According to CryptoPotato, a recent report by crypto market intelligence provider IntoTheBlock has outlined the most effective risk-adjusted methods for earning yield in the decentralized finance (DeFi) sector. Despite the vast array of strategies available, the firm suggests that the most successful approaches are often the simplest, boiling down to a few key principles.
The first strategy highlighted by IntoTheBlock is Automated Market Maker (AMM) Liquidity Provisioning. In this approach, DeFi users deposit their assets into AMM pools for various trading pairs, thereby providing liquidity to facilitate trades. Depositors earn yield from trading fees each time a user swaps between two assets using that pool. AMM yields tend to be higher for trading pairs where the two assets have a low price correlation. However, the volatility of the assets in these pairs can also lead to the risk of impermanent loss for investors.
Another promising source of high yield is recursive lending, where protocol users can supply and borrow the same asset, profiting from the difference between borrowing costs and protocol incentives. As with AMM pools, yields decrease as more capital is added to the strategy, so IntoTheBlock recommends lower leverage when depositing over $3 million in assets.
The report also discusses supervised lending, which combines the previous two techniques. Users use an unproductive asset, such as BTC, as borrowing collateral, then use their borrowed funds to buy a more productive asset that earns yield in another area, like an AMM pool. This strategy can be risky, as borrowing rates can often exceed protocol incentives, and there is a risk of both liquidation and impairment loss.
Lastly, the report mentions leveraged staking as a strategy for producing medium returns on assets like ETH or SOL, which can be natively staked for yield to secure their respective blockchains. Yield remains positive with this strategy as long as borrowing rates for the asset remain below their staking rate. Returns rise as leverage increases, potentially exceeding 10% APY, compared to 2% to 4% yields generally seen with simple staking.
IntoTheBlock warns that the combination of these strategies can create a complex chain of risk considerations when it comes to rebalancing and taking profits.