Good morning/evening

One of the things I have always liked about crypto is the ability to make your crypto work for you. Why leave your coins sitting around doing nothing when you could be earning a little extra on them?

Well, that was always my thinking anyway, and over the years I have tried quite a few different ways of earning passive income from my crypto. Some have worked out rather well, others I would rather forget about. (Grape, Frozen walrus and node season as a whole!) I have written about my reservations in DeFi at the moment, but still went ahead anyway, so that got me thinking. Are we actually taking far too much risk just to earn a few extra percent?

I am not talking about chasing those ridiculous yields we used to see during the last bull market. Anyone who has been around crypto for a few years will remember the days of hundreds, sometimes thousands of percent APY. Looking back, it was a huge red flag, but at the time plenty of us thought we had discovered the secret to making money. Of course, we hadn't lol.

These days I am a little more sensible, or at least I like to think I am, but I am becoming increasingly cautious about how much risk I am prepared to take to earn it.

Of all the different ways to earn crypto, native staking is probably the one I am most comfortable with.

I hold Solana and have staked more of it. I like the idea of delegating my SOL to a validator, keeping control of my wallet and earning some rewards for helping secure the network.

There are still risks, of course. Validators can have problems, rewards fluctuate, and depending on the blockchain, unstaking can take time.

I learnt that lesson with Celestia (TIA). Having to wait around 30 days to unstake when the price is falling is not particularly enjoyable. By the time your tokens become available, the opportunity to sell at a decent price might have disappeared. Been there, done that.

Now we come to something I have never been particularly keen on, liquid staking.

I understand the attraction. You stake your crypto, receive another token representing your staked assets, and can then use that token elsewhere in DeFi while your original crypto continues earning staking rewards. Sounds wonderful, doesn't it? But to me it starts sounding like a house of cards.

You have your original crypto staked somewhere, then you have another token representing that crypto, and then perhaps you deposit that token into another protocol to earn additional yield and some people go even further, borrowing against those tokens or putting them into other yield strategies. Somewhere along the way I start wondering just how many things need to keep working perfectly for the whole arrangement not to come tumbling down.

To be fair, liquid staking tokens are generally backed by actual staked assets. They are not simply creating extra crypto out of thin air. Some of the larger protocols have also been operating for years and have undergone numerous security audits but that doesn't remove the additional risks, and if you have used that token as collateral to borrow against, things could get rather ugly.

I am sure liquid staking works perfectly well for plenty of people, but personally I would rather earn a little less and have fewer things that could go wrong.

Now I cannot pretend to be completely innocent when it comes to taking risks in DeFi. I have used Aave to deposit collateral and borrow stablecoins to buy more Bitcoin. I have also used Kamino with Solana.

The idea was fairly straightforward. Rather than sell my crypto, I could borrow against it and use the borrowed funds to increase my Bitcoin holdings and when/if the market moves in my favour, it can work rather nicely.

Even with a large safety margin, there is still the possibility of liquidation if your collateral falls far enough in value. Borrowing rates can also change, and you are relying on smart contracts and price oracles functioning correctly, then there is the risk of something going wrong elsewhere in DeFi and causing problems for protocols that weren't directly involved. I still think Aave is one of the better established DeFi platforms, but that doesn't mean it is risk free.

Let's say you have $10,000 worth of crypto and you are considering putting it into a protocol offering 5% APY. That is approximately $500 a year, assuming the rate stays the same and ignoring any changes in the price of your crypto. Not a bad little bonus, but what if earning that $500 means exposing your entire $10,000 to additional smart contract or protocol risk? It only takes one serious exploit to wipe out several years of rewards.We tend to concentrate on what we might earn rather than what we could potentially lose.

This is probably where my thinking has changed the most over the years. Sometimes it is just easier to keep it simple, I have tried all of it, trading, LPs, staking, lending, ALTs and even microcap wild cards to name a few and yes I do still do a little, but with bigger buffers, smaller risk and have reduced the number of tokens I invest in , I don't see the shiny new thing and feel I must get into that now. I would like to think I am a bit more selective lol, Bitcoin, Solana and Stacks. Yes I still have some ALTs from last cycle, and the alerts for those are set at cost price, so no expectations there!

Only time will tell if I have made a huge mistake, what about you? Are you still chasing yield in DeFi, or have you started thinking that sometimes the safest APY is 0%? Are you concerned about the risks more now that AI is everywhere and have all the recent hacks put you off?

As always, thank you for reading and please feel free to comment.