DeFi Yield For Beginners: Two Meta Strategies

This post will be useful for those who invest in traditional financial markets but are considering diversifying their portfolios with crypto assets. So, what are the main strategies for those entering crypto through DeFi?

There are many different DeFi strategies for maximizing your crypto profits: lending, staking, restaking, single asset farming, two or three-sided pools, creating on-chain activity and volumes for retrodrop hunting, etc. But globally, we have only two meta-narratives (or strategies). The first is investing in stablecoins. The second is investing in Bitcoin or altcoins. Let's analyze each, conservative and risky scenario for them and the corresponding risks and benefits.

Investing in stablecoins

So, the first strategy is to invest in stablecoins, tokens with exchange rates pegged to the corresponding fiat currency. In simple terms, it is buying a digital US dollar (or euro) for fiat. Companies that issue stablecoins usually ensure that their exchange rate is pegged by backing and operating the same amount of money in traditional assets (for example, $USDT, $USDC). There are also synthetic dollars, algorithmic stablecoins, etc. Before investing in a particular stablecoin, it is worth understanding how it works.

In crypto, there have been cases when stablecoins have lost their peg to the fiat and depegged. The most famous case in recent years is the stablecoin $UST from Terra Money. USDC also lost its peg but recovered it fairly quickly. So, one of the main risks is depeg, the loss of a peg for various reasons.

Most of today's popular stablecoins are also managed by centralized companies that can close or go bankrupt. Some people also doubt that issuers of stablecoins are fully backed with corresponding amounts in fiat or other assets. There is a general risk of scam, theft, or hacker attacks.

Advantages: less volatility compared to altcoins, huge liquidity, a large number of use cases, and higher yields compared to traditional investment instruments. When investing in stablecoins, you can choose between two scenarios: conservative and risky.

Conservative means simply buying stablecoins and staking, farming, or lending them at higher interest rates than in traditional finance. By choosing well-known and large protocols, you reduce the risks of exploits. A risky scenario is, for example, portfolio leveraging with borrowing. It is when you simultaneously lend your tokens and borrow even more stablecoins or altcoins to farm more rewards, for the sake of cross-protocol arbitrage, and so on.

The risks in this case are higher, as the position can be liquidated, or the fees can be higher than the income.

Investing in Bitcoin or/and altcoins

Another meta-strategy is investing in Bitcoin or altcoins. It is more risky in general, and also has a conservative and risky scenario. Conservative is, for example, just a holding for future growth. Or staking tokens like $eth through Lido, where you can earn ~3% per annum additionally.

A more risky scenario is restaking, adding liquidity to pools, and so on. It is when you first stake ETH on Lido or Rocket Pool, then restake it in, for example, Ether Finance, and then use the restaked tokens in Pendle or bridge to other blockchains and use them for farming there. The risks increase with each new interaction.

The advantages of this strategy are potentially higher yields compared to stablecoins. Blue chip assets are also liquid and have many use cases. In addition to the basic income, you can receive a portion of fees generated by protocols, rewards from participation in various activities ($ARB or $OP grants), or airdrops.

Risks are typical for all crypto: volatility, loss of value, scams, hacks, and lack of regulation in many jurisdictions.

Conclusion

Remember, investing in crypto products is high-risk, although we have seen the recent adoption of BTC and ETH ETFs. If you want to invest directly and use decentralized products, after determining your strategy and risk tolerance, use Defillama to find the best current rates.

Keep security in mind. Diversify and rebalance your portfolio.

Learn about hedging positions, delta-neutral strategies, and impermanent loss.

This post is for educational purposes only 🙂 and no financial advice. Follow Qoda Finance on X to learn more about DeFi and products we build.