As you all know, DeFi stands for Decentralized Finance, but some guys (like ChainLinkGod.eth) proposed recently to call it on-chain finance, because it is not always decentralized as we expect... Nevertheless, it is still possible to make money with DeFi, if you follow some basic rules.
Rule #1: Choose well your blockchain and DeFi protocol
Some blockchains are safer than some other ones. For instance, Harmony blockchain lost US$100 million recently due to hacked private keys. That's not a good sign. It means it is not really safe. That's probably the reason why most major DeFi platforms switched to other blockchains, like DeFi KingDoms which moved onto Avalanche (AVAX) blockchain. That's a huge loss for Harmony... That said, how can you assess yourself the level of security of a blockchain and its DeFi protocol? There are many parameters, but you can at least check if they were major exploits by checking rekt.news/leaderboard.
Rule #2: Identify the most profitable DeFi pools
A DeFi pool is generally a pool of two assets on which you earn a part of the swap fees. However, there are also single asset vaults. There are so many blockchains and DeFi protocols that it would take ages to go through all of them to find the best ones. Fortunately, there are some tools to help you:
Wait a minute... It is not as easy as it looks... First of all, the first two sites are rarely up-to-date, so once you think you have indentified a good pool, you need to check if the interest APY (Annual Percentage Yield) is still as high as they say. Secondly, a high APY does not mean you will make a lot of money.
Rule #3: Guestimate how much you can (really) earn
The first thing to take into account is the impermanent loss, which will be higher when the two assets of your pool are not well correlated between them. It is worth spending some time on this to understand well how it works. Otherwise, your money could progressively disappear due to this strange factor.
The other thing to take into account is the volatility of the assets which are in this pool. Let's take a concrete example. On Beefy Finance, there is a sETH-ETH pool on Arbitrum chain with an APY of 874.69M%. There is no typo, you read well: higher than eight hundred million percent... It looks cosmic...
On top of that, with two assets which seem to be both pegged to ETH. That's weird... So let's have a look at sETH to ensure it is really like ETH:
- This sETH (because there are some other ones, which might be confusing...) is a creation from Ripae Finance. It is linked to pETH, which would be, according to Ripae, "The better" (not the best...) algorithmic stablecoin on Arbitrum, pegged to the price of 1 ETH via seigniorage." (still wondering what it means...). Then, they explain what sETH is with this wonderful sentence: "Stake your pETH-ETH LP in the Tellers to earn sETH rewards."
- We can conclude that this sETH is a reward token to incentivize the investors on Ripae. sETH tokenomics: Circulating Supply: 2224; Total Suppy: 181710... That's why Beefy Finance gave themselves the following rating to this pool: "Micro market-capitalization, extreme volatility asset".
In summary
As usual, there is no easy money. You need to work hard to find the best DeFi protocols, and to check yourself that their assets are not too volatile. You also need to check that the DeFi protocol itself is safe through the audits which have been done or your own code review if you can... Which takes time. At the end of the day, what makes sense is to invest in a few safely audited pools with non-too-volatile assets which will provide you with reasonable APYs over time... The bad news is: The best DeFi pools are not so easily given, because if too many people jump on it, the APYs will quickly decrease...
Please find below a few links to earn a few coins...
