Even though I have most of my money in it Bitcoin (BTC 0.28%)I still enjoy playing with other cryptocurrencies. There is a lot of potential to grow my portfolio by using DeFi, so I actively seek and capitalize on opportunities. Over the past two years, many DeFi applications have emerged and with them strategies to generate returns. You just need to know what they are and how to use them.
Grow your money with DeFi
Growth through DeFi applications
DeFi applications are like tools. The first step is to learn what tools are in your toolbox and how to use them correctly. As with any tool, there is a risk of injury if you don’t know how to use it. Misuse can lead to total loss of money.
Secured Loan Applications
The first tool in my toolbox is secured loan applications. Cryptocurrencies can be anchored in a smart contract and used as collateral to take out a loan. These are very risky applications because if the value of the collateral decreases too much, the application will confiscate your collateral to cover your debt. However, if you are careful and keep an eye on the amount of collateral you post and the amount of debt you have taken on, you can mitigate the risk. I prefer not to withdraw more than 50% of the value of my collateral. Interest on the debt accrues daily and you can pay it off at any time without penalty.
Applications for yield farming
Yield farms allow you to lend most cryptocurrencies to DeFi applications. These are applications that help decentralized exchanges work better. They do this by matching you, the lender, with the borrower, the decentralized exchange. The exchange then uses the funds you provide as liquidity for people making trades. When someone makes a trade, they pay a fee to the exchange. This fee is collected and distributed to the users who have lent their money to the exchange.
Whenever you provide liquidity to a yield farm, it is done in pairs. That is, you must lend equal parts of two tokens. So if you want to provide liquidity to the BTC/USDT liquidity pool, you need to provide $1,000 worth of Bitcoin U.S. dollar connection (USDT). This is risky as it exposes you to temporary loss. A temporary loss occurs when the price of BTC changes compared to USDT. Even though you deposited $1,000 worth of BTC and USDT, a withdrawal from the pool would give you more BTC units when the BTC price went down and fewer BTC units when the price went up. The reason it’s a temporary loss is because the loss doesn’t actually happen until you’ve retired. The reason it’s a loss is because in the event that bitcoin goes up and you get fewer units, you would have been better off just holding bitcoin and not putting your money into a liquidity pool.
However, there are ways to circumvent a temporary loss. Lending money to the USDT/USDC pool does not incur a temporary loss as the two tokens are mutually stable. So these are the types of liquidity pools that I prefer to lend money to.
A synergistic DeFi strategy
This brings me to my favorite DeFi strategy to implement: I can collateralize my bitcoin to borrow in the form of USDT and USD circle (USDC). Then I can make these stablecoins available to a USDT/USDC liquidity pool. As long as the interest rate of the liquidity pool is higher than the cost of borrowing the stablecoins, this strategy makes money. The risk is relatively low because even if the value of Bitcoin falls too much, I can always save myself by paying off my debt. This requires me to monitor the market for signs of a sudden price drop. Preferring to keep my stress low, I decide to pay off my debt when I see the value of my bitcoin going down compared to the amount of money I owe. To do this, I need to withdraw my USDT and USDC from the liquidity pool and settle my debts on the platform I borrowed them from.
My Favorite DeFi Applications
The same types of DeFi applications exist on any smart contract-enabled blockchain, so you are not locked into using Ethereum. I prefer using the DeFi applications on Cronos, a platform developed by Crypto.com. Tectonic is the secured lending platform and VVS Finance is one of the yield farms. The great thing about this strategy is that the applications you use don’t necessarily have to be the same ones I use. As long as the same functionality is there, you can find the applications on the platform of your choice. Be sure to only use verified and publicly tested applications. Even then, DeFi applications are still vulnerable to hacking, which can result in the total loss of funds. You can make money from DeFi applications, but do so at your own risk.
Keegan Francis owns Bitcoin. The Motley Fool owns shares of and recommends Bitcoin. The Motley Fool has a disclosure policy.
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