Investors have been allocated new types of cryptocurrencies. The decentralized financial space, … [+]
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Your bank will pay you a quarter percent. But some cryptos will pay you 6% or even much more for locking funds for the “true believers” in a specific decentralized finance (DeFi) protocol. If you are not afraid to see the value of your token drop by 20% or more, then DeFi yield is your next crypto investment.
Yield-paying DeFi cryptos are one of the main reasons cryptocurrency investors have diversified from Bitcoin to the altcoin universe led by Ethereum. But at least for the past year, it’s also been about Algorand, which I own because it’s a 6% yield. It’s 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 generate returns in a diversified, cryptic way.
Many of these DeFi protocols (think of them as fintech startups, in layman terms) are designed for investors who have a deep knowledge of cryptocurrency and the platforms they operate on, and who may lose most of their investment, without losing sleep.
In short, there are many ways DeFi projects are paying returns to their investors, not just through “yield farming.”
A brief overview and three tips
DeFi are financial services running on public blockchains, primarily Ethereum. DeFi tokens earn interest, allow you to borrow, lend, insure, or simply trade as a speculative crypto investment.
Yield farming is a reward system that has taken off in the DeFi crypto world over the last year. If you want to compare it to traditional investing, it’s like the yield on a bond or a dividend. This is arguably one of the main reasons investors who don’t use Algorand buy Algorand, among others.
As with a traditional dividend stock or bond, the yield of DeFi tokens fluctuates depending on how these projects and exchanges implement them. Anyone with a Coinbase account can easily find out which coins are yielding returns. That’s how I found Algorand.
“Investors’ focus should be on the fundamentals of the project, not just the return,” said Eric Nguyen, CEO of Spores Research and former senior investment analyst at Elliott Management, a hedge fund with over $35 billion in assets under management . “If a decision is made to hold the tokens of certain projects long-term, then exploring revenue-paying schemes is an option. But making the coin investment decision solely based on the yield offered will be problematic as there are downsides to consider as well. A key issue is that the annual percentage return can be high, but the available staking time is small – for example, you can get 200% APY in 15 days, provided it’s compounded daily. In fact, your coin balance will only increase by maybe 4.6% over those 15 days,” he says.
As with traditional dividend payments, as the price per coin increases, the return paid on your crypto gives you new coins, and now you have more coins that are worth more money.
But DeFi yield is more like C-rated junk bonds for traditional Wall Street investors. High risk, high reward if you get the timing right and the underlying instrument is solid and seriously pays what it promises.
“DeFi tries to mimic traditional financial services with a decentralized twist,” says Gil Shpirman, CEO of Don-Key.Finance. In April, Don-Key closed a private funding round to build its $2.2 million Defi Social Yield Farming platform, backed by some of the new blockchain funds such as Chicago-based Black Edge Capital, Genesis Block Ventures the Caymans and MoonWhale of Bangkok, and Morningstar Ventures of Dubai to name a few.
Just like a bank takes a deposit from a customer and pays them 1% interest and then lends the same amount to another customer and charges 5% interest, a decentralized protocol will do the same thing, but with a “smart contract” inside the middle to Reduce costs and increase 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 see significant adoption. Their DAI coin is a stablecoin that trades essentially in line with the dollar, paying a yield of around 2%. It is one of the largest stablecoins and high-yield coins out there with a market cap in excess of $4 billion.
Another DeFi protocol I looked at to buy, Aave defines itself as a non-custodial liquidity protocol designed to earn interest on deposits and borrow assets in crypto. If you own DAI and deposited it in the Aave application, you could earn 1.57% APY. Aave pays yield on collateral but not on farming.
Curve finance is not for beginners. Its main goal is to allow users and other decentralized protocols to exchange stablecoins and thus generate some yield.
“You provide your capital and get a return on it, but this is not without risks as some of the smaller DeFi projects have suffered exploits in the past,” says Nguyen, meaning “hacks.”
“You should choose coins where you understand the fundamentals and believe in their long-term value, as the yield may not be able to offset the drop in their value,” Nguyen says.
As this market becomes more complex and an extension of traditional Wall Street, investors who ultimately want to invest more of their portfolio in crypto need to do one of three things:
1) Fuel it with the major coins – Bitcoin and Ethereum or Grayscale ETFs they hold if you don’t want to bother opening an account on an exchange (you should anyway).
2) Risk it with the DeFi coins you’ve read about from trusted investors and other sources, or;
3) Find a specialized cryptocurrency company, open an account with them and let them do the work.
DeFi startups issue coins, pay interest as rewards for long-term holders, act as collateral for … [+]
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Fear not the Reaper
Recent volatility in crypto, with Bitcoin struggling to claw back over $40,000 and losing around $375 billion in market cap over the past three weeks, is unlikely to wipe out interest in DeFi investing, says Antoni Trenchev , Co-Managing Partner at Nexo, a US$4 billion regulated digital assets financial institution based in London.
“There are so many legitimate (DeFi earnings) projects out there, but I think the future belongs to those that are compliant, well-capitalized and scalable companies with functional products and highly professional teams,” says Trenchev, who believes that Nexo one is from them. They offer their investor clients tax-efficient instant cryptocurrency credit lines, high yield on crypto and fiat, sending and payment capabilities, high-level crypto trading, custody account insurance, and a crypto wallet called Nexo Wallet.
For example, despite some saying a new “crypto winter” is beginning, Ethereum-based DeFi protocols threw record revenue in May, according to data compiled by The Block.
The total value of liquidity pools in yield farming DeFi projects this weekend was $7,977,544,158.
More sophisticated trades use DeFi marketplaces like Venus to lend their coins like a bank and earn interest or “rewards” on the Venus coin XVS. This coin price has increased nearly 10-fold since January. Some of the higher yielding loan pools are for those who make loans in Polkadot (DOT). It pays around 10%.
Pancake Swap is another offer for experienced traders. Some of the trades at Pancake Swap are like 10x leveraged bets on a traditional market. I would avoid
Because of this, I’m sticking with Algorand and watching my rewards stack up in my Algorand wallet.
“If there’s one takeaway from the recent episode of market volatility, it’s that it reinforces the view that crypto requires a long-term view because it’s trending on the one-, five-, ten-year scale for just about every asset outperform,” says Trenchev. Your NEXO coin is up over 1,100% in the last 12 months.
“The space has survived and thrived because of and despite price drops of 30%+ and a few times a year,” he says. “Cryptocurrencies remain the only free market today, showing that an asset – like Bitcoin – cannot be the best performer, nor can it be volatile. Volatility is an essential characteristic of high asset performance.”
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