Doing DeFi?

Many people have attempted Decentralized Finance and have often been wrecked. As an early Degen from 2020, I've experienced some of the best and worse of this but realize that nothing is 100% safe.

Realize that APY or APR is usually associated with some level of risk and often fluctuates in crypto. This number is usually derived from one of three categories: lending, trading fees, or inflationary tokens. Know how the platform is generating revenues. Giving out rewards as an inflationary token isn’t enough.

Aave is a DeFi protocol that facilitates lending and makes money via lending single-sided assets in an over-collateralized loan which is about as safe as it gets in crypto and thus why returns aren't as exciting. Note there is always platform risk and the potential for exploits that could drain funds.

Those providing liquidity for GMX on the other hand make money through lending and trading fees paid by those using its leverage trading platform. Unfortunately, most people get wrecked in leverage trading but if someone were to win big, depositors could potentially also take a loss. High rewards, often require high risks which one shouldn't take unless willing to accept a complete loss.

Next are traditional liquidity pools such as Sushi. People are often incentivized by liquidity pools with high APRs that are typically paired with a heavily inflationary token which quickly gets dumped. The superior token is then drained as it dollar costs average into the token losing value leaving the owner often with significant losses as the APR was likely tied to the inflation rate of the inflationary token. It's very similar to currency debasement. As inflation declines, so does the APR. Then it becomes a matter of whether the token will have any real value through future utility. It's always important to compare the circulating supply vs the total supply in order to understand how much more of the token will be released over time. Liquidity pools often also suffer from impermanent loss which is the loss in pool value vs having just held the cryptos in a wallet. Many hope that the fees generated will offset this loss.

The best tools are auto-compounders such as Beefy finance. Beef generates returns via trading fees and staking rewards through other platforms. Beefy combines liquidity between multiple users which allows it to harvest platform rewards from staking more frequently. Beefy auto sells the platform token to buy more of the underlying assets. Tokens pairs with higher APRs aren’t always best if paired with an inflationary supply and certain pools may have platform risk due to the underlying platform or protocol. I prefer liquidity pools using 'blue chip' cryptos such as ETH/WBTC or just simply using stablecoins. Other than for gas, crypto should be earned and not bought.

Another useful tool is Uniswap v3 which is a bit more complex but yield calculators can be found online. In a Uniswap v3 position, one sets up a trading range and makes fees while in that range. The pink as shown in the picture above represents the concentration of liquidity. It's always important to be happy with either asset as you might end up with one or the other. Per our example, the left of the orange bar would be 100% WBTC, and to the right of the blue bar would be 100% USDC. Realize the max price isn't what you'd get as it's dollar cost averaging in and out. The max and min are simply the prices at which you are no longer in the trading range. While in the trading range, fees will accrue which can then be harvested.

Disclosure Statement: The content being provided is an opinion piece for discussion and educational purposes only. One should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing presented here constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments whatsoever. Do your own research and due diligence. Seek proper council. Make your own decisions based on your level of risk and level of knowledge. Realize that any investment could result in loss. Don’t risk what you're not willing to lose.