The fact that we are in the middle of the bear market has now reached the bottom of the valley. Here you can find out how you can earn good interest rates with DeFi and stack coins despite the bad market situation.
Some investors have had to learn the hard way in recent weeks. It all sounded so cozy: 20% interest on a stack coin on the DeFi market – it promised Terra Luna. In the middle of a bear market! It was only a few weeks before this dream had to burst.
However, DeFi in particular can be a good chance to increase your wealth in the bear market. You need to keep in mind that not all stack coin and token pairs have a good risk-reward ratio. Risk-Reward refers to the profit you can potentially make with an invested US dollar. We have been looking for you!
DeFi – Interest through Loans, Loans and Co.
In the DeFi area, everything should be possible, which is also possible in normal banking. Of course without the intermediary, the bank. Everything decentralized. The protocol defines the rules of the game on the many internet platforms – it’s all organized by smart contracts. For example, users can borrow their money, borrow money, run dividend farming or liquidity extraction.
You have probably heard of Aave, a specialized crypto-lending platform.
At Aave you can borrow a large number of cryptocurrencies, but you pay interest on them. If you think it’s like a bank, then unfortunately we have to disappoint you. In order for users to receive cryptos, they must deposit crypto as security. Depending on the token, this security may be higher than the amount to be borrowed. As the lending rate is significantly higher than the lending rate, no one would think of undermining the system.
As the interest in such transactions is too low, we do not want to burden you with it. There is just no need to put your money to work at 2% a year. Nevertheless, we present a lucrative exception below in the examples.
It gets more interesting in the Yield Farming category and its Liquidity Mining subcategory. Yield farming means that when you use a platform, you get platform tokens in addition to the interest rate. Best Known Representative: Composition.
Although the percentage interest in Compound tokens is really low right now, some users were able to earn really good on them in the beginning – mainly because the token has been increasing all the time.
…. and now?
The heart of DeFi is now to provide liquidity in a pool. Just as you can exchange US dollars for euros in a bank, smart contracts allow e.g. and Ethereum / USDC pool. This means that users are simply switching Ethereum to USDC in this pool. These smart contracts, known as Liquidity Pools (LPs), can consist of two or more tokens. For this purpose, users in former ETH and USDC provide the pool with liquidity.
These users then charge transaction fees from others with a percentage of mostly 0.3%. Example:
- LP ETH / USDC includes $ 1 million in total ETH and USDC
- A trades for $ 2,000 on 1 ETH for USDC
- The exchange includes a transaction fee of 0.3 percent
- The smart contract draws 2,000 x 0.3 percent, i.e. 6 US dollars, and distributes it accordingly to the users of 1 million US dollars LP
- Users earn an annual interest rate (APY), which depends on the transaction volume
If users exchange millions a day, it will of course also be of interest to those who make ETH and USDC available. Most of the time, part of the APY represents the transaction fees, another APY in platform tokens. If a 40% APY is promised for a pool, find out if part of it is paid in, for example, Sushiswap tokens. This part then does not come from the transaction fees.
Does this work in the bear market with stack coins?
If liquidity extraction were so easy, everyone would do it. There are some risks associated with this. The greatest danger comes from Impermanent Loss (IL).. IL is the loss you suffer from liquidity, compared to just holding tokens in your wallet. Does that sound complicated? Absolutely not! An example:
- You have 1 ETH and 2,000 USDC. 1 ETH corresponds exactly to 2,000 USDC. After one year, the value of ETH rises to 4,000 USDC. Now you have 4,000 plus 2,000 that is, 6,000 USDC.
- Comparison: You place 1 ETH and 2,000 USDC in a liquidity pool. Assuming only your tokens are in the LP, then exactly 50 percent ETH to 50 percent USDC. 1 ETH corresponds exactly to 2,000 USDC. The value of ETH will continuously increase to 4,000 USDC as above. As users increasingly switch USDC to ETH, the ETH / USDC ratio in the pool will change. Other users buy more ETH, which means less ETH in the pool.
Assume you have only 0.5 ETH and 2800 USDC after one year. So in total you would have 3,000 USDC (0.5 ETH) plus 2800 USDC, that is 5,800 USDC. in This is a “loss” of 200 USDC compared to 6,000 USDC.
How can you avoid this loss?
Correlation plays the most important role
The focal point is always the higher demand for one of the two tokens. Because it moves the relationship in the pool and it comes to IL. Therefore, you should look for two tokens that have a similar price history. You can examine the connections here.
The closer this is to 1, the closer the price development is. But you can also calculate your IL on Balls.
As you can see is THE most important criterion for finding tokens that evolve in the same way. If a pair includes a stablecoin, a 400% development only affects your position by 25% IL. Simulating a bear market has even less of an impact on your position.
Liquidity pools – DeFi made easy
Now that you know about IL, you are ready to learn about the other important factor. Only invest in tokens you believe in. It just does not make sense to allocate ETH / USDC if you think ETH will go under. It does not matter if you lose value in the liquidity pool or by holding it. You’re losing money, period.
The same goes for liquidity mining if you get part of the APY in platform tokens. We show you this with our first tip:
1. USDC / wNEAR on Ref Finance at 20.4% APY
First of all, we believe in the symbol NEAR. Of the 20.36% APY, 10% is paid out in REF tokens. Ref Finance is the largest DeFi platform on Near. We also believe in this platform. Therefore, it makes sense to accept APY of around 20% in mixed form. Should the value of NEAR or Ref fall in the meantime, we remain calm and wait and see. HODL.
2) USDC / AVAX on TraderJoe to 39.3 percent APY
Just as we believe in NEAR, we also believe in Avalanche (AVAX). Benefit: TraderJoe pays out the entire APY through transaction fees. That means you just have to believe in the Avalanche token.
3) Loan Phantom on Aave at 12.23% APY
Even better, in this case, you only have to believe in the Phantom, as the interest is paid in the Phantom. This is lending, ie borrowing.
These 3 tips are examples of a wide variety of choices. Now that you know what to look for, your hands are free to make some money in the bear market.
All information contained on our website has been examined to the best of our knowledge and belief. The journalistic contributions are for general information purposes only. Any action taken by the reader based on the information on our website is entirely at your own risk.