How Do I Make Money in Crypto?

The best thing about trading crypto is the incredible volatility inherent in the space. The worst thing about trading crypto is the incredible volatility inherent in the space. So that nets out, but one positive that volatility yields is yield itself! While finding 4% on dollar backed USDC deposits was ALMOST as easy as depositing USDC in a Coinbase account, and would have been infinitely more than your local bank, there are still loads of other opportunities that yield significantly more. Whether you take a delta-neutral approach or simply want to add a bit extra on top of holding ETH, there are a million ways to use today’s DeFi protocols to find extra yield.

I’d bucket them three ways:

1) Basic

2) Actively Managed

3) Outsourced

Basic

I call it basic because it is the lowest effort, lowest risk, and offers the lowest returns. Some tokens literally require no action other than to buy and hold tokens in a wallet, while some require depositing tokens in a protocol that lends them out on your behalf. In these examples, you maintain full price exposure to the underlying asset.

Buy and hold examples:

1. DAI — Buy and hold on Coinbase for 2%
2. ALGO — buy and hold in Algorand Wallet for ~4%
3. XTZ — buy and hold on Coinbase for 4%
4. Staked ETH (stETH) — buy and hold stETH for ~4.5% after fees
5. ATOM — buy and hold on Coinbase for 5%

Lending:

Exchanges usually offer lending rates for deposits, which they lend out to traders who use leverage. Some rates are here: https://defirate.com/lend/. These are the equivalent of high interest rate accounts.

DeFi lending protocols also offer yield in return for staking your tokens. MakerDAO, Aave, and Compound are the three largest. Here is a breakdown of what Aave offers.

Notional Finance and Element.fi offer fixed rate lending and borrowing for single assets and LP tokens, respectively. Notional is pretty straight forward with their single asset platform (borrow USDC or lend USDC at 8.5%). Element is significantly more complex but lets you stake your variable-rate LP tokens from several different liquidity pools in exchange for a fixed rate note over a set term. I wrote a post about using Element for added yield on ETH.

Actively Managed

This is where you can actually participate in DeFi to find higher yields. In this space you can provide liquidity, stake tokens in asset management protocols, or use other advanced strategies.

Pure Staking — Most protocols and blockchains offer ways for users to stake their tokens to help secure the network and are paid a fee in return. For instance, you can stake your ETH to help secure ETH2, or just purchase stETH (Staked ETH) for 4.5% rewards. You can also stake your AVAX in the Avalanche wallet for about 4%. Often, governance tokens or other DeFi protocol tokens offer ways to stake their tokens on their protocol to access fees, like Curve, Convex, or Bancor.

Providing Liquidity — providing liquidity is a concept native to crypto and is the magic that powers decentralized exchanges, or DEXs. It entails staking both tokens of a particular pair into a pool that a DEX provides to traders as liquidity for that particular pair. As an LP, you earn fees based on the percentage of the pool you own — if you supply 1% of the AAVE / ETH pool, you are paid 1% of the fees that pool generates. Curve, Uniswap, Balancer, Sushiswap, and Bancor are the 5 largest DEXs, each with their own variation on the idea.

Yields depend on the percentage of the pool you provide and the volume of transactions against that pool. The stETH/ETH pool on Curve currently yields about 3% and is fairly stable.

Meanwhile, over on Beefy Finance, yields on some AVAX liquidity pools are significant, with the DOMI-AVAX pool yielding over 3,000%:

A downside of providing liquidity in a paired pool is “impermanent loss,” which can limit your returns due price changes in the underlying LP assets. If you are an LP in the DOMI-AVAX pool, impermanent loss is likely a minor factor if the pool is paying 3000%, but it’s still a factor. More on impermanent loss here. (Also, I have no idea what DOMI is.)

Most liquidity pools yield between 1%-10%, but what if you could use leverage to increase those returns? After all, there is little price risk in the stETH/ETH pool noted above, why not borrow some additional ETH and add it to the pool to collect more fees? Well, Alpha Finance offers a easy way to do this, with a number of pools yielding over 30%. There are specific risks to this type of yield farming which warrants additional consideration, but overall these yield farms should be safe as long as there are not wild price swings in one asset versus another in any given pool.

If impermanent loss doesn’t sound like something you want to take on, single-sided staking pools do not suffer impermanent loss and is a key component of Bancor v3 coming in early 2022. While they currently have an insurance mechanism active in Bancor 2.1, which returns any impermanent loss back to liquidity providers when they remove their tokens, there is a vesting schedule for that insurance benefit. V3 removes that vesting schedule and adds several other significant, and exciting, new features.

Asset Managers — If you don’t know where to LP tokens (Balancer? Uniswap?? Compound???), and don’t have the time to manage a portfolio of tokens, some protocols can help. Yearn was one of the first, and now the largest, “asset manager,” which programmatically finds the highest yield for your assets and deploys them automatically. BadgerDAO offers ways for you to deposit “wrapped” BTC (BTC traded on Ethereum) and earn yield, as well as several other strategies for Ethereum tokens. Yield on BTC is interesting because there are no DeFi protocols native to the Bitcoin blockchain. Yield optimizers, like Beefy Finance, provide a “cross-chain” protocol that provide yield opportunities, generally through providing liquidity, on several different blockchains like AVAX, BSC, or FTM. In addition, Beefy offers a healthy 13% yield on its native token for staking. It is called a yield optimizer because, like Yearn and other asset managers, they auto-harvest rewards for you. This means, for instance, Beefy automatically “credits” your account with accrued fees in real time, which saves you the time and fees you’d otherwise have to spend to claim those rewards, split rewards into two LP pairs, and then restake those tokens into a liquidity pool.

Option Strategies — I like this one. On Ribbon Finance you can stake several different assets into single-sided asset vaults that utilize options writing strategies for added yield. Options writing, in this case covered calls, is a classic investment strategy that can be a low risk way to increase returns. Their stETH vault is yielding about 20%, while their USDC vault is around 27%. These strategies are relatively low risk, do not expose you to impairment loss, and are fee efficient.

(Quick tangent: one of the coolest new financial primitives to come into this space is called a “Squeeth.” Bizarre name, but it’s a “perpetual option” that provides pure gamma with zero liquidation risk. That means it provides exponential exposure to upside, with exponentially less exposure to the downside. Basically, if price goes up, your return is x², but if price goes down, it is x^(1/2). Naturally, it’s massively beneficial for investors, so it is not permitted in the US.)

Nodes — The jury is still out on these. All protocols, including ETH, require a decentralized network of miners to maintain the blockchain and nodes to save all the data of the blockchain. There’s a ton of activity around new protocols offering “nodes” to investors, but by definition the data nodes that these projects portend to source earn no revenue. I think there is potential, but at the moment a lot of these protocols offering “infrastructure nodes” are essentially ponzi schemes, albeit “transparent ponzi’s”.

Outsourced

This is a fairly new concept and one I am focused on lately. The idea for these protocols is to provide a managed fund that the team manages on behalf of token holders. A core attribute for these protocols is the tax applied to transactions involving their tokens, sometimes as high as 15%. The tax serves as a source of revenue for the protocol that is used to fund the treasury, pay operational/marketing costs, and offer “reflections” to current holders. A reflection is a direct transfer payment from the transaction tax to all existing holders on a pro-rata basis. If I own 1% of all outstanding tokens, I get 1% of the reflection portion of the tax applied to every transaction. Additionally, holders of the tokens receive dividends from the treasury, as determined by the community or protocol team, as well as “reflections” from all buy/sell transactions of the token. The team either manages the treasury themselves or outsources management to other treasury managers.

Of these “DeFi-as-a-service,” “Finance-as-a-service,” DeFi3.0, or whatever else crypto Twitter is calling them at the moment, I am personally invested in a few, including Exponential Finance ($EXPO) and Reimagined Finance ($REFI). Both are developing and executing at a very high level, have very transparent and responsive teams, and have grown their treasuries significantly in very tough market conditions. I have learned a ton just reading Huf Haus’ posts on the moves he is making in the REFI treasury, while the small cap traders in EXPO have multiplied their small cap sleeve 25x over the last 2 weeks, posting their trades in real time. $EXPO is sitting at $9m market cap with about $900,000 in the treasury after launching 4 weeks ago, and pays about 57% APY in reflections. $REFI is $34m, has a treasury of $2.2m, and pays dividends directly from the treasury since removing their reflection tax. I think there is huge upside for both these tokens.

Now What?

This is a lot, and by no means exhaustive, but hopefully this provides some interesting opportunities for yield other than holding USDC in Coinbase account for 4%. If you are looking for a low-touch, fee-efficient way to earn a bit extra, I’d consider Ribbon’s options vaults, Alpha Finance, and potentially allocate a small portion to managed treasuries like $REFI and/or $EXPO. For yield on BTC, BadgerDAO has great options, and some of the yield opportunities on Beefy are hard to pass up, as long as the tokens you’re holding are worth long term holds.