Getting acquainted with yield farming
My strategy to generate returns on my crypto assets
Well, that was a sobering start to the crypto market in 2022. Color those charts red. The crypto markets took a beating over the first ten days of 2022, with Ethereum and Bitcoin plunging to three-month lows. What comes next? Does it matter?
You buy the red and sell the green — it is not rocket science. Patience is a virtue as they say and in the meantime I have decided to stay calm and dip and dabble in yield farming.
In short, yield farming is the practice of staking or lending crypto assets in order to generate high returns or rewards in the form of additional cryptocurrency. So it is basically the cryptocurrency equivalent of earning an annual percentage yield (APY) on deposits with banks.
To be sure, I have never had much desire to dip and dabble with Ethereum’s DeFi protocols. The fees are just too high, which for all intents and purposes has rendered the most used smart contract blockchain practically unusable for the average Joe. As it relates, check out my previous post Ethereum might have more to offer than just high gas fees.
Put simply, Ethereum’s DeFi gas fees don’t make me excited = [erection] down horrendously! Accordingly, my crypto strategy thus far was to buy and HODL.
But times have changed!
New burgeoning DeFi economies have sprung up on EVM-compatible chains such as Polygon and Avalanche and non-EVM chains such as Solana, Terra and Klaytn.
This is exemplified by the fact that Ethereum’s TVL (Total Value Locked) ratio was 96% a year ago — it is 62% now. Layer 1's are definitely coming for Ethereum’s lunch.
While the color of those crypto charts remains red and Ethereum’s gas fees high, I have decided to try out some of those DeFi protocols on alternative Layer 1s.
Aside from speculation on cryptocurrencies, I believe that it’s the right time for me to enter this space by using some of these burgeoning DeFi protocols in order to find products that I love.
I have been a bit of a #Lunatic lately so I have decided to look into the Anchor Protocol. For more information on Luna check out my previous post ‘Deep Dive into Terra (LUNA)’ — this one was fairly well received!
Route 2 FI would certainly agree. He is a shrewd operator in the DeFi space so follow him on Twitter at your own convenience.
In a nutshell, Anchor is a savings protocol offering low-volatile yields on Terra stablecoin deposits. The Anchor rate is powered by a diversified stream of staking rewards from major proof-of-stake blockchains, and therefore can be expected to be much more stable than money market interest rates.
Anchor protocol aims to deliver a fixed rate of 20% APY on your deposits. Alternatively you could always park your Brinks truck at Citi Bank at 0.50%.
I’d say that is a huge improvement over traditional savings accounts in traditional finance. 20% APY vs. 0.50% APY hmm. Surely, Anchor is a game changer as I don’t see any scenario where the banks aren’t f*cked; they just don’t know it yet — Amen.
It appears I am very late to the Anchor party that it’s not even funny. Here is a Mar 24, 2021 pod by The Defiant’s Robin Schmidt explaining the Anchor hussle. In fact, I clearly remember being intrigued by this video a year ago but the use of Uniswap and all these different kinds of wallets and exchanges got me very unenthusiastic about it all. *Might be well worth it to follow The Defiant and Robin Schmidt for all things DeFi.
Fast forward a year and things got much easier so no need to use Uniswap. The onboarding process is very smooth and easy. Simply download the Terra Station wallet, buy some $UST from Binance or Kucoin and send them to your wallet. Click on the Anchor Earn tab, allocate the desired amount and Bob’s your uncle.
I am learning from my mistakes so be sure NOT to deposit ALL your $UST — leave a dollar or two for the gas fees or else your transaction will get stuck in limbo like Tom Hanks in the movie The Terminal. Other than that this should be a relatively straightforward procedure.
If you want to find out the ins and outs of how the protocol is able to generate these kinds of returns check out Do Kwon’s discussion with Ark Invest. This is one of the better interviews and retrospectively was a big reason why I got interested in Luna.
This low risk yield farming strategy suits me just fine. To be sure there are more adventurous approaches. For example, in this video Adam breaks down his favorite passive income strategy using the Anchor and the Mirror protocol in a ‘delta neutral yield farming strategy’.
Very nifty indeed — I don’t think I’d feel comfortable putting anything substantial behind this strategy (yet!) as I’d need to get acquainted with hedging ‘synthetic’ equities.
I have also come across The Defiant’s introduction to the Degenbox, which is a strategic program created by Abracadabra Money to solve the issue of accepting non-interest-bearing tokens. In this tutorial Robin Schmidt runs through the steps of creating a looping yield mechanism through $UST and $MIM.
Of course you could always go all out degen yield farming trying to capture +1000% APY from Geoliquidity dot whatever. Why bother with crypto at all if you can get +1000% APY? No but seriously — I consider it risky clicking on the link let alone investing my crypto in this!
This cannot be serious, can it?
Sounds like Angelina Jolie knocking unexpectedly at my door and asking me out on a date! Needless to say I didn’t bother to look into this.
In summary, I am not much of a crypto trader. Thus, it makes sense to get my coins out of the exchanges and put them to work in some sort of yield farming protocol.
My first move was to order a Ledger Nano X hardware wallet, which offers full control over my crypto while at the same time helping me earn the maximum possible staking rewards. Its promise of high security and high profitability sounds enticing. *Freshly ordered! I will report back on that one!
Next, I have figured out how to park my fiat in $UST stablecoins with Anchor while getting some excellent returns on them. This will ensure a diversified portfolio plus it will enable me to hold my fiat while waiting for buying opportunities.
As it relates I have learned the hard way that YOU BUY THE RED AND SELL THE GREEN! Note to myself: Never ever buy in the All-Time-High (ATH) range anymore! While I have mastered my FUD emotions fairly well, I am still trying to beat my inner FOMOmeter. My dumbass had to buy Bitcoin after the ALH because Plan B assured me that the next stop was surely going to be 150k.
*Clearly my bad! I see a lot of anger towards crypto influencers on Twitter nowadays — what’s up with that? People should take responsibility for their actions and not blame some anonymous stranger on Twitter for the crypto dip.
Lastly, it’s always a good idea to get yourself acquainted with some of the DeFi protocols that offer some nice yields on your crypto coins. I found that I am fairly risk averse — thus the Anchor protocol is all I need. Maybe you want to look into some of the higher yield strategies e.g. staking $FTM on TOMB Finance, delta neutral strategies, …, etc. It all depends on your risk appetite.
I will leave you with Route 2 FI’s remarks on DeFi:
Happy yield farming ya’ll!
Frei Bier / Twitter: @FreiBIER13
DISCLAIMER: My writings are merely a reflection of my learning journey and my attempt to compartmentalize the cryptoverse. I am learning out loud so feel free to correct me or disagree with me. This is not investment advice but my hope is that you find value in some of my links and ideas.