Keeping the value of your debt well below the value of your collateral is the best way to maximize returns while minimizing risk. Providing crypto without using it as collateral for lending is the safest and most straightforward approach, but lending stablecoins against stablecoin collateral is also relatively risk-free as their prices tend to stay the same. Lending and lending platforms are most bankable when offering bonus token rewards, but bonus APY is less reliable as it is subject to change.
Liquid staking solutions
Liquid staking tokens are derivatives of proof-of-stake tokens locked into custodial contracts and have become an integral part of yield farming strategies. A famous example of a liquid staking derivative is stETH, a token representing staked ETH locked into a staking contract until after Merge Ethereum. Liquid staking tokens like stETH can be deposited into other DeFi platforms for additional income.
The best proof-of-stake cryptos allow you to generate income for securing the network by staking coins with a validator, but this may include a blocking mechanism to prevent short-term withdrawals. Instead of directing your wealth to a single source of income, you can use a liquid staking platform like Lido to maximize the yield from staked cryptos. Liquid staking tokens can be made available to a lending platform as collateral for credit or as liquidity for a DEX.
By depositing liquid staking tokens into DeFi protocols, you can earn staking rewards while earning income as a liquidity provider or crypto lender. Liquid staking helps maximize the capital efficiency of your proof-of-stake cryptos, but a downside is that liquid staking derivatives run the risk of detaching from the underlying asset. While yield farming with liquid staking tokens can be more profitable, it does not reduce any of the risks.
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