One of the most promising industries to rise from the crypto revolution is Decentralized Finance or DeFi. For the first time in history, individuals are able to interact with decentralized protocols to do financial transactions such as borrowing, lending, staking, exchanging and insuring. This means that people can finally empower themselves to be financially independent without the need for any third party intermediaries like banks or clearing houses. This open access to financial products also allows individuals to reap the benefits of the ecosystem just like banks reap all the benefits in the traditional finance system. So, are you ready to empower yourself and step into the lucrative world of Decentralized Finance?
Scroll to the bottom of this article if you already understand the basics and just want to see the strategies I use.
How to Interact with DeFi Protocols
In order to interact with DeFi protocols, you’ll first need to download a self-custody wallet that connects to the blockchains you’re interested in using. Although Ethereum still has the largest DeFi ecosystem, there are several other blockchains that are quickly gaining momentum in the DeFi space. Some of the other popular blockchains that run DeFi applications are Binance Smart Chain, Polygon, Tron, EOS, Polkadot, Tezos, etc….
Here are a few self-custody wallets that you can use to access DeFi applications. All of these applications can be downloaded from your phone’s app store or directly to your PC.
Trust Wallet – This is a great wallet that allows you to access multiple blockchain ecosystems.
• For iOS users, the link below will show you how to enable the dApp browser on your device.
Metamask – One of the most well known and trusted self-custody wallets in the industry with access to multiple blockchain ecosystem.
Coinbase Wallet – The self-custody wallet created by the Coinbase team.
Ledger Wallet – The Ledger hardware wallet is one of the most secure ways to access DeFi protocols.
IMPORTANT – When you create a new self-custody wallet, you will be shown a backup phrase that can be used to restore your wallet on another device in case something happens to the device you initially downloaded it on. So, it’s extremely important that you write this backup phrase down and keep it in a very safe place.
Buying Crypto Assets to Transact with DeFi Protocols
Once you have your self-custody wallet downloaded and the backup phrase saved in a safe place, it’s now time to buy the crypto assets that you need to interact with DeFi protocols. Since you’ll be creating transactions on a smart contract blockchain, the first asset you’ll need is the one that gets used for transaction fees. For Ethereum, you’ll need to own some ETH to pay for transactions, while the Binance Smart Chain requires you to own BNB and Polygon requires you to own MATIC tokens. So, depending on the ecosystem you want to interact with, this will determine the asset that you’ll need for transaction fees. Check out our list of Best Crypto Exchanges to buy these assets if you don’t already have an exchange account.
At this time, Ethereum’s fees are very high, but once the Ethereum 2.0 upgrade is rolled out, that should solve the problem. In the meantime, blockchains such as Polygon and Binance Smart Chain are being used to help users overcome the fee issue. For Ethereum protocols I recommend having at least $300 worth of ETH in your wallet to cover fees right now. For Binance I recommend at least $20 worth of BNB while Polygon requires even less of its MATIC token since fees are extremely cheap on Polygon right now.
It’s important to note that the BNB you purchase on exchanges is usually the BEP-2 version, which is the Binance Exchange token, but in order to use their Binance Smart Chain, you’ll need to convert the BEP-2 tokens into the BSC equivalent BEP-20 tokens. This is done very easily with Trust Wallet, but I’m not sure about other BSC wallets.
Also, for MATIC/Polygon DeFi protocols, you may need to bridge your Ethereum tokens over to the Polygon network first before being able to interact with the network’s protocols. You can do this using the following link, https://wallet.matic.network/bridge.
The other crypto assets that you’ll need will depend entirely on the DeFi protocol that you’ve chosen to use as well as the action that you’re looking to perform. Since the DeFi ecosystem is growing at lightning speed, it’s far too difficult to list all the various actions one could perform to grow their assets using these protocols, so this article primarily focuses on exchanging, lending, staking, bridging and providing liquidity.
DeFi Transactions Explained
The various types of DeFi transactions that’ll exist in the future are only limited by the imagination of the developers that create the smart contracts. Actions such as borrowing, creating synthetic assets, NFTs, getting a flash loan, buying insurance for your deposits, etc… are all possible using existing DeFi protocols, but this article will only focus on the transaction types below.
Exchanging – Using a decentralized exchange or DEX to swap one crypto token for another. Each swap transaction incurs fees, so be careful to pay attention to the amount it’ll cost you before making your decision. Transaction fees will vary depending on the blockchain being used.
Lending – Depositing your assets into a protocol that allows other users to borrow those same assets. The depositor earns a variable interest rate that changes based on the difference between the total deposits and the total amount borrowed. The more deposits that get utilized for borrowing, the higher the interest rate. All borrowers must have more than 100% collateral deposited into the platform in order to borrow against those assets, so this drastically reduces default risk since the collateral can be liquidated if the borrower doesn’t pay back their loan.
Staking – Locking up your assets for a period of time in order to earn a portion of the new tokens that get created for a particular protocol or blockchain. Staking core blockchain assets such as ETH, BNB or MATIC is crucial in providing security for the blockchain network, while staking application tokens has various use cases depending on the DeFi protocol being used.
Bridging – Transferring crypto assets from one blockchain network to another. The assets aren’t exactly transferred, but instead get locked up on the primary blockchain while copies of the assets get created on the new blockchain. The locked up assets on the primary chain can’t be moved until the copies are destroyed and the native assets unlocked. Of course, all of the technical details are hidden from the end user who primarily cares about being able to use whichever blockchain provides the best incentives.
Providing Liquidity – Many protocols require users to deposit their assets in order for the protocol to work. For example, whenever you swap a token on a decentralized exchange, the new asset that you get in exchange for yours was provided by other users who deposited that token into the platform. Liquidity providers are rewarded by receiving a portion of the fees that get generated from the usage of the trading pair they provided liquidity for. Users that provide liquidity are also given LP tokens that represent the amount and type of liquidity provided to the protocol. These LP tokens can then be staked in the same platform or others to earn even more yield!
Choosing a DeFi Protocol
Now you’re ready to begin exploring the various DeFi protocols that exist and the multiple services they provide. To start off, we’ll review a few sites that focus entirely on keeping track of the major DeFi protocols that are being used and how they add value to the ecosystem.
DeFi Prime – https://defiprime.com/
• This is one of the best sites to find great DeFi projects worth exploring. The site provides great explanations for projects on the Bitcoin, Ethereum, Binance Smart Chain, EOS and Tron blockchains. If you’re interested in exploring DeFi projects outside of the Ethereum ecosystem, then this is a great site to use.
DeFi Pulse – https://defipulse.com/
• DeFi Pulse is another great site to get information on Bitcoin and Ethereum DeFi protocols. I expect they’ll add protocols for other blockchains in the future, but one of the best features this site provides is the TVL or Total Value Locked in each of the protocols they list on their site. They also provide a graph showing the TVL for the entire Bitcoin and Ethereum DeFi ecosystem. The info is a great way to keep track of the growth in the industry and to see which projects are being used the most.
DeFi Rate – https://defirate.com/
• This site is great for finding the best lending rates among centralized and decentralized lending services. They also provide information about various other DeFi services with a focus on Ethereum projects.
Awesome Polygon – https://awesomepolygon.com/
• The Polygon/MATIC network is quickly gaining momentum as one of the best places to transact with DeFi protocols due to its incredibly fast transaction speeds and ultra low fees. Since Polygon is a layer 2 solution that was designed to improve the efficiency of other blockchains, you may notice several DeFi protocols on this site that were originally designed for other blockchains such as Ethereum and Binance Smart Chain. Polygon also has several native DeFi applications that are definitely worth checking out.
Recommended DeFi Projects
Since there are so many incredible DeFi projects in this space, we could never list them all, but here are a few of the projects we’ve personally used and recommend you check out.
Uniswap – One of the largest and most well known decentralized exchanges on the Ethereum blockchain. The simple interface is intuitive and fairly easy to understand. Swap any Ethereum token for another or provide liquidity to one of the trading pairs to earn fees. Whenever liquidity mining is available, providing liquidity to certain trading pairs can also reward users with UNI tokens, the governance token for the platform.
Sushiswap – Another DEX, similar to Uniswap with additional ways to earn yield on your assets. Sushiswap also has its own SUSHI token which can be staked to earn even more. Some LP tokens that you get for providing liquidity can also be staked on Sushiswap to earn more yield. Yearn Finance (below), is a partner of Sushiswap to help users maximize the yield they can earn on their assets.
Aave – Deposit crypto assets to the Aave Liquidity Protocol to earn a variable interest based on the borrowing demand for the assets you deposit. Once you have assets deposited into the platform, you can choose to use those assets as collateral to borrow any other asset on the protocol. The Aave governance token can also be earned for providing liquidity to certain pools. Aave has recently added a new protocol built on the Polygon layer 2 solution to increase transaction speed and reduce fees. The Polygon version of the protocol is currently rewarding users with MATIC tokens for providing liquidity.
Compound – Another Liquidity Protocol, similar to Aave with its own COMP token. Compound has done a very good job at creating a strong network of partners and is integrated directly into the UI for many well known crypto applications. Deposit your assets to earn interest and COMP tokens while also enabling yourself to borrow against your assets if you choose to.
Curve Finance – A decentralized exchange protocol with a heavy focus on producing high yields for stablecoins. Curve Finance uses bonding curves to maintain the stability of the asset pools they provide access to. The best part about providing liquidity to stablecoin trading pools is that you don’t have to worry about impermanent loss since both assets in the trading pair remain stable at $1. Curve Finance also distributes its own CRV governance token which can be used for voting or to give a yield boost to the liquidity pools you choose to deposit money into. Yearn Finance (below) is a partner of Curve Finance to help users maximize the yield they can earn on their assets.
Yearn Finance – One of Ethereum’s largest Yield Optimization Protocols. Yearn Finance’s mission is to help simplify yield farming by combining multiple strategies from various DeFi protocols and then automatically processing the necessary transactions to compound their user’s deposits. A simple example would be one of their Curve Finance vaults which adds together the regular yield from the Curve pool, any CRV governance tokens that are distributed for providing liquidity plus the CRV boost that Yearn Finance rewards its users with. When added together, the yield you can earn from the assets you deposit into Yearn Finance is quite large compared to other protocols.
Binance Smart Chain Protocols:
Pancakeswap – Binance Smart Chain’s largest decentralized exchange. Similar to Uniswap and Sushiswap, Pancakeswap also allows users to swap any BSC token, provide liquidity to its trading pair pools and receive CAKE governance tokens proportional to the amount of liquidity provided to the protocol. Pancakeswap is also well known for its multiple yield farming pools and staking options that allow users to earn fantastic yields on their assets.
Venus – Automated Money Market and Stablecoin minting protocol. Venus is similar to Aave and Compound in that it allows users to deposit BSC crypto assets to earn interest as well as borrow against those assets if they choose to. On top of that, Venus is also a minting protocol for their own algorithmic stablecoin named VAI. MakerDAO is the Ethereum version allowing users to mint the algorithmic stablecoin DAI. The Venus protocol only allows users to mint new VAI tokens by using their deposits as collateral to back up the newly created tokens. The VAI tokens can then be used in other DeFi protocols to earn additional yield.
Ellipsis – The Ellipsis protocol is the BSC version of Curve Finance and allows for decentralized swapping of crypto assets with a focus on stablecoins. The yield you earn on your deposits comes from a combination of the swapping fees generated from the usage of the protocol’s DEX as well as the distribution of the protocol’s EPS governance token. Just as we see with other similar protocols, users are given LP tokens that represent the amount and type of liquidity that they deposit into the protocol which can then be staked for additional yield farming.
Belt Finance – Combining a decentralized exchange with a yield optimization protocol is exactly what Belt Finance has built. While Belt Finance is similar to Ellipsis in that it provides a decentralized exchange for stablecoins, it also offers yield optimization vaults similar to Ethereum’s Yearn Finance protocol. This protocol also has its own BELT token which is distributed to the users of the protocol. Belt Finance also provides users with LP tokens whenever they add liquidity to one of its trading pools which can be staked to earn even more!
Beefy Finance – One of the largest yield optimization protocols on the Binance Smart Chain. This is the BSC version of Yearn Finance and acts in a similar way. Users can deposit the LP tokens that they receive for providing liquidity to other protocols and deposit them into Beefy Finance for automated compound interest. It essentially sums up all the rewards you earn from the protocol you deposited liquidity into, sells any governance tokens back into the assets you deposited and continues to compound your earnings.
QuickSwap – One of the largest and most well known DEX protocols on the Polygon network with its own QUICK token. Swap assets quickly and with incredibly low fees.
Aave, Curve Finance and SushiSwap – All of these very popular Ethereum protocols have recently added MATIC layer 2 options to their protocols to provide their users with faster transactions and lower fees. You can find their URLs above under the Ethereum Protocol section.
Polycat Finance – One of the best yield optimization protocols on the Polygon network at this time. Not only can you exchange tokens with the integrated SushiSwap and QuickSwap protocols, but you can also provide liquidity to these protocols and then immediately stake those LP tokens on Polycat’s Farms and Vaults to earn additional yield. If you want to keep the protocol’s FISH tokens, then you’ll want to stake your LP tokens on the platform’s FARMs, but if you prefer to compound the LP tokens you deposited, then you’ll want to stake your LP tokens in their Vaults instead. Polycat also has some additional Pools and Tanks where you can earn even more FISH and other tokens.
CryptoRenegade’s DeFi Strategy
With so many DeFi protocols to choose from, how exactly does one figure out which protocols are best to use? Well, after spending a good amount of time playing around with various DeFi protocols, I found what I believe to be a stable strategy that provides great yields while minimizing risks. Although one can earn incredibly high interest on some of the more exotic trading pairs that exist, it also comes with much higher risk if the tokens lose market value quickly. For those willing to take on additional risk however, savvy DeFi investors can earn unbelievably high yields on the more risky tokens.
That being said, most of my DeFi money goes into protocols that provide high interest rates on stablecoins and a few other top projects like BTC, ETH and LINK. The protocols I’m currently using to earn interest on my USDC and BUSD usually pump out between 12-800% APY (Annual Percentage Yield) with my average being somewhere around 120% APY right now. Now, this may not sound as sexy as some of the insane APYs you might see on exotic token pairs, but it also comes with far less risk as well. Since DeFi already has enough protocol risks, the last thing I want to do is add even more risk on top of that. This is also why I like to spread my money out between multiple protocols just in case a bug exists or someone figures out a loophole in the code.
Alright, now let’s talk about the specific protocols that I personally use. I would like to start off by saying that I’ve used every protocol mentioned above and when fees were lower on the Ethereum blockchain I would move my funds around between the protocols that were offering the highest yields. However, now that fees have gone way up, and yield optimization protocols were invented, I pretty much stick to these protocols now in order to maximize my returns while reducing fees as much as possible. So, this strategy primarily uses Yearn Finance, Beefy Finance and Polycat Finance to earn high interest rates on Stablecoins, BTC, ETH, BNB, MATIC and LINK.
All of the URLs for the following protocols can be found under the Recommended DeFi Projects section above.
Yearn Finance Strategy
I use Yearn Finance’s vaults to earn a high yield on USDC, BTC, ETH and LINK. As you begin looking over the vaults, you’ll notice that many of them have a ‘crv’ at the beginning of the name. This means that the underlying asset for those vaults are LP tokens that you receive for providing liquidity to the Curve Finance protocol. Fortunately, when depositing assets into Yearn Finance, users no longer need to add liquidity directly to the other protocols since Yearn does this for you automatically. However, when withdrawing your assets, Yearn only allows users to receive back the underlying LP assets or their choice of ETH, WBTC, DAI, USDC or USDT. So, if you’re only interested in earning a yield on your ETH, DAI, USDC or USDT, then you never have to worry about using any other protocols. For the LP tokens and WBTC, you’ll need to understand which protocols those assets came from, so you can get back the crypto tokens that they represent. For those who don’t know, WBTC is Wrapped Bitcoin that’s bridged over to the Ethereum blockchain so it can be used in DeFi protocols. You can easily Google where to find the protocols that distribute the LP tokens listed in Yearn’s vaults or how to get your BTC back for WBTC, but please leave a comment below if you need help.
Yearn Finance Stablecoin Vaults
Best Paying BTC, ETH and LINK vaults to consider.
For the LINK vault, if I want to get back my original LINK tokens I need to withdraw the LP tokens from Yearn and jump over to Curve Finance to withdraw the LINK that the LP tokens represent. For all the other vaults that I use, I just withdraw directly into the asset that I want.
Beefy Finance Strategy
I’m currently using Beefy Finance to compound my BUSD and CAKE tokens. For the CAKE tokens, it’s very easy since you just need to deposit CAKE directly into the vault without any need to acquire LP tokens first. This CAKE vault simply automates the harvest feature on PancakeSwap’s CAKE pool and redeposits the earnings back into the pool to compound the interest you make. The other vaults that I use are the Belt Finance LP token vaults. In return for depositing BUSD into the Belt Finance’s stablecoin liquidity pool, I get back LP tokens which I then deposit into the following Beefy Finance vaults. The Beefy protocol then automates the harvesting of the BELT tokens that I receive for staking my LP tokens, and then exchanges those governance tokens for more LP tokens which get compounded for additional yield. When I wish to get my BUSD back, I simply withdraw the LP tokens from Beefy Finance, and then go back to Belt Finance to withdraw my BUSD in exchange for the LP tokens. Belt Finance also has a few high yielding vaults for BTC and ETH which I use occasionally as well.
You’ll only want to use this vault if you own CAKE tokens or want to at some point in the future.
Deposit stablecoins into this liquidity pool to get back 4BELT LP tokens.
Deposit your 4BELT LP tokens into Beefy Finance’s Belt vault to compound your earnings.
Use Beefy Finance to auto-compound your earnings from Belt Finance’s BTC, ETH and BNB vaults.
Polycat Finance Strategy
So far Polycat Finance is the best yield optimization protocol that I’ve discovered on the Polygon network. Not only does it provide links for users to swap tokens and provide liquidity using SushiSwap and QuickSwap, but it also provides incredibly high yielding Vaults, Farms, Pools and Tanks to maximize your yield potential. I personally use Polycat’s Vaults and Pools to earn incredibly high yields on my stablecoins. I’m currently researching other vaults and pools to see how I might use all my crypto assets as effectively as possible.
PolyCat Finance offers many ways for users to earn insane yields on their crypto assets.
These are the current stablecoin vaults that I use to earn between 40-60% APY.
Earn FISH tokens for depositing stablecoins. You can compound your stablecoins if you choose to swap your FISH tokens for more stablecoins and deposit them back into these pools.
Final Thoughts and Recommendations
The vast world of DeFi is far too big to fully explain, even in a long article like this one, so I highly recommend you do your own due diligence, weigh all the risks and determine if this is something you want to begin exploring. I’ve been experimenting with DeFi protocols for over two years now and the incredibly fast growth in this industry is mind blowing! It truly is impossible to keep up with it all, but that’s also why this industry is so exciting and lucrative.
However, there are several risks that one should consider before putting too much of their capital into these protocols. One risk that too many people don’t consider are code risks and loop holes in the design logic. The protocols above have been audited by third parties to mitigate this potential risk, but that doesn’t mean that they’re bullet proof. Market risk is another issue to consider when you decide to hold on to the governance tokens that these protocols distribute. The value of these tokens can easily go way up or down very quickly, which makes the interest rates you earn from these types of vaults and liquidity pools unreliable to depend on over the medium to long term.
It’s also important that I disclose that only a small portion of my portfolio is locked away in these DeFi protocols. Most of my crypto assets are either stored offline in cold storage or earning interest using one of the centralized services mentioned in my Crypto Interest Strategy article.
As long as you’re willing to deal with the risks, then investing your money into DeFi protocols can be an extremely lucrative opportunity. Also, don’t be afraid to make mistakes. This is a brand new industry with lots of room for improvement and we all tend to make mistakes during these early days. However, it’s the pioneers of any industry that benefit the most, so don’t wait until this industry becomes mainstream since the opportunities won’t be as vast as they are now.
Be sure to check out our other Crypto Strategy Articles:
The strategies in this article are best combined with the other strategies taught on this site.
- How To Find The Best Cryptocurrency
- Crypto Data Strategy
- Crypto Interest Strategy
- Crypto Due Diligence
- Crypto Allocation Strategy
Recommended Crypto Services, Products and Strategies:
The first thing any crypto investor needs is a reliable and secure Crypto Wallet. Whether you’re looking for an online wallet, hardware wallet, desktop or mobile wallet, Crypto Renegade provides you with all the Best Crypto Wallets in each category.
When you’re ready to buy more crypto, or exchange your coins for others, Crypto Renegade’s list of the Best Crypto Exchanges has you covered. The Crypto Exchanges recommended here offer everything from simplicity and convenience to advanced trading platforms and profit sharing.
For those people that don’t have any money to invest right now, or just want to understand the technology a bit more, you’ll definitely want to check out Crypto Renegade’s Free Crypto Strategy and start collecting Free Coins today!
What do you think about the DeFi strategies written in this article? Do you have any questions about them? Be sure to leave a comment below.