At the latest with the crash of the Terra crypto project (LUNA), many unsustainable developments in the DeFi market came to an abrupt end.
The days when you could earn between 10 and 20 percent interest a year on your stablecoins in DeFi are over. Meanwhile, DeFi protocols such as Anchor, Compound or Aave actually throw off less return (1-3 percent) on stablecoins annually than U.S. government bonds (4-5 percent).
But if you know where to look in the DeFi space and you are willing to take a slightly higher risk, there are still numerous ways to make money in DeFi.
Below are three DeFi protocols you can use to earn interest on Ethereum, Bitcoin, and Stablecoins.
1. DeFi Lending Protocol Maple Finance (MPL)
Maple Finance is a lending platform, for under-collateralized loans. Unlike so-called overcollateralized loans, which can be taken out using DeFi's Aave or Compound protocols, for example, undercollateralized loans are not 100 percent backed by other assets.
Maple thus specializes in a niche in the DeFi market that allows institutional investors, such as market makers or venture capital investors, to take out loans that, as in traditional banking, do not have to be 100 percent funded. The Maple Finance community decides which investors are considered creditworthy in this process.
Once an investor is approved by the community, anyone can participate in funding the loan via Ethereum (ETH) or USD Coin (USDC) to various loan pools.
In return, investors will receive interest and MPL token rewards. To date, Maple has originated $1.6 billion in loans and is the largest DeFi protocol of its kind.
Maple Finance: the risks
Maple lenders, however, must not forget about some risks. If one pays their capital into one of the credit pools, those assets are subject to a 90-day lock-up period during which they cannot withdraw their capital from Maple.
In addition, Maple users take credit risk where they can suffer a total loss if the counterparty to a pool (borrower) is unable to repay a loan.
Anyone using Maple Finance must therefore trust the Maple community to select reputable and creditworthy companies.
2. DeFi Exchange GMX
GMX is a DeFi derivatives exchange where users can trade a variety of cryptocurrencies in a leveraged manner. The advantage for users is that they can conveniently trade via their MetaMask wallet or other Web3 wallets without having to relinquish control of their assets and their data to a central exchange.
Anyone who wants to support GMX and enable traders to trade on this decentralized exchange (DEX) can provide capital on GMX in a pool.
This pool is known as GLP. GLP is a token primarily composed of major cryptocurrencies such as Ethereum, Bitcoin, and some stablecoins, and functions similarly to a stock index.
To open positions on GMX, traders borrow money from the GLP pool, with a lending fee replacing the traditional funding rate. This fee, as well as fees incurred from opening positions, liquidations, and swaps on GMX-DEX, will be paid out in ETH or AVAX to GLP holders and stakers of GMX tokens at a ratio of 70 to 30. There is currently $430 million in GMX's GLP pool.
For providing capital in the pools, Ethereum currently pays out a return of 18 to 20 percent a year.
Risks of GMX
Investors deploying capital in the GLP pool are primarily taking two types of risks.
The first risk is that they can lose money if the traders on GMX make more profit than loss. As mentioned earlier, GLP acts as a counterparty for traders on GMX. This means that a portion of GLP could be withdrawn if traders make a significant profit.
The second risk you take as an investor is that you are directly tied to the price performance of the tokens within the GLP pool. While over 50 percent of the GLP pool is currently composed of stablecoins, if the remaining tokens in the pool perform poorly, one can still suffer a loss in U.S. dollars. Conversely, of course, you can also benefit from the price increases of Ethereum, Bitcoin and Co. Profit.
3. Hop Cross-Chain Exchange (HOP)
Hop is a cross-chain exchange that connects different blockchain networks and enables the exchange of tokens. On Hop, users can thus transfer assets between Ethereum and Layer 2 networks such as Arbitrum and Optimism, without much delay.
Anyone can provide capital on Hop in the form of DAI, USDC, USDT, or Ethereum to enable others to trade their tokens between the different blockchains.
Some of the pools that currently yield the most are the MATIC pool (8 percent per year) on Polygon and the USDC pools on Optimism and Arbitrum (5 to 6 percent per year).
- Blockchain networks: Ethereum, Optimism, Arbitrum, Gnosis Chain and Polygon
- Risk: Medium
- Assets: USDC, USDT, DAI, MATIC, and ETH
Hop: The risks
DeFi protocols in particular, which allow tokens to be exchanged between different blockchains, have repeatedly come into the crosshairs of hackers in recent months. Even the Binance Smart Chain (BSC) recently fell victim to such a bridge hack, after which Binance was forced to perform a hard fork.
In addition, investors who provide liquidity on HOP are tied to the price fluctuations of the particular digital asset they deposit.
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