Cross-protocol yield farming using borrowing assets

Lending and borrowing are the basic financial tools in DeFi that help maximize the return on crypto holdings. We wrote earlier about how traders can increase their portfolio using borrowed assets. This article expands the number of use cases and shows how you can increase your income.

Although holding assets provides inherent value, leveraging your portfolio using borrowed assets can amplify returns, presenting opportunities previously unavailable in traditional finance. Let’s discover the strategies and precautions necessary to navigate this field, and set you on the path to discovering the full potential of crypto investments.

Crypto Borrowing

Let’s start with crypto loans.

In a trustless environment, crypto loans from decentralized protocols must be secured, and to get a loan, you need to first deposit collateral. Lending protocols such as Aaave, Compound, or Qonstant usually support several assets for collateral.

Each has its own collateral factor, which determines the borrowing power, in other words, how much you can borrow against your collateral. To understand how it works in more detail, please read this article.

In general terms, this is the mechanism of crypto loans: you deposit the assets you hold, retain ownership, and receive additional funds, which you can use at your own discretion. One of the options is a cross-protocol yield.

Cross-protocol yield

Today’s DeFi industry is quite fragmented, especially when compared to traditional finance. But what does that mean?

When you go to a bank, you can open an account, deposit funds, get a loan, invest, exchange your money for a different currency, and send it to another country, or pay for goods or services. In DeFi, it is impossible to perform all these tasks in one place. Here, we have different products: portfolio trackers, DEXs, lending/borrowing protocols, wallets for sending and holding funds, and so on. That is why this area is considered fragmented.

This appears to be inflexible and not very convenient, right? However, there are advantages. Cross-protocol yield is one of them, which is made possible by this fragmentation. Using different tools, you can maximize your profit, diversify your strategy, and at the same time have more flexibility. So, how does it work?

Let’s assume you hold USDC during a volatile market. Simply keeping the asset in your wallet is not the best strategy. You can use it as collateral in a protocol like Qonstant and receive tokens as a loan. These tokens can then be used in another protocol for staking, thereby earning money on it separately. This way, you retain your assets, earn on them, and also earn on the borrowed assets.

Let’s look at a more specific example.

A Use Case

Let’s imagine that a user has savings in altcoins like ETH or ARB and does not want to sell them during a volatile market. However, they can use their savings as collateral and, for example, receive USDC tokens as a loan.

The user retains ownership of their assets, but now they will also have other tokens, which can be staked or deposited to pools in other protocols.

Thus, the initial tokens amount can be converted to a larger amount. This leads to a larger farming volume, and so this is a winning strategy provided the yield profit covers the fees for the use of the borrowed funds.

Risk Management

Always be aware of the risks and implement prudent risk management.

Only use products you trust. Remember that even a security audit does not guarantee 100% security.

Only use certain tools or protocols once you clearly understand their functionality.

Always do your own research. This article is not financial advice.

Resources

https://blog.qoda.fi/maximizing-cross-protocol-yield-with-borrowed-assets-d5a3b3c3bbfe