impermanent loss for investors.
Another promising source of high yield in DeFi is “recursive lending,” where users can supply and borrow the same asset, profiting from the difference between borrowing costs and protocol incentives. Yields drop as more capital is added to the strategy, so it is recommended to use lower leverage when depositing over $3 million in assets. It is essential to assess the risks associated with DeFi, including supervised lending, which combines both prior techniques. Users utilize an unproductive asset as borrowing collateral, then use borrowed funds to buy a more productive asset that earns yield in another area, like an AMM pool. However, this strategy can have low or net negative yields and carries risks of liquidation and impairment loss.
Furthermore, IntoTheBlock highlighted “leveraged staking” as a strategy for producing medium returns on assets like ETH or SOL. By staking these assets to secure their respective blockchains, users can potentially earn over 10% APY, compared to the 2% to 4% yields typically seen with simple staking. It is crucial for investors to consider the complex chain of risk considerations when it comes to rebalancing and taking profits with these strategies. As new capital is added to the pool, the expected APY may get diluted, so the initial size of the pool relative to the capital deployment needs to be considered.
Overall, DeFi offers a range of opportunities for investors to earn yield, but it is essential to understand the risks associated with each strategy. While AMM Liquidity Provisioning and recursive lending can provide high yields, they also carry the risk of impermanent loss and decreasing returns as more capital is added. Supervised lending combines both strategies but can result in low or net negative yields and poses risks of liquidation and impairment loss. Leveraged staking offers medium returns on assets like ETH or SOL, but investors need to carefully consider the risks associated with leverage and asset borrowing rates. By diversifying strategies and considering risk factors, investors can navigate the DeFi landscape to maximize their yield potential.
