Blockchain
How is DeFi Yield So High?
07 Mar 20224min
“I shot an arrow into the air,
It fell to earth, I knew not where;
For, so swiftly it flew, the sight
Could not follow it in its flight.”
It fell to earth, I knew not where;
For, so swiftly it flew, the sight
Could not follow it in its flight.”
- Henry Wadsworth Longfellow, The Arrow and the Song, 1845
Moving into 2022, the world is facing record-breaking inflation rates across the board. The ongoing pandemic underpins longer-term financial effects such as supply chain issues, fuel consumption rates, property ownership and more. Uncertainty and imbalance is the name of the game, leading to more and more people searching for viable alternatives outside of traditional banks and their wavering interest rates to invest and reap higher yields. DeFi has opened this gateway.
Savings accounts as we know them rarely promise more than 0.05-0.5%, if you’re lucky. DeFi accounts promise usually 3-8% on annual percentage rates (APRs), if not many more orders of magnitude! It almost sounds too good to be true!
Rather than letting your money sit in a bank vault for anonymous managers to play around with or lend to others, DeFi is set up for you to direct the funds exactly where you want it. The multi-faceted approach of DeFi through use of smart contracts, dynamic liquidity pools and more, ensures unprecedented APRs for anyone willing to take the dive.
The way DeFi returns yield so high can be broken down into four main angles:
| Mechanism of Yield | How it Works | Typical APR | Common Examples |
|---|---|---|---|
| Staking Rewards | Compensation for putting your hand up to help “secure the blockchain”. It’s like putting your own crypto to work for the global network in verifying transactions for the blockchain. | 5-6% | You can stake ETH on most centralised platforms such as Kraken, Coinbase or Binance. Platforms like Lido also provide liquidity for staked assets. |
| Lending Rates | Interest earned for providing cryptocurrency for others to borrow. Cuts out many of the middlemen in traditional banking by using smart contracts and global liquidity pools to connect lenders and borrowers. | 4-10% | AAVE and Compound are two of the most prominent lending platforms and the ones used by Block Earner. |
| Exchange Rewards | Compensation for providing funds to global exchange services. It’s like you are a part-owner of a foreign currency exchange booth at any airport or tourist trap in Europe. | 5-15% | Any decentralised exchange like Sushi. Thousands of different tokens are available to users. You earn a cut of all trades that are done with any of those funds. |
| Fee Distributions | Fees charged by various platforms that are distributed to their token holders. Kind of like ‘buying into’ a company or platform that you want to support long-term. | 3-5% | The above mentioned Sushi also have a feature for their token holders called the ‘Sushi Bar’. This is not staking crypto in the sense of validating a blockchain, but merely a way of retaining users and encouraging a platform to grow based on token staking. |
These four main pillars of DeFi yields show that a solid 5-10% APR is near guaranteed for investments. There are two more avenues that ‘promise’ astronomical rates of hundreds, if not thousands of percent on APR.
The first is by incentivised liquidity pools. This consists of essentially dishing out rewards for new users to onboard with a platform. It is considered risky with the considerable inflation or crashes that may occur, and already have in some cases - check out IRON’s story for more.
The last ‘too-good-to-be-true’ is that of auto-compounding protocols. Using the mathematical miracle of compound interest, it is possible in theory to make an investment that with 200% APY - annual percentage yield (accounts for compounding interest), not annual percentage rate (only relies on simple interest).
Traditionally, to utilise compound interest in DeFi involved manually managing your interest from multiple sources. The field of automated compound services is still emerging, but for now, be wary of anyone promising something that sounds too good to be true.
DeFi is a highly dynamic field with many angles that can be put to work for you and your assets. Block Earner understands the insides and outs of these four pillars of APR, and facilitates stable cryptocurrency returns in the increasingly volatile and uncertain world around us.
