Traditional investors routinely invest in companies and assets like bonds and real estate in search of a return that beats inflation. However, in tough economic times, with inflation at 10% and the possibility for companies to cut their dividends to preserve cash reserves, it’s not easy to generate a risk-adjusted return unless you’re up to 3%-5% in nominal terms satisfied the traditional markets .
While the blockchain sector offers certain revenue solutions, these suffer from management opacity, inadequate security measures, and generally poor regulatory oversight. In this article (source: ByBit) we explain the differences between yield farming and staking and how Phoenixa revolutionary returns product developed by a Hatchworks advisory firm offers one of the best risk-adjusted ways to generate healthy cash returns in the blockchain space.
Yield farming is a method of generating cryptocurrencies from your crypto holdings. It has drawn analogies with farming because it’s an innovative way to “grow your own cryptocurrency.” The process involves making crypto assets available for interest to DeFi platforms, which lock them in a liquidity pool, essentially a smart contract for holding funds.
Funds locked in the liquidity pool provide liquidity to a DeFi protocol, where they are used to facilitate trading and lending and borrowing. By providing liquidity, the platform generates fees that are paid out to investors based on their share of the liquidity pool. Yield farming is also referred to as liquidity mining.
Liquidity pools are essential for AMMs (Automated Market Makers) or Dexes that offer permissionless and automated trading using liquidity pools instead of a traditional seller-buyer system. Often, but not always, liquidity provider tokens or LP tokens are issued to liquidity providers to track their individual contributions to the liquidity pool.
For example, if a trader wants to exchange Ethereum (ETH) for Dai (DAI), they will pay a fee. This fee is paid to liquidity providers in proportion to the amount of liquidity they add to the pool. The more capital that is made available to the liquidity pool, the higher the returns.
As a yield builder, you can lend digital assets like Dai through a DApp like Compound (COMP), which then lends coins to borrowers. Depending on how high the demand is, the interest rates change. The interest earned accrues daily and you are paid out in new COMP coins, which may also increase in value. Compound (COMP) and Aave (AAVE) are some of the most popular DeFi protocols for yield farming that helped popularize this part of the DeFi market. Other protocols that focus on lending, such as Euler, also allow those who lend capital to earn interest.
Instead of just storing your cryptocurrency in a wallet, you can effectively earn more crypto through yield farming. Yield farmers can earn from transaction fees, token rewards, interest, and price increases. Yield farming is also a low-cost alternative to mining – since you don’t have to buy expensive mining equipment or pay for electricity.
More sophisticated yield farming strategies can be implemented using smart contracts or by escrowing a few different tokens on a crypto platform. A yield farming protocol typically focuses on maximizing yields while considering liquidity and security. However, most protocols are controlled by unknown management teams and developers, with moral hazard being a significant concern. Yields are rarely sustainable.
A yield farming protocol is only as sustainable as the project’s tokens into which one is deposited to provide liquidity. As mentioned, yield farmers can earn through transaction fees, token rewards, interest, and price increases. Transaction fees depend on volume and volume is a function of the news flow in a project. Most crypto projects are hype fests with little real news flow of economic substance. Since the project isn’t delivering any real traction over time (real concurrent users, real cash flows), the newsflow cycle weakens and volume tends to dry up. Token rewards are only worthwhile when the token price is not in a death spiral and unfortunately their tokens which are usually inflationary also tend down over time as the defi protocols ultimately fail to deliver. Thus, the only “real” source of income remains interest on loans or other actual activities of real value.
Phoenix, the app, installs your liquidity on a global Dex liquidity line, but focuses on yield farming efforts on only the most valuable and relatively stable digital assets such as Bitcoin, Ethereum, and certain stables.
There are no other payouts in the form of inflationary tokens from a startup project – which we think is gimmicky and unsustainable – and the app limits transients due to natural hedges built into the way liquidity is installed Losses significant and aligns with crypto prices ranges from 0.1-0.5x.
APYs are earned every minute, paid out in USDC and funds are never frozen. APRs tend to be in the 7-20%+ range, depending on the risk level you choose. During periods of high news flow, APYs typically rise to 50-100%, but can also drop as low as 3-5% on weekends and quiet periods.
The team is fully doxxed and the official licenses are in place. There is no risk of a rug pull or hack based on contract errors when using Phoenix as all smart contracts used are from reputable decentralized exchanges that have been extensively audited.
Staking is the process of supporting a blockchain network and participating in transaction validation by committing your crypto assets to that network. It is used by blockchain networks that use the Proof of Stake (PoS) consensus mechanism. Investors earn interest on their investments while waiting for the block rewards release.
PoS blockchains are less energy intensive than Proof-of-Work (PoW) blockchains like Bitcoin because, unlike PoW networks, they do not require large amounts of computing power to validate new blocks. Instead, nodes — servers that process transactions — on a PoS blockchain are used to validate transactions and act as checkpoints. “Validators” are users on the network who set up nodes that are randomly selected to sign blocks and receive rewards for doing so.
You may not even need to know the technicalities of setting up a node, as crypto exchanges often allow investors to provision their crypto assets and the network then handles the node setup and validation process. For example, brokers like Binance, Coinbase and Kraken offer this service.
Because PoS consensus is ownership-based, an initial setup is required to distribute coins fairly among validators for the protocol to work properly. This can be done through a trusted source or through proof of burning. Once staking has started and all nodes are in sync with the blockchain, proof of stake becomes secure and fully decentralized.
Staking ensures that a blockchain network is protected from attacks. The more shares involved in a blockchain network, the more decentralized and secure it will be. Because stakers are rewarded for maintaining the integrity of the network, it is possible for them to earn higher returns than those investing in other financial markets, but this is rare. Stake returns on Ethereum, for example, are around 5% gross. In addition, staking also poses risks as the stability of networks can fluctuate over time.
DeFi stands for decentralized finance, an umbrella term for financial applications that use blockchain networks to avoid using intermediaries in transactions.
Now, for example, when you take out a bank loan, the bank acts as an intermediary by making a loan. DeFi aims to eliminate the need to rely on such an intermediary through the use of smart contracts, which are essentially computer code executed based on pre-established conditions. The overall goal is to reduce the costs and transaction fees associated with financial products such as lending, borrowing and savings.
When it comes to staking, there are some additional measures that investors should consider when getting exposure to DeFi. These include:
- Considering the security of the DeFi platform
- Assessing the liquidity of staking tokens
- Investigate whether rewards are inflationary or not
- Diversification into other staking projects and platforms
In theory, DeFi platforms are often more secure than traditional financial applications because they are decentralized — and therefore less vulnerable to security breaches. In reality, Defi platforms often lack the appropriate code checks and can be hacked and dumped, leading to total failure, as we saw with Euler earlier this year.
When considering yield farming vs. staking, staking is often the easier strategy to generate passive income as investors simply opt into the stake pool and then secure their cryptocurrencies. Yield farming, on the other hand, can take a bit of work – as investors decide which tokens to lend on which platform, with the option to continuously switch platforms or tokens.
In order to provide liquidity as a yield farmer on a decentralized exchange (DEX), it may be necessary to deposit a pair of coins in sufficient quantity. These can range from niche altcoins to high-volume stablecoins. The bonuses are then paid out based on the deposited liquidity. It’s often worth constantly switching between yield farming pools, but doing so also requires paying additional gas fees. Additionally, managing protocol risk, ensuring the underlying liquidity pool is not made up of tokens from a substandard project, and general fickle loss management makes yield farming tedious.
For this reason Phoenix, However, for the aforementioned reasons, it does all of this on autopilot.
Team Hatchworks
Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers
https://nov.link/cryptoanswers
Comments are closed.