What are the Best DeFi Strategies to Earn High Yield?
Decentralized finance, or DeFi, has been one of the most prominent use cases of blockchain and cryptocurrencies, and can help users achieve extremely high yields on their assets with no middleman, like a bank, taking a cut. However, it is a constantly changing landscape, and yield farmers have to be vigilant in order to earn solid yields in good coins. Let’s take a look at a few tips, tricks, and strategies for earning a high yield in DeFi.
One of the most important decisions when yield farming is deciding when to exit one DeFi application or farm and move to another. Due to the variable interest rates, a protocol paying 10% one day may only be paying 5% on the next, and the more popular a farm becomes, the lower its interest rates typically go. In order to ensure that emotions or laziness do not get in the way of earning a yield, farmers should set a base APY that they want to hit, and move if a farm is lower than desired for a set period of time. For example, a base APY for stablecoins could be reasonably set around 15%, since there are multiple platforms like Curve and Anchor Protocol where this is possible. For Ethereum, a good number could be the rate that one could get by staking ETH, which is currently around 3.6%. For liquidity provision on different pairs, farmers can have a specific number in mind based on the correlation of the two assets. For example, ETH and MATIC are highly correlated, meaning their prices move together and thus less impermanent loss is experienced, so a lower interest rate like 20–30% could be sufficient. Having these numbers in mind beforehand helps farmers consistently earn solid rates.
Almost every popular DeFi protocol has completed an airdrop at one time or another. An airdrop is when a project gives users of the platform free governance tokens. They typically do this because they want to incentivize and thank early adopters, while also ensuring that their platform’s governance is sufficiently decentralized. They are analogous to if a company like Facebook decided to reward its first users with free shares of Facebook for using the platform and getting their friends to sign up. In the past, some of the largest airdrops were for Uniswap, Optimism, and ENS, all of which were worth thousands of dollars. In the world of DeFi, where there are dozens of new projects released every day, it may be worth moving away from the more prominent platforms to the newer ones in case they eventually airdrop tokens to their oldest users. Additionally, newer platforms typically have higher rates, since not many people know about them and their distributions are split among fewer people and less money. Some protocols to look at for airdrops include Zksync, ZigZag Exchange, Orbiter Finance, Arbitrum, and Arrakis Finance. There is added risk of exploits or bugs with new platforms, but the reward of thousands of dollars in free tokens just may be worth it in some cases.
DeFi yield farmers are often drawn into protocols with sky-high interest rates of over 500% that claim to be sustainable and can get its users rich quickly. However, this is simply not the case. Most of the time, the tokens with the highest interest rates also have ridiculous inflationary schedules, meaning that any yield you would gain from staking is immediately diluted by the influx of new tokens on the market. It is best to farm tokens that have less volatility, a high market capitalization, and are tokens that users would actually want to buy and hold. In some cases, auto compounders can solve the problem of less-than-desirable tokens. Auto protocols, the most famous being Beefy Finance, allow users to stake their tokens in them and have their gains automatically compound. For example, if someone were to farm the ETH-BTC pair on a decentralized exchange and get the XYZ token in return, Beefy Finance would automatically sell XYZ, and put more money into the ETC-BTC pair. This not only prevents users from having to hold a bad token, but also increases the amount of money they will be earning due to the effect of compound interest and saves the user the time and tax obligation of withdrawing their reward, selling it for the base tokens, and re-depositing them.
DeFi offers incredibly lucrative rates for those who know how to find them and could be good enough income to supplement a full-time job. That being said, there are of course risks involved, and the best farmers are able to manage risk while still reaping the maximum reward possible.
By Lincoln Murr