One of the main goals for crypto users in DeFi is the pursuit of yield. Crypto has succeeded in democratizing yield opportunities for the average retail user allowing them to access financial tools that may have otherwise been reserved for select individuals, particularly those with high net worth. However, with great yield comes great responsibility. Especially in crypto, users are ultimately fully responsible for their funds with little room for recourse in the event of hacks, scams, or rug-pulls. Education is paramount as there is little hand-holding in this space. In this report we will dive into:
Crypto yield can broadly be defined as the investment return a user receives for providing a service with their tokens. These user activities are generally grouped in the following categories:
While both Proof of Stake (PoS) and Proof of Work (PoW) generate “yield”, the mechanisms involved and the recipients of the yields are distinct.
The core mechanism that powers PoW consensus is the use of computational power, i.e., electricity, in order to solve complex mathematical equations to verify transactions and create new blocks. In exchange for performing this work, miners are rewarded with newly minted coins, also called a block subsidy, as well as transaction fees.
In contrast, PoS requires users to hold a certain amount of cryptocurrency to validate transactions and create new blocks. Instead of using computational power to secure the network, cryptoeconomic stake is used. Therefore, the larger the amount staked, the more secure the networks is as the cost to attack it increases proportionally. Much like PoW, in return for staking their crypto and securing the network, validators are typically rewarded with a block subsidy and transaction fees.
The key distinction between these two systems is that in PoW you are not required to hold the native token in order to receive yield while this is not the case for PoS. In PoW, a miner is directly performing work to earn yield, which increases the barrier to entry as mining difficulty increases due to competition, which increases hardware requirements. Meanwhile in PoS the process is more passive. Systems like Delegated Proof of Stake (DPoS) and liquid staking democratize staking so that virtually any participant can earn yield without being restricted by hardware requirements. Stakers can essentially defer to service providers to handle the logistics by foregoing a small portion of their yield for the service
When DeFI Summer took off in 2020, and yield farming was born, users were able to earn extraordinary APYs through dilutive token incentives. The market downturn has revealed that these strategies are unsustainable over long time-frames, as they often place persistent downward pressure on the native token. This leads to decreased morale for token holders, potentially leading to an exodus, which spurs a vicious cycle. Incentives become worth less and APYs dwinde.
While token incentives can be an effective bootstrapping tool to garner attention and usage of a dApp, they generally need to be balanced by real demand and revenue in the long run, aka “Real Yield”.
Dashboards like Token Terminal are valuable in providing insight into how profitable protocols and DAOs are by tracking key metrics and ratios:
A burgeoning DeFi narrative has been Liquid Staking Tokens (formerly known as Liquid Staking Derivatives). These improve capital efficiency by allowing holders to stake their tokens while utilizing a receipt token that represents their stake in DeFi. This removes the opportunity cost associated with staking as holders no longer need to make the choice of locking up their capital for long periods of time (unbonding periods often last weeks) in order to earn staking rewards. They can now earn those rewards while stacking additional yield on top by using them in DeFi, e.g., lending their staked tokens or providing liquidity for them.
Liquid staking offers the benefit of increased liquidity, more yield opportunities, composability, and decentralization of stake across a number of validators. Due to the attractiveness of liquid staking, it serves to improve the security of blockchains by increasing the amount staked that otherwise wouldn’t have.
There are a number of Liquid Staking providers in DeFi today:
As there are so many complex ways that users can earn yield in DeFi, it can be overwhelming to know what the most optimal and safest options are. This is the issue that dashboards like De.Fi and DefiLlama’s Yields Dashboard address by providing tools that allows users to discover and monitor these opportunities in one place.
De.Fi: Provides unified data for the most popular DeFi protocols via an intuitive interface or flexible API. They have coverage of nearly 400 protocols, 40+ chains, and 140K+ tokens. Their tool also provides users insight into their centralized exchange holdings as well as DeFi. With their dashboard you can track your balance summaries, staked amounts, and any assets held in liquidity pools. Their Portfolio tool allows you to view all your assets as well as a detailed report monitoring price, profit/loss, and transactions history.
Their Explore tool allows users to explore yields across all their supported chains and protocols. This allows users to sort and filter for the highest yield opportunities across chains. They include filters for Single Token staking, LP staking, Lending, and Stablecoins. Their “REWARDS” column indicates which, if any, inflationary token rewards are included in the APR figure, which is helpful for users that want to distinguish between real yield and inflationary yield.
Another useful feature of their dashboard is their Scanner tool, which significantly mitigates DeFI risk through “rapid smart contract audits”. This tool quickly checks for known vulnerability and generates comprehensive audit PDFs. Their Audit Database includes 4K+ audits of DeFi protocols, and their Rekt Database includes detailed reports on vulnerabilities of past and present exploits. As exploits have become commonplace, the latest one being the $200M Euler Finance hack, this knowledge is becoming vital for users to weigh the risks of participating in yield opportunities.
DeFiLlama: The Yields section on DeFiLlama is another tool that allows users to search for yield opportunities. It tracks over 8400 pools on around 280 protocols on over 50 chains. It also distinguishes between Base APY, i.e., real yield, and Reward APY, i.e., token incentives. Additionally, it includes other attributes to filter by, e.g., whether the protocol is audited (Audited), the stability of the yield (Stable Outlook), and the confidence level of the yield outlook (High Confidence).
The tool also includes Strategy Finders for users looking to deploy various yield strategies, namely Delta Neutral, Long-Short, and Leveraged Lending strategies. The Delta Neutral strategy allows users to input a collateral token, and the finder will discover opportunities across protocols where users can earn a yield from lending tokens as well as incremental yield by depositing borrowed tokens in farms. The “Delta” indicated represents the additional yield the user is able to earn by using the strategy vs the supply APY they would earn by depositing their collateral token in a lending protocol.
The Long-Short finder is similar to the former although it looks for strategies across perpetual-swap markets including CEXs. For example, a user could long stETH (staked ETH) by purchasing spot stETH or minting it via Lido while simultaneously shorting ETH on an exchange. By doing this they would earn the “Farm APY”, which in this case is ETH staking rewards, while also earning the “Funding APY”, which is the yield paid to shorts by longs and vice versa. This yield is delta-neutral because the user doesn’t have any exposure to directional price movements.
Finally, the Leveraged Lending tool allows users to find opportunities where they can loop their collateral token to boost their yields. A user would deposit their collateral token in a lending pool, borrow the same token against their collateral token at the maximum Loan to Value (LTV) allowed by the protocol, and deposit this borrowed token as collateral, repeating the process to the desired degree of leverage (looping). DeFiLlama displays both the “Loop APY” and the “Boost”, which indicate the additional yield earned using this strategy vs the supply APY.
One of the most important considerations for users looking for yield opportunities is to truly understand where the yield is coming from. As the adage goes, if you don’t know where the yield comes from, you are the yield. Another crucial aspect is the security and ownership of your funds. Many of the high profile crypto failures of the past year have involved users losing funds to opaque black boxes like Celsius and Voyager where advertised “yields’ were simply hidden leverage.
Kado, on the other hand, is fully aligned with the Web3 ethos of self-custody. By onboarding users directly to their self-custodial wallets and DeFi protocols, users are always in full control of their funds and not subject to the whims of a few decision makers at the helm of centralized entities. With Kado, users are able to go to direct sources of yield straight from fiat, whether that be staking with a Cosmos validator, depositing with a liquid staking provider, or using the variety of options available in DeFi. By empowering users with the full tranparency of crypto rails, users can make more informed decisions about where and how they want to deploy their funds.
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