As a seasoned crypto investor with a few years under my belt, I’ve seen the DeFi landscape evolve from a niche corner of the blockchain world into a bustling ecosystem teeming with innovation. And while the potential rewards are alluring, so too are the risks.


On Thursdays, crypto market insights firm IntoTheBlock released a study exploring top yield-generating strategies in the decentralized finance (DeFi) realm, considering risk factors.

Although the company asserts the existence of an almost unlimited variety of potential strategies, it is advised to adhere to the fundamentals and keep strategies simple, which essentially involve just a few basic building blocks.

The Best Way to Earn In DeFi

The first strategy highlighted by the firm is AMM Liquidity Provisioning.

An Automated Market Maker (AMM) functions as a self-governing system in Decentralized Finance (DeFi) that facilitates trades between assets by providing necessary liquidity. By depositing their assets into these AMM pools for specific trading pairs, users contribute to the market and generate earnings through collecting transaction fees whenever someone exchanges two assets using that very pool.

In pairs with low-priced assets having little correlation, AMMs typically generate greater returns. Yet, this advantage comes with increased volatility risks, potentially leading to losses that may not be permanent.

When fresh capital joins the pool, the anticipated annual percentage yield (APY) becomes less concentrated, according to IntoTheBlock. Since the returns are expected to decrease with the addition of more capital, it’s essential to take into account the initial size of the pool in relation to the total capital being invested.

One effective way to rephrase this is: “Recursive lending is another profitable avenue within these protocols. In this approach, users can both supply and borrow the same asset, earning a profit from the disparity between borrowing fees and incentives. However, it’s important to note that yields decrease as more capital enters the strategy. Therefore, the firm advises utilizing lower leverage when investing over $3 million in assets.”

Assessing The Risks Of DeFi

As a researcher, I’ve come across the concept of “Supervised Lending,” which is a combination of previous techniques. In this approach, individuals utilize their “less productive assets” such as Bitcoin (BTC), as collateral for borrowing funds. Subsequently, they employ these borrowed funds to invest in more “productive assets” that generate returns in various sectors, like Automated Market Making (AMM) pools.

As an analyst, I would caution that the returns from this strategy could be disappointing or even result in a loss. Borrowing costs may outweigh the rewards offered by the protocol, leading to negative yields. Additionally, there is a risk of liquidation if market conditions turn against us, and the value of our assets could decline, resulting in impairment losses.

Lastly, the report identified “staking with leverage” as an approach that generates “moderate” returns on cryptocurrencies such as ETH and SOL, which can be staked directly to contribute to their respective blockchain networks and earn rewards.

With this approach, the return on investment (ROI) stays positive so long as the borrowing costs for the particular asset are less than its staking rate. The profits increase in correlation with the level of leverage used, possibly surpassing a 10% Annual Percentage Yield (APY), which is significantly higher than the typical 2% to 4% yields obtained through conventional staking methods.

“These strategies, when used in tandem, can result in a intricate web of risks to take into account when it comes to rebalancing and realizing profits,” According to IntoTheBlock.

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2024-06-29 17:36