How to earn passive income with DeFi? Rule #2: Choose well your protocol
Choose well your protocol

How to earn passive income with DeFi? Rule #2: Choose well your protocol

By Cryptofab | Cointune | 25 Aug 2021

In my previous article, I mentioned the risks of rug pull with DeFi protocols and the importance of checking the code or at least the audit report.

Now the question is: how to choose the right protocol and the right blockchain, and which one should be chosen at first?

To start, you need to get an overview of all the protocols and blockchains. You can use a site like DeFiLlama:

Then, there are 2 possible strategies: 1) To choose the blockchain at first and then the protocol and tokens; 2) To choose the tokens and protocol at first.

Let's apply these 2 possible strategies to Avalanche's coin AVAX which has been quite bullish in the last few days:

1) First strategy: I want to use the Avalanche blockchain (please check how to use Avalanche through Metamask at first)

In that case, I look at all the protocols using Avalanche blockchain and then select the top 3 protocols in TVL:

  • Benqi: the audit has been done. There is at least one vulnerability with the medium risk level. I would recommend to use it cautiously...
  • Pangolin: the audit is done because it is "a fork of an existing audited protocol"... So the question is: from which protocol has it been forked? The answer is: Uniswap V2. It seems to be a good reason to trust. However, the liquidity pool APYs are not as exciting as planned
  • Trader Joe: the audit has not been done. Although the APYs are quite attractive, I would not recommend to put a lot of money inside

As only Pangolin gives the expected confidence level for the time being but liquidity pool APYs are rather low, we have to search for alternative options.

2) Second case: I want to have AVAX but not necessarily on Avalanche chain

In that case, I look at the top 10 protocols in TVL and then select the ones using at least 3 blockchains (which increases the chance to find the AVAX token) in one of their liquidity pools:

  • Curve: this protocol is already on 4 blockchains and has been audited. Unfortunately, it is specialized in stablecoins. Not what I am looking for
  • Sushiswap: this protocol is already on 7 blockchains. The audit report is available and shows vulnerabilities, which had to be fixed. However, Sushiswap has been used for a long time now, with no exploit reported, except that a white hat recently discovered a vulnerability which could have been exploited but has been fixed since that. Therefore, we cannot say it is 100% safe but 90% seems a good assumption. Furthermore, I have found the liquidity pool AVAX/ETH on Polygon chain, with an APY (>200% as of now) higher than what I could find on the AVAX chain

Conclusion: as my priority was to be exposed to AVAX on the most possibly safe protocol, I decided in that case to use Sushiswap on Polygon chain which offers higher APY for the AVAX/ETH pair than on Avalanche. However, this may change soon. It is likely that Sushiswap has launched that pool in order to prepare the launch of their protocol on the Avalanche blockchain, and in that case it will be likely worth to migrate from Polygon to Avalanche.

In summary, there is not one best chain or protocol. You have to adapt your strategy to the market. But in case, check the audit report to avoid rug pull.

On a different topic, if you want to keep $10 EGLD (the token of Elrond that is also working towards DeFi), please click here.




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