Get ready to make some serious money from your crypto stack.

HODLing leaves your tokens idle. Fortunately there’s a better way than just playing the waiting game.

Want to make money while waiting for your token to moon? How about getting your funds to work harder than you at the office?

Now you can!

Staking

Staking in the purest sense of the word, refers to proof-of-staking (PoS). This was the earliest way to earn “interest” on your holdings.

Just like how Bitcoin miners need to prove that they have “done work” via Proof-of-work (PoW), PoS token owners “mine” by holding on to their tokens.

Think of PoS as a toll on a road that some bloke is using. Each time he needs to clear a transaction in the blockchain he needs to pay a fee for his transaction to go through, and that fee goes towards the miners supporting that infrastructure.

So yes it is a way to get more of the same coin that you are staking.

An example is Cardano (ADA), an Ethereum competitor. Here you can join a stake pool and the rewards (after accounting for maintenance etc) is split among the stakers in the pool. Returns are typically single digit per annum (still several times better than the fixed deposit your bank is paying you), and are paid out in the original tokens to your address from which you staked.

And if the token goes up in value, VIOLA! You have just parlayed your dividend gains into capital gains as well.

You can also stake through a centralized exchange (Binance, Coinbase, Kucoin, Kraken, etc), which will invariably be more user friendly, but in return you probably earn less.

Difficulty level: Intermediate

Lending

Lending here has some similarities to the traditional finance world. Here is how a bank lends out your money:

Look at these uh-may-zing rates I’m getting on my fiat deposits!

And here is how a centralized crypto exchange lends out your money:

An example is Gemini Earn, BlockFi and Nexo. A slightly more advanced version is Binance Earn, where they also include other suites of products apart than plain ol’ vanilla deposits (and that’s why some returns can be higher). But the gist of centralized exchange lending is still the same.

The rate that you get for lending your token is dependent on current demand and supply (some of these levels vary on a daily or even hourly basis – yes crypto moves fast). Right now the yield on stable coins like USDT are relatively higher than a major coin like say Bitcoin, because a good number of people are looking to borrow USDT to buy crypto on margin.

Enter decentralized lending.

Decentralized lending is done on a decentralized lending platform. The idea is that there is no middleman and hence more juice for the liquidity providers or depositors (ie. end users like yourself who provide the funds).

How does it work? Well these platforms operate off smart contracts on the Ethereum smart chain (ERC20 format) or Binance smart chain (BEP20 format). Basically these are programmable contracts to govern and direct who and how much to pay.

The smart contract is a machine. It functions on what we call a trustless mechanism.

It doesn’t care if you have been declared bankrupt 29 times previously, or haven’t taken a shower in 3 days and stink to the high heavens. Or that your headshot and submitted photo ID pictures don’t match (exchange woes anyone?).

It doesn’t discriminate against race or gender demographics. Instead it lends you based on programmable metrics, like whether or not you have the necessary collateral available.

As a lender, your yield comes from interest paid by borrowers (who open leveraged positions). This yield is determined by lending pool utilization.

The ERC20 smart contract is a machine

Annual Percentage returns range between single digits and low double digits. Some of the more popular decentralized lending platforms that currently exist off the ERC20 format are Compound and Aave. Recently due to higher ETH transaction fees, BEP20 platforms (or Binance smart chain) such as Venus have been popping up.

Difficulty level: Intermediate to Advanced

Yield Farming / Liquidity Mining

This is where the magic happens. Instead of plain ol’ lending, we now have all sorts of financial transactions coming into the picture. Some even incorporate building blocks and derivatives which allow you to leverage off your base deposit so that you can increase your yield.

The Automated Market Maker (AMM), sometimes also referred to as a Decentralized Exchange (DEX) is basically a platform where you can go to trade crypto, as you would a centralized exchange. Only difference is, the middle man brokering the trade is now based off the DEX smart contract instead of the centralized exchange’s algorithm.

Let’s say if you wanted to trade the ETH/UNI pair. Previously in the past you would need to wait for Binance or Coinbase (centralized exchange) to list the coin, shore up enough liquidity on both sides, before a market can be made.

With AMMs, individual liquidity providers ie. users can now inject liquidity directly into the pool:

The DEX then issues tokens – in this case, Uniswap tokens/UNI.

Uniswap has to incentivize the end users to shore up liquidity through its incentive structure and tokenomics.

So it’s crucial to structure the rewards in line with desired user behavior (eg. providing liquidity for certain pairs / not dumping incentive tokens after receiving them).

UNI tokens can invoke certain privileges, eg. governance. They trade like equity and rise in value as the DEX (Uniswap) becomes more popular (these are also what will make you rich).

Another example for yield farming is an Aggregator or Yield Farm Optimizer.

Think of this optimizer as a resource allocator, that directs your funds to whichever DEX needs it more, and is willing to pay more for it. Remember, this is still a demand vs supply game.

Different platforms have different mechanics of how the incentive rewards are dished out. Returns here can go up into a few hundred or few thousand percent per annum. Yes you heard that right. You could potentially double or triple your money within a year (but these skewed rates usually don’t last that long).

Beefy Finance APYs (Yield Farm Optimizer on BEP20) – in case you think I’m full of it

APY is the daily compounded rate which tends to be much higher than the simple interest. But the simple annual returns are still in the 3 digit percentages. However! don’t get carried away by the headline yield – you need to pick one that you understand and suit your strategy for growing your crypto stack.

Difficulty level: Advanced to Expert

Where the Industry is Headed

Recent developments since last year have propelled this space into a multi-billion dollar industry. DeFi, or Decentralized Finance for short, is the key idea powering this concept. Instead of having a bank or middleman brokering the deal, we now have smart contracts filling the gap. Cheaper to maintain and requiring no coffee breaks, you can now see why there is more juice available to end users.

The Total Value Locked (TVL), or amount committed to DeFi platforms has ballooned from hundreds of millions to tens of billions in AUM.

Source: DeFi Pulse

A few things to keep in mind about the chart above.

  1. This is also largely due to Bitcoin’s rising price, which brings up the fiat value of all crypto coins.
  2. This is only representative of the ERC20 half of the DeFi TVL (as of Apr 2021). If we add in the BEP20 numbers, they should be much higher.
  3. These numbers include vanilla decentralized lending, yield farming and liquidity mining.

It’s still nascent for now, but clearly we’ve gotten off to a good start. There will be ongoing scams, and the occasional hacks from time to time. But DeFi is definitely made of stuff from the future and an awesome space to watch.

P.S. Nothing in this post is to be considered legal or financial advice. All of the writing here is meant for information and entertainment purposes, so DYOR and make decisions based on your own beliefs.

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