Cryptocurrency returns are back at 70% and DeFi is becoming a hot spot for leverage again

Memory is proving to be extremely short in the world of cryptocurrencies: With the resurgence of the investment strategy known as yield farming, trading platforms are once again offering returns of 70% and more.

Less than 18 months after the collapse of algorithmic stablecoin project Terra that triggered an industry-wide meltdown, exchanges from GMX to Binance are offering double-digit incentives to boost trading activity after months of stagnation. Terra, once the most ambitious experiment in the DeFi space, had promised a return of nearly 20% to investors who deposited funds into its protocol.

“It will always stay that way,” said Zaheer Ebtikar, founder of crypto fund Split Capital. “People can’t help it. [Crypto] is literally the most FOMO industry ever.”

The high yields, essentially not found elsewhere than in distressed securities, were key to the emergence of decentralized finance in 2020, which aims to eliminate traditional intermediaries such as banks. Yield farming involves lending cryptocurrencies in exchange for interest and sometimes fees, with the bulk of the reward often coming in the form of units of a new cryptocurrency.

The DeFi market grew to as much as $179 billion in November 2021, just before the implosion of the FTX exchange triggered a massive investor pullout from digital assets. After crypto markets rebounded in October, the DeFi sector is now valued at about $44.1 billion, according to data tracker DeFiLlama.

GMX, a DeFi derivatives exchange that allows users to trade Bitcoin and other cryptocurrencies with up to 50x leverage, launched an incentive program with Arbitrum DAO on Wednesday. The decentralized autonomous organization is behind Arbitrum, a so-called Layer 2 blockchain that aims to reduce congestion on the Ethereum network. Through the program, users can earn annual returns of up to 70% for trading, providing liquidity, and other activities on one version of GMX. Approximately $12 million or $12 million in ARB tokens, Arbitrum’s governance token, will be used to pay the additional yields.

Demand has also increased as interest rates for borrowing stablecoins like USDC and Tether have risen above 10% in recent days on Aave, the largest peer-to-peer lender in the DeFi space. The rise in lending coincides with increasing demand for leverage in trading.

“Traders who want to gain leverage need to deposit risk assets into lending protocols and borrow dollars against those risk assets,” said Keone Hon, co-founder and CEO of Monad Labs, the developer of a new blockchain called Monad. “They then use those dollars to buy more risky assets.” The demand for leverage is the fundamental source of returns.”

Yield farming was once a popular method for crypto projects to acquire new users in a short period of time. It was particularly popular in the ultra-low interest rate environment during the Covid-19 pandemic. That changed as crypto prices fell and traditional interest rates rose.

“It simply took the industry a while to get used to a system of high trading returns on low crypto volume and be able to develop competitive products in this space,” said Leo Mizuhara, founder and CEO of institutional DeFi asset manager Hashnote . Tradfi is a popular term to describe traditional finance.

“The GMX product, in my opinion, only makes sense if there is interest in crypto trading, and that is now in its latest phase,” Mizuhara added.

The incentive programs don’t just apply to DeFi. For example, the largest crypto exchange Binance promotes a “bonus” return program through its Earn project, where Binance offers up to 13% annual returns to users who park their USDT stablecoins on Binance. According to the exchange’s website, Binance offers an additional 7% return on up to 500 USDT on top of the 5.93% interest rates on USDT savings.

“With animal spirits resurgent, projects may think now is a good time to issue token emissions to gain some momentum,” said Monad Labs’ Hon.

This article was provided by Bloomberg News.

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