How to get DeFi returns, and why invest in them

Your bank pays you a quarter of a percent. But some cryptos will pay you 6% or even much more for the inclusion of funds for the “true believers” in any particular decentralized finance (DeFi) protocol. If you’re not afraid of seeing your token’s value drop by 20% or more, then DeFi returns are your next crypto investment.

Yield-paying DeFi cryptos are one of the main reasons cryptocurrency investors have diversified from Bitcoin into the alt-coin universe, led by Ethereum. But for the past year, at least it’s also about Algorand, which I own, because it pays 6% yield. It is not as safe as the Global X Super Dividend (DIV) ETF, which I also own. But Algorand and other tokens are – for investors – another way to capture returns in a diversified, crypto-like way.

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

In short, there are many ways DeFi projects pay their investors returns, not just through ‘yield farming’.

A quick overview and three choices

DeFi are financial services that run on public blockchains, primarily 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 scheme that has taken off in the DeFi crypto world over the past year. If you want to compare it to traditional investing, it’s like yield on a bond, or a dividend. This is probably one of the main reasons why non-Algorand investors buy Algorand among others.

Like a traditional dividend-paying stock or bond, returns on DeFi tokens vary depending on how these projects and exchanges roll out. Anyone with a Coinbase account can easily discover which coins pay returns. This is how I found Algorand.

“The focus of investors should be on the fundamentals of the project, not just the returns it pays,” said Eric Nguyen, CEO of Spores Research and a former senior investment analyst at Elliott Management, a hedge fund with more than $35 billion in assets. under management. “If it is decided to hold certain project’s tokens over the long term, then investigating yield-paying systems is an option. But deciding on coin investment purely based on the yield offered will be problematic, as there are also downsides to consider. One main issue is that the annual percentage return can be high, but the available strike period is low – for example, you can reach 200% APY in 15 days, assuming it is compounded daily. In reality, your coin 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 return paid on your crypto gives you new coins and now you have more coins worth more money.

But DeFi returns, to traditional Wall Street investors, are a bit more like C-rated junk bonds. High risk, high reward, if you get the timing right and the underlying instrument is sound and serious about paying what it promises.

“DeFi is trying to mimic traditional financial service providers with a decentralized twist,” said Gil Shpirman, CEO of Don-Key.Finance. In April, Don-Key completed a private funding round to raise its Defi social returns farming platform to the tune of $2.2 million raised from some of the new blockchain funds such as Black Edge Capital in Chicago, Genesis Block Ventures in the Caymans, MoonWhale from Bangkok was caught. , and Dubai’s Morningstar Ventures, to name a few.

Just as a bank takes a deposit from a customer and pays him 1% interest and then lends the same amount to another customer and charges 5% interest, a decentralized protocol will do the same but with a “smart contract ” in the middle of reducing costs and increasing efficiency. Investors are paid in “rewards”, which are like returns and – depending on the project.

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

The Maker Protocol is one of the largest decentralized applications on the Ethereum blockchain, and was the first DeFi application to gain significant adoption. Their DAI coin is a stable coin that basically trades in line with the dollar and pays around 2% yield. It is one of the largest stable coins and yield paying coins out there with a market cap of over $4 billion.

Aave, another DeFi protocol I looked into buying, defines itself as a non-custodial liquidity protocol designed to earn interest on deposits and lend assets in crypto. If you own DAI and you have deposited it in the Aave application, you can earn 1.57% APY. Aave pays returns for collateral, but not for farming.

Curve Finance is not for beginners. Its main purpose is to allow users and other decentralized protocols to exchange stablecoins and capture some return this way.

“You provide your capital and get a return on it, but it’s not without risks, as some of the smaller DeFi projects have suffered in the past,” says Nguyen, meaning “hacks.”

“You have to choose coins where you understand the fundamentals and believe in their long-term value because the returns may not cover the decline in their value,” says Nguyen.

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

1) Wing it with the main coins – Bitcoin and Ethereum, or Grayscale ETFs that hold them, should you not want to bother opening an account on an exchange (you should anyway)

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

3) Find a specialist cryptocurrency firm, open an account with them and let them do the work.

Do not fear the Reaper

The recent volatility in crypto, with Bitcoin struggling to regain more than $40,000 and losing about $375 billion in market cap over the past three weeks, is unlikely to kill interest in DeFi investing, says co-managing partner Antoni Trenchev at Nexo, a regulated digital asset financial institution with $4 billion under assets based in London.

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

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

The total closed value of liquidity pools in yield farming DeFi projects stood at $7,977,544,158 as of this weekend.

More sophisticated trades use DeFi marketplaces like Venus to lend their coins like a bank, receiving interest, or “rewards,” in the Venus coin, XVS. That coin price is up almost tenfold since January. Some of the higher yielding lending pools are for those lending in Polkadot (DOT). It pays around 10%.

Pancake Exchange is another one for sophisticated traders. Some of the trades on Pancake Swap are like 10x leveraged bets in a traditional market. I would avoid.

For this reason, I stick 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 view that in crypto you have to take the long-term view, because on the one-, five-, ten-year scale it tends to outperform just about any asset perform,” says Trenchev. Their NEXO coin has risen over 1,100% in the last 12 months.

“The space has survived and thrived because of and despite price drops of 30% and more, and several times a year,” he says. “Cryptocurrencies remain the only free market left these days and show that an asset – like Bitcoin – cannot be the best performer nor can it be volatile. Volatility is an essential feature of high asset performance.”