How to get DeFi yield and why invest in it

Your bank pays you a quarter of a percent. But some cryptos will pay you 6% or even more to lock in funds for “true believers” in a particular Decentralized Finance (DeFi) protocol. If you’re not afraid of seeing your token value drop by 20% or more, DeFi Return is your next crypto investment.

Return-paying DeFi cryptos are one of the main reasons cryptocurrency investors have branched out from Bitcoin to the alt-coin universe, led by Ethereum. But for a year at least, it is also about Algorand, which I have, because it brings back 6% of return. It’s not as secure as the Global X Super Dividend ETF (DIV), which I also own. But Algorand and other tokens are – for investors – another way to capture return in a cryptographically diverse way.

Many of these DeFi protocols (think of them as fintech startups, in layman’s terms) are for investors who have extensive knowledge of cryptocurrency, the platforms they operate on, and may lose most of their money. investment without losing sleep.

In short, there are many ways that DeFi projects pay their investors’ returns, not just by “Yield agriculture”.

A quick overview and three choices

DeFi is a financial service running on public blockchains, mainly Ethereum. DeFi tokens earn interest, allow you to borrow, lend, buy insurance, or simply trade as a speculative crypto investment.

“Yield Farming” is a reward program that has taken hold in the DeFi crypto world over the past year or so. If you want to compare it to a traditional investment, it’s like the yield on a bond or a dividend. This is arguably one of the main reasons why investors who do not use Algorand buy Algorand, among others.

Like a traditional dividend-paying stock or bond, the yield on DeFi tokens fluctuates depending on how these projects and exchanges deploy them. Anyone with a Coinbase account can easily find out which coins are earning a return. This is how I found Algorand.

“Investors should focus on the fundamentals of the project, not just the return it earns,” said Eric Nguyen, CEO of Spores Research and former senior investment analyst at Elliott Management, a hedge fund with more than 35 billion dollars in assets. under management. “If it is decided to keep the tokens of certain projects for the long term, then exploring paid systems is an option. But deciding to invest in coins solely on the basis of the yield offered will be problematic as there are also downsides to consider. One of the main issues is that the annual percentage return can be high but the available stake period is low – for example, you can hit 200% APY in 15 days, assuming it’s compounded daily. In reality, your coins balance will only increase by maybe 4.6% in those 15 days, ”he says.

Like traditional dividend payments, if the price per coin increases, the yield paid on your crypto gives you new coins and now you have more coins that are worth more money.

But DeFi return, to traditional Wall Street investors, looks a bit more like junk C-rated bonds. High risk, high reward, if you get the right time and the underlying instrument is strong and serious for it. pay what he promises.

“DeFi tries to emulate traditional financial service providers with a decentralized twist,” says Gil Shpirman, CEO of Don-Key.Finance. In April, Don-Key finalized a private funding round to kick-start its social return agricultural platform Defi to the tune of $ 2.2 million captured on some of the new blockchain funds like Black Edge Capital in Chicago, Genesis Block Ventures in Cayman Islands, MoonWhale in Bangkok and Morningstar Ventures in Dubai, to name a few.

Just like a bank takes a deposit from a customer and pays them 1% interest, then loans that same amount to another customer and charges 5% interest, a decentralized protocol will do the same thing but with a “smart contract”. In the middle to reduce costs and increase efficiency. Investors are paid in “rewards”, which are like yield and – depending on the project.

“Good examples are MakerDao, Aave and Curve,” says Shpirman.

The Maker Protocol is one of the largest decentralized applications in the Ethereum blockchain and was the first DeFi application to be widely adopted. Their DAI coin is a stable coin that primarily trades online with the dollar and earns around 2% return. It is one of the biggest stablecoins and it earns paying coins with a market cap of over $ 4 billion.

Aave, another DeFi protocol that I have considered purchasing, defines itself as a non-custodial liquidity protocol designed to earn interest on deposits and borrow crypto assets. If you owned DAI and deposited it in the Aave app, you could earn 1.57% APY. Aave pays the yield for the collateral, but not for the agriculture.

Curve Finance is not for beginners. Its main purpose is to allow users and other decentralized protocols to exchange stablecoins and thereby capture a certain return.

“You provide your capital and get a return on it, but it’s not without risk as some of the smaller DeFi projects have suffered exploits in the past,” Nguyen explains, which means “hack”.

“You should choose coins where you understand the fundamentals and believe in their long-term value, as the return may not be able to cover the decline in their value,” says Nguyen.

As this market becomes more sophisticated and becomes an extension of traditional Wall Street, investors who ultimately want to allocate more of their portfolio to crypto will need to do one of three things:

1) Wing it with the major coins – Bitcoin and Ethereum, or the grayscale ETFs that hold them, if you don’t want to be bothered to open an account on an exchange (you should, anyway)

2) Risk it with the DeFi coins you read from trusted investors and other sources or;

3) Go find a company that specializes in cryptocurrencies, open an account with them, and let them do the work.

Don’t fear the grim reaper

Recent crypto volatility, with Bitcoin struggling to recover more than $ 40,000 and losing around $ 375 billion in market cap over the past three weeks, is unlikely to kill interest in investing. DeFi, says Antoni Trenchev, co-manager at Nexo, a regulated company. financial institution for digital assets with $ 4 billion in London-based assets.

“There are so many legitimate projects (DeFi yield), but I think the future belongs to those who are compliant, well-capitalized, scalable companies with working products and highly professional teams,” says Trenchev, who believes that Nexo is one of them. of them. They offer their investor clients instant tax-efficient cryptocurrency lines of credit, high yield on crypto and fiat, send and pay capabilities, high-level crypto trading, custodial insurance and a crypto wallet called Nexo Wallet.

Although some say a new “crypto winter” is beginning, DeFi protocols built on Ethereum, for example, generated unprecedented revenue in May, according to the data. compiled by The Block.

The total locked-in value of cash pools in DeFi Yield Farming projects stood at $ 7,977,544,158 over the weekend.

More sophisticated transactions use DeFi marketplaces like Venus to lend their coins like a bank and receive interest or “rewards” in the Venus coin, XVS. The price of this coin has almost increased tenfold since January. Some of the higher yielding loan pools are for those who lend to Polkadot (DOT). It earns around 10%.

Pancake Swap is another for sophisticated traders. Some Pancake Swap trades look like 10x leverage bets in a traditional marketplace. I would avoid.

For this reason, I stay with Algorand and watch my rewards accumulate in my Algorand wallet.

“If there’s one takeaway from the recent episode of market volatility, it’s the reinforcement of the idea that in crypto, you need to take a long-term view because, on a scale of one, five, ten, that tends to outperform just about any asset, ”says Trenchev. Their NEXO coin has risen over 1.100% in the past 12 months.

“Space has survived and prospered thanks to and despite price drops of 30% and more, and a few times a year,” he says. “Cryptocurrencies remain the only open market that remains today and show that an asset – like Bitcoin – cannot be the best performing and not be volatile. Volatility is an essential characteristic of high asset performance.