4 December 2020
Earning With Cryptos: DeFi, CeFi, Market Making and SwissBorg
Yield Farming is the practice of generating a return (yield) on your crypto assets that is not based on the asset going up. Different yield farming strategies carry different levels of risk.
But how can you earn a yield? The most common ways are DeFi (decentralised finance), CeFi (centralised finance) and market making, each of which come with different risks and benefits.
Earning a yield with DeFi
In DeFi, You can earn a yield lending your crypto assets (ETH, USDC, DAI, etc.) to other users. You will then earn interest on the assets you lend.
DeFi is relatively easy to use and understand. It supports multiple assets, including Bitcoin on the Ethereum blockchain (WBTC) making it more accessible. On the other hand, there are some obstacles and complications in earning a yield. For one, interest can vary depending on demand and supply, going from as low as 0.01% to 50%+ in a matter of hours in extreme cases. More importantly, you may not be able to withdraw if all the supply has been borrowed. Transaction costs are an important consideration as well, when there is high demand on the Ethereum network some basic transactions can cost $30-70 in gas fees, which may reduce returns substantially. Finally, the biggest risk to consider in DeFi, is smart contract risk, which is the possibility that there is a bug in the underlying code that may be exploited to steal or lock your funds.
Earning a yield with CeFi
In CeFi or Centralised Finance, you can earn a yield by lending your assets to a provider who then, in turn, invests your assets or lends them to other users to generate a return.
The advantages of having a provider investing your crypto assets is that you won’t need to pay blockchain transaction fees and you are not limited to specific blockchains. On the other hand, with CeFi there’s always a risk of the centralised counterparty defaulting and in general very limited transparency on how the assets are used. If the platform were to run into trouble, you may realise too late as there isn’t any transparency on its operations, as opposed to the blockchain.
One common example of this is lending on exchanges that allow margin trading, you are supplying your coins so that other traders can use leverage and then they return your coins plus interest to you.
You can earn a yield by providing assets for liquidity or trading purposes to a decentralised exchange, you earn a fee when users use your pool to trade, just like an exchange. Multiple liquidity pools are available where you can choose for which assets you want to provide liquidity.
The drawback here is that some pools have a high risk of losses if the assets for which you provide liquidity fall in value. Also, there’s, once again, the risk of high transaction fees of Smart Contracts.
How SwissBorg Combines the Best of All Worlds
Our Smart Yield account finds the best opportunities to maximise returns while balancing risk.
Some of the key benefits of our Smart Yield account include:
- Evaluates the yield and optimisation of the yielding strategy to maximise the return
- Lowers transaction costs
- Evaluates market risks posed by the strategy and ways to minimise or eliminate it
- Evaluates any liquidity risk or any case where withdrawals would be restricted
- Evaluates the smart contract risk by performing due diligence of their code
- Evaluates the overall risk of various strategies implemented and the correlation between them to optimise the return-to-risk ratio (the Sharpe ratio)
The result? Maximum returns with minimal risk!
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