The emergence of Blockchain and Cryptocurrency had a very positive impact on people who were curious about the world of investments online. But these assets had a very restricted use because of the lack of proper technology that could help them transfer those assets. Then came DeFi, short for Decentralized Finance, which offered many avenues for investors to monetise their assets efficiently.

Users can now use various passive income opportunities with DeFi by employing their idle cryptocurrencies (and other digital assets) on lending protocols, liquidity pools, and decentralized exchanges. These strategies have proved to be quite successful in generating high DeFi interest Rates. 

Below are a few strategies that can help you diversify your portfolio AND spawn higher DeFi Interest Rates.

**1. DeFi Lending**

Defi lending is a very interesting concept. The lending platforms enable users to list their crypto coins for lending purposes. Why does it stand out? It stands out because such platforms can provide crypto loans without the need for any middlemen. 

DeFi lending has proved to be more efficient than traditional lending techniques because it supports transparency, and accessibility negating the need for intermediaries. As a long-term investor, you can use DeFi Lending at your disposal and earn high-interest rates as it offers margin trading options to the users. 

**2. Yield Farming**

Yield Farming has turned many eyes ever since its launch. Token holders who practise yield farming can maximise their earnings using different DeFi systems. But how does it work? Yield farmers get paid in cryptocurrency in exchange for the liquidity they supply to various token pairs. 

Although Yield Farming can be a bit risky because of the market instability and volatility, with proper research and analytics, one can gain high benefits from this phenomenon. 



**3. Liquidity Mining**

And last, liquidity mining. Again, crypto owners get rewards for lending their assets to decentralised exchanges in this case. Liquidity miners typically receive compensation in the native token of the blockchain. They also have the opportunity to earn governance tokens, maximising the level of involvement they can have with a given project. Similar to any other liquidity pool, providers get paid according to the portion of the liquidity pool they contributed to.

## Conclusion

DeFi lending protocols have created great avenues for investors to produce high interest through their assets. But, as an investor, it is your responsibility to monetise those avenues. So, read the market trends as thoroughly as possible and make informed decisions before exploring any new investment strategy. 







Users can now use various passive income opportunities with DeFi by employing their idle cryptocurrencies (and other digital assets) on lending protocols, liquidity pools, and decentralized exchanges. These strategies have proved to be quite successful in generating high DeFi interest Rates.

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Ways to Earn Higher DeFi Interest Rates

Is it possible to imagine a world without banks? A world where, for example, you could purchase a house directly from the seller instead of having to go through the complications of dealing with agents, lawyers, and banks. This liberating notion that unlocks a whole new financial system seems beyond reach — or it was until the idea of Decentralised Finance (DeFi) came into being. Now, its presence in the financial market is so imposing that the predicted market size for cryptocurrency is $1087.7 million by 2026. Despite its growth potential and the liberty it affords to the world of finance, mainstream financial institutions have not been able to accept cryptocurrency primarily due to its volatile nature.

## What is the Meaning of DeFi?

There is an exciting history of innovation richly embellishing the genesis of DeFi — with the idea going back to as far as the 1980s. However, certain economists argue that decentralised finance emerged in 2009 with the launch of Bitcoin. In its simplest definition, DeFi is a system that allows customers to access financial products without the interference of middlemen or centralised financial agencies such as banks, brokerages, or exchanges. DeFi aims to replace the traditional and inflexible financial world with a more inclusive, transparent, and safer system of financial transactions. The technology that is fuelling this financial disruption is called blockchain.

## Understanding Blockchain Technology in Decentralised Finance

The financial applications for DeFi are built on blockchain technology. It is a decentralised ledger that electronically stores a record of all the transactions made on the network. Meaning, blockchain shares all the information in a decentralised manner across a peer-to-peer network that confirms every transaction without the need of a central clearing authority. Blockchain is a type of distributed ledger technology (DLT) wherein the details of a transaction are recorded in various places at the same time, unlike traditional databases that have a central place for data storage.

The information on the blockchain network is collected in groups termed “blocks” that have a particular storage capacity. When this capacity is reached, the block is closed and linked to the previous block thereby forming a chain of data. This is why the technology is termed blockchain. When it is implemented in a decentralised format, this structure creates an irreversible data timeline that prevents the recorded information from being edited. The blockchain technology can be better understood when one learns how it works:

- When someone makes a transaction request it is broadcasted on a peer-to-peer network that comprises computers known as nodes
- This network of nodes employs certain algorithms that validate the transaction and the user status
- As the transaction gets verified it is stored with other transactions to create a new data block for the ledger
- This new data block is included on the existing blockchain in an immutable manner and finally, the transaction is completed

The potential of blockchain lies beyond cryptocurrency as this collaborative technology can be used to improve business software and impart greater security to transactions. To offer financial instruments in a secure manner, blockchain technology uses smart contracts. Let us understand smart contracts in greater detail.

## Understanding Smart Contracts and its Benefits

Any understanding of blockchain is incomplete without the knowledge of smart contracts. As the name suggests, smart contracts are automated agreements that eliminate the need for intermediaries to validate a transaction. Smart contracts stored on a blockchain are coded algorithms that enforce a set of rules that have to be agreed upon by every individual using the blockchain network. Smart contracts affirm that a programme on blockchain would work only when the predetermined conditions are met. Smart contracts on blockchain come with certain crucial advantages to the world of finance including: -

- Eliminating the need for a central intermediary
- Greater transparency as the data is stored on the decentralised architecture of the blockchain network
- Eliminating human error by automating the executions and transactions when the pre-decided conditions are met
- Imparting greater security to the financial transactions as smart contracts use encryption at a blockchain level

Decentralised finance has created numerous opportunities to enable a transparent and robust financial system that is not controlled by a single authority. DeFi offers an alternative financial system that is structured to be governed by the community of users to eliminate the inefficiencies of the traditional financial system. The technology that it employs to attain this objective is central to knowing how it is set to liberate the world of finance. Therefore, to benefit from this financial disruption an initial understanding of the underpinning technology is considered imperative.

As the concept of DeFi is relatively new and its scope seems to be constantly expanding, there is a lot of misinformation and ambiguity surrounding it. To truly avail oneself of its benefits, the need of the hour is to seek a clear understanding of this newly emerging ecosystem of financial applications and the technology underpinning it.

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Understanding the Technology Behind DeFi

Decentralized Finance (DeFi) has experienced a wave of enthusiasm for Ethereum and other smart contract platforms like Binance Smart Chain, Solana, etc. We can see the popularity of Yield Farming for token distribution, the surge in volumes of flash loans, and the growth of tokenized BTC on Ethereum.

Meanwhile, we couldn’t help but notice automated market maker protocols regularly encountering high liquidity, competitive volumes, and an increase in the number of users.

But many of us often wonder about what AMM is in-depth and the risks attached to it. Let’s find out.

# **AMM**

An automated market maker (AMM) is the underlying protocol that intensifies a decentralized exchange (DEX) via the trading of digital assets in a permissionless and automatic procedure, using crypto liquidity pools as complements, instead of a conventional buying/selling market. Instead of using an order book like a traditional exchange, AMM relies on a mathematical formula, or pricing algorithm, to price assets. Each protocol uses this formula in its own way for the specific use-cases they target. For example, Uniswap uses a x b = k, where ‘a’ and ‘b’ are the respective amounts of the two tokens in the liquidity pool, and k is a fixed constant, which means that the pool’s total liquidity always remains constant. The connection between all of them, however, is that they determine the prices algorithmically.

# **Liquidity Pool**

Liquidity providers (LPs) put funds into liquidity pools. One could imagine a liquidity pool as a huge amount of funds that traders can trade-off. In return for supplying liquidity to the protocol, LPs receive fees from the trades occurring in their pool. The rewards are determined by the protocol. But why drawing liquidity to the pool is so important? The framework of AMMs implies that the liquidity is inversely proportional to the slippage of large orders. And that, in turn, may attract more volume to the platform, and the cycle goes on.

The slippage issues vary with different AMM designs, but it’s important to remember that the pricing is determined by an algorithm. Hence, it is determined by the amount of change in the ratio between the tokens in the liquidity pool after a trade. If the ratio varies by a wide gap, the amount of slippage will increase.

# What is Impermanent Loss?

In simple terms, when the price ratio of deposited tokens changes after you deposited them in the pool, impermanent loss occurs. The bigger the change, the bigger the impermanent loss. It is why AMMs work best with token pairs of a similar value. If the price ratio between the pair remains in a relatively small range, the impermanent loss is also insignificant.

“Impermanence” considers that if the assets go back to the initial prices where they were deposited, the losses are mitigated. But if you withdraw your funds at a different price ratio than when you deposited them, the losses are very much permanent. In some cases, the trading fees might mitigate the losses, but it’s still crucial to consider the risks.

# A thorough Analysis of Impermanent Losses

Let’s take the ETH-USDT fund pool as an example to quantitatively analyze the risk of AMM. Suppose that the market maker deposits x0 ETH and y0 USDT into the fund pool at the price of P0, and the market maker’s assets will become xn ETH and yn USDT at the price of Pn. There are the following five market-making groups:

**1.Group 1,**  which wants to hold USDT for a long time, participates in market making, hoping to convert into USDT to maintain positive returns.

Under the xyk AMM model, its rate of return = yn/y0 -1 = (Pn/P0)^.5 -1 for the market-making group without considering the fee income.

![](https://miro.medium.com/max/1400/0*g-ncPd21uqLo6ifc)

Figure 1- Mining profit and loss of market maker group 1

**2. Group 2,**  which wants to hold ETH for a long time, participates in market making, hoping to convert it into ETH to maintain a positive income.

Under the xyk AMM, its rate of return = xn/x0 -1 =(P0/Pn)^.5 -1 for group 2 without considering the fee income.

.

![](https://miro.medium.com/max/1400/0*B2FJpiB6XaUANZzJ)

Figure 2 Mining profit and loss of market maker group 2

**3.**  **Group 3,**  which wants to hold both ETH and USDT for a long time, participates in market making, hoping to convert into USDT to maintain a positive return.

Its rate of return = 2yn/(x0*Pn + y0)-1=2*(P0Pn)^.5/(Pn+P0) -1 without considering the fee income.

![](https://miro.medium.com/max/1400/0*bye8orPFXJqqX5NV)

Figure 3 Mining profit and loss of market maker group 3

**4.**  **Group 4**, which wants to hold both ETH and USDT for a long time, participate in market making, hoping to convert into ETH to maintain a positive return.

Its rate of return = 2yn/(x0*Pn + y0)-1=2*(P0Pn)⁰.5/(Pn+P0) -1 without considering the fee income.

![](https://miro.medium.com/max/1400/0*OczyYG99XulMN64A)

Figure 4 Mining profit and loss of market maker group 4

**5.**  **Group 5**,  _sushiswap single-sided solution_: depositing ETH, borrowing equivalent SIL, and returning SIL when withdrawing.

Its rate of return = (2xn — (y0)/Pn))/x0 -1= 2(P0/Pn)^.5 — P0/Pn -1 without considering the fee income.

However, the sushiswap single-sided solution cannot hedge impermanent losses, but the market maker’s assets will have the risk of returning to zero when the price falls by 75%.

![](https://miro.medium.com/max/1400/0*pzPhTsC3WPNPpbrX)

Figure 5 Mining profit and loss of market maker group 5

Based on the quantitative analysis of the above five groups, the profit and loss of automatic market makers are related to price. Group 1 bears the risk of price falling, group 2 bears the risk of price rise, and groups 3 and 4 face losses whether price rising or falling known as impermanent loss in the industry.

Decentralized Finance (DeFi) has experienced a wave of enthusiasm for Ethereum and other smart contract platforms like Binance Smart Chain, Solana, etc. We can see the popularity of Yield Farming for token distribution, the surge in volumes of flash loans, and the growth of tokenized BTC on Ethereum.

An Analysis of AMMs & Impermanent Losses


Thousands of initiatives are vying for broad cryptocurrency acceptance, with blockchain technology used for different business and consumer demands. The market valuation of the cryptocurrency business has increased dramatically in the preceding year.

However, many individuals are still confused between coins and tokens. So, let’s clear things up and explain what the distinctions are.

# **Utility Tokens**

These are assets developed for a particular function that is utilized. These tokens can be swapped for a digital product, benefit, or service, facilitating interaction and use of decentralized applications (dApps) as well as access to decentralized finance services (DeFi), such as Ethereum (ETH).

Ethereum is one of the most popular blockchain networks today because it is much more than simply crypto. It’s a decentralized, open-source public service that uses blockchain technology to provide smart contracts and safe cryptocurrency trading without the use of middlemen. It’s also essential for DeFi and, more recently, non-fungible tokens (NFT).

In practice, however, the application of these terms is rarely as precise. As the blockchain market is still in its inception, the terms “coin” and “token” are frequently interchanged. On the other hand, most industry insiders agree that a coin is money and a token is virtually anything else.

# **Security Tokens**

A security token is a digital asset that symbolizes ownership or other rights and is used to transfer value from one asset to another. Security tokens are the digital equivalents of traditional investments such as stocks, bonds, and other assets. For example, instead of issuing shares, a corporation that wishes to generate cash for an expansionary project could issue fractionalized ownership of their company via a digital token. It might then sell this token on an exchange that accepts digital security tokens to investors.

When you buy a tokenized form of a stock, you get the same profit shares and voting rights as if you sold the shares via a conventional stockbroker. The only variation is that a token is electronic.

Security tokens differ from utility tokens as they are considered investments. As a result, they are susceptible to the same legal oversight as other investment products.

# **Coins**

A digital coin’s function is to serve as a payment option. It acts similarly to money as a measure of value, a store of value, and a medium of exchange. A crypto coin is similar to the original coins we carry in our pockets; the difference is that it is digital and not governed by a central bank.

Both crypto coins and tokens are comparable on the surface, but they are distinct entities: all coins are tokens, but not all tokens are coins.

Surprisingly, many people are clueless if they are purchasing crypto tokens or crypto coins. At its most basic level, the main distinction between them is their functionality.

Defining each type of coin and token is a crucial step toward gaining a better grasp of how blockchain technology is being used by companies. They assist individuals and businesses to avail advantages of digital money while avoiding unpredictability.

Thousands of initiatives are vying for broad cryptocurrency acceptance, with blockchain technology used for different business and consumer demands. The market valuation of the cryptocurrency business has increased dramatically in the preceding year.

25 July 2022

2 min read

Conclusion

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