I’m not gonna lie. To make money without risk, you need to start with money. If you start with a small budget, you will earn some money, but if you start with a bigger one, you will earn much more. We use to measure return on investment as APR (annual percentage rate) or APY (annual percentage yield). The difference between them is that the last one compounds returns to compute the yield.
This is all the theory I think you need in order to understand the core ideas exposed in this article. Let’s suppose that you, the investor, proposed a set of constraints before investing:
you are not willing to expose your assets to market volatility, i.e., you will hold just stable coins (cryptoassets paired 1:1 with fiat money);
you are not willing to lose even a penny in your holdings, i.e., you are looking for strategies that only increment the value of your position time over time.
When I say “without risking a penny”, Im talking about financial risk. Please consider that there could be other kind of associated risks:
- risks associated with the smart contracts: are you going to stake on a contract? What if the contract is hacked by a third party? How to reduce this risk: only stake on contracts which have been audited (look for public audit reports)
- risks associated with the operation itself: are you going to transfer funds from one wallet to another? What if you have a typing error, and you send the assets to another (non-owned) wallet? How to reduce this risk: always copy-paste addresses instead of typing characters
- risks associated with stablecoins: some coins are dollar-pegged and their value depend on fiat reserves held by the companies behind the project. Historically, there have been attempts to discredit the reserves of some currencies such as USDT, but the project has survived all audits. How to reduce the risk? Never depend on a single stable coin, distribute your assets.
- other possible non-common risks, like errors in smart contracts functionalities, scam centralized eschanges that run with user funds, etc.
I am exaggerating here, but I mention these topics so that you are aware of risks that go beyond the trading strategy. Now, let’s discuss some investment possibilities.
Option Number 1: Fixed Rate Pools on Big Exchanges
You have bought some crypto. You hold your assets in some stable coin like, let’s say, USDT (which is 1:1 paired with american dollars). The first option you have, the simpler and the very basic one, is to subscribe your savings to a pool with a fixed rate in a centralized exchange. For example, in Binance, you can subscribe USDT or BUSD on the Flexible Savings and Locked Savings products. The last one works like a classical bank deposit with fixed term, and the first one, allowing the possibility to withdraw funds at any time, without losing the earnings. Usual APY in this kind of products: between 1% and 2%.
Option Number 2: APY Lending on Centralized Platforms
This opportunity requires an extra step. Once you have bought your crypto, you should withdraw them from the exchange and deposit into a lending platform like, for example, Nexo or Celsius. Those platforms offer users instant crypto credit lines. You can earn yield on your savings by depositing them here. Nexo process daily interest payments and Celsius weekly payments. On these platforms, you can expect an APY between 8% and 12% on your stable coins.
Option Number 3: APY Lending on Decentralized Platforms
This is a more complex possibility. You need to have some technical knowledge in order to handle decentralized applications. Platforms like Aave and Compound support decentralized (peer-to-peer) loans. You can expect an APY between 2% and 10% on your stable coins in this platforms. Benefits compared to Possibility Number 2? Decentralization, which means, no company holding your assets in your name; just smart contracts (transparent, audited and non-owned code) in the middle.
Option Number 4: APY Providing Liquidity on Decentralized Swaps
Some decentralized platforms like Uniswap, Sushiswap and Pancakeswap, to give just some examples, allow users the possibility to swap between assets. Those platforms work using decentralized liquidity pools in the middle. Suppose a user wants to swap USDT in exchange of DAI, he uses the USDT-DAI pool depositing USDT and withdrawing DAI at market price (aprox 1:1). This swap wouldn’t had been possible if the pool hadn’t had DAI liquidity. This is where liquidity providers come to the equation: they earn yield on they assets, by providing liquidity in these swap pools. How? Simple, a small fee is charged to the users on each trade swapping assets. If you become liquidity provider, you could expect an APY between 2% and 25% or more, depending on the current pool liquidity and its use frequency: it is expected that most popular pools collect more fees (but also popular pools are not competitive enough, due to higher value locked).
By providing liquidity, you receive LP tokens. Hold them! They are used to claim assets back when you want to close the position.
Option Number 5: APY Farming LP tokens
This Option requests just one extra step from the previous one: staking the LP tokens on a farm, like PancakeSwap or Biswap. Farms usually compensates users that stake LP tokens by minting them protocol tokens. Those tokens should be sold in exchange of a stable coin as soon as received in order to freeze the APY promised by the farm. Expected yield between 8% and 25% depending on the blockchain and farming platform. Looking for harvest automation? Contact us at Rather Labs: we have developed a series of bots and processes that automate some core operations like depositing, swapping, harvesting, withdrawing, and even choosing between pools based on monitors.
Option Number 6: APY Staking on Vaults
By this point you might imagine that there is a universe of opportunities to stake/lend your assets and/or farm your LP tokens, not only because you need to choose which stable coin to hold, but also because you need to choose the right platform and the right pool. Sounds like an optimization problem isn’t it? Some platforms like RabbitFinance or Autofarm are yield optimizers. You stake your assets on a vault, and the platform manages them in a decentralized way, consuming some pre-defined optimization decentralized strategies.
You can expect between 5% and 25% APY on those vaults, depending on the network you choose, the assets, the platform madurity, etc.
Option Number 7: Flash Loans to Arbitrage
This strategy is a by far the most complex in this presentation. If you are unfamiliar with arbitrage, you can refer to this article to understand how it works, and to this article in which I presented a profitable arbitrage strategy. Those articles were written a couple of years ago when DeFi was still a baby in the crypto space, and so common strategies were implemented consuming API endpoints from centralized exchanges. Now days, with a much madure DeFi ecosystem, we can make use of flash loans to get access to liquidity and operate in a fraction of a second: in the same blockchain transaction we ask the loan funds, we use those funds in an arbitrage strategy, and we repay the loan. All that even without the need to provide a collateral guarantee! This possibility is amazingly powerful, but pretty complex to implement, so I would motivate you to move forward with this only if you have some smart contract development experience (or if you are willing to learn!).
I hope this article is educational for those who are starting their steps in the crypto investment world. My intention is not to provide financial advice at all, but, if you are still unfamiliar with the crypto space, to open your curiosity to this new exciting and passionate world.
Get in touch with us at ratherlabs.com