My DeFi Investment Strategy (2021)

I’m experimenting with Decentralized Finance (DeF) as I’ve been thinking more about unbundling of work and cash flow. I think that DeFi, and yield farming in particular, could be a viable mechanism to generate predictable cash flow, that is not tied to active labor.

I hope to be able to only commit a few hours a week to spot-check positions and harvest rewards and 1-2 full days a month to research new projects and rebalance the portfolio. I will track the starting point and try and calculate my effective yield but given the volatility of the assets and unpredictability of the rewards, I know the result will be difficult to replicate consistently. 

It’s also worth noting that this kind of active management might not be significantly better than just buying and holding ETH (this article has some good data) which has much fewer fees and work associated with it – but where is the fun in that 🙂

This is the structure I use for my strategy: 

NameDescription% of AssetsAPY TargetRisk LevelActive Management Project Examples
SafeStablecoins that earn yield passively40%5-10%LowNoneBlockFi, Celsius
Stable PairsHigh correlation long-only assets30%10-30%MediumMed (Weekly)ETH-WBTC, ETH-DPI
Stable and LongStablecoin + long-only asset30%15-50%High Med (Weekly)USDC-ETH, USDC-MATIC
DegenHigh incent temporary reward pools<1%100%+InsaneVery High (Daily)Polycat, Pacake Swap (Polygon)

The core of my farming is liquidity pools with stable pairs and stablecoins (like USDC which is collateralized and pegged to the dollar) with assets that I’m long like Ethereum, Matic or Solana. 

Everything that is outside the “Safe” section requires a wallet (or multiple wallets across multiple chains) to access and is all pretty confusing (even crypto native folks).  You’ll need to use some aggregators like Zerion, Zapper or DeBank (better for cross-chain) to help you visualize your portfolio and your trading history.  I try not to have more than 10-15 core positions at any point in time but curiosity, low friction, and lack of discipline usually get the best of me so I end up having to trim back every few months. 

I’m not borrowing against my assets yet, but it’s something that I’m considering when there are good incentives for borrowing against “safe coins” like BTC or ETH. In traditional finance, this is one of the main benefits of using a financial advisor like Goldman Sachs or owning a primary residence — you can often get leverage against your assets so I will experiment more in this space in the future.

“Safe” Yield (40%)

A significant part of my exposure is in “Safe” US Dollar stablecoins that are passively generating 5-9% yield in BlockFi and Celsius.  I am comfortable that BlockFi especially has very solid security practices. This interview with Zac Prince (CEO) is a good listen

All you have to do is send in your money and pick how you want to get paid (I get paid in ETH on BlockFi) which makes it fairly easy to access for most people even those completely unfamiliar with crypto. Celsius has slightly faster withdrawal times than BlockFi which usually takes a few days. 

Even though this is “safe” in crypto land there is still no FDIC insurance as crypto is not FIAT so you are mostly relying on the fact that BlockFi and Celsius are well run with strong risk management practices and will refund you your money in case of an incident. This is just a reminder that this is still a lot less safe than a bank or money market account. 

Stable Pairs (30%)

Stable pairs are assets with high or 100% correlation which reduces the impermanent loss risk of exchange rate volatility. This strategy is reserved for assets that I plan to hold anyway.

  • Stable pairs are assets with high or 100% correlation:
    • USDC-DAI (100% correlated)
  • As a farmer providing liquidity for stable pairs (usually in an equal ratio) you are usually rewarded in trading fees and special tokens as an incentive for providing liquidity. 
  • When the market moves your assets will typically increase or decrease in value in synchronization which means you reduce your exposure to Impermanent Loss. Impermanent Loss occurs when a the automated market maker rebalances the pool to get to a 50/50 ratio of value and can eat into your expected gains significantly. 
  • New projects especially on new chains (e.g. Polygon or Solana)  will incentivize you to provide liquidity on their platforms. The “safest” ones have established projects moving to new chains – e.g. Balancer moving from Ethereum to Polygon feels safer than a totally new project on Polygon. 
  • I generally avoid new algorithmic stablecoins unless there is a very good reason to trust it – eg. UST is probably fine on Terra as it has a $2BN market cap but still makes me nervous as it’s not technically collateralized. 
  • You usually don’t make that great yields on stable pairs but I generally look for incentives that can get me to 15%+ yields. 

Example Projects

  • I’ve been playing around a little bit with leverage for correlated pairs (starting with Alpha Finance), but this just adds more risk and most of the reward is in $ALPHA (degen coins) that I’m likely to sell as I harvest.
  • DPI is the DeFi Pulse Index and a good mix of all the main DeFi coins. I like the DPI-ETH liquidity pool with $INDEX rewards.
  • DFX is a decentralized FX for currency stable coins to allow for EUR-USD-CAD transfer which is offering 20-40% yields for providing liquidity with $DFX rewards.

Stablecoin + Long Assets (30%) 

For this strategy, I usually look for pools that pay higher yields than the stable pairs because of the increased risk and margin erosion from Impermanent Loss (explainer video here). 

  • For assets that I plan to hold like $BTC, $ETH, $MATIC, and $DPI I will often invest in a pool with a stablecoin. e.g. 
    • USDC-ETH
    • USDC-MATIC
    • DAI-ETH
  • I only do this for things that I would hold anyway and when the farming rewards are high enough so that I’m comfortable that they will offset the impermanent loss
  • I think that a number of projects on Solana (e.g. Raydium) and Terra (Anchor, Mirror) are interesting and I’m able to execute this strategy on those protocols as well. 
  • I target 25%+ yields here (higher than stable pairs) but they can often end up much higher. 

Example Projects

  • I usually provide liquidity on the major exchanges like UniSwap V3 or SushiSwap which have high volume so good trading fee revenue,  but often will move these pairs to new chains (like Polygon) where the token incentives are better. Revert Finance is a good tool to track all your liquidity positions and APY. 
  • Projects like Balancer, Visor, and Charm are interesting from a liquidity management perspective and can help counter the effects of 50/50 pools that you would just let sit passively  — I’ve recently increased my exposure to these projects.  
  • Mirror is a decentralized platform to own public securities like ETFs, Apple, or Google and is a new project with token incentives to provide liquidity. 

Degen Coins (<1%)

Here is where it gets really weird and this is a place where I don’t think most people should participate. It’s as close to gambling as you’re going to get in Crypto but the 1%+ daily yields can often be very enticing. I’m almost never planning on holding these over the long term unless I start to really get conviction on the project.

  • Holding and providing liquidity for Degen coins is extremely risky. I’ve already been burned over and over again with the allure of stupid APRs and had a front seat to the Iron-Titan fiasco where I almost lost my original investment besides being up almost 3x within a 2 week period.
  • I very rarely participate in Degen projects on Ethereum – the gas (transaction hash) fees are so high that it’s usually not worth it. Most of my degen activity is on Polygon but also play around on Solana as well.
  • However, It’s a lot of fun to play with these projects so if you do dive in, pick projects that seem legit and put in a small amount of money into the pools (or farm with stables) and then sell off the LP rewards as they come in to reduce risk.
  • It’s even more fun to be in Degen projects/pools with friends because it’s exciting and things move fast. It’s also helpful to have friends around to tell you when to get out!
  • I look for 200%+ APYs for this strategy and try not to stay in the coins for too long – if you do make gains, I’d suggest locking them at around 2-3x and then playing with house money. I’ve never really made any money on Degen, but I’ve never really made any money gambling at a casino either 😂

Example Projects

Note, these projects may not exist when you read this 🙂

  • Pancake Bunny: Yield aggregator with auto-compounding pools on Polygon. I’m in the ETH-Bunny pool at 1% yield per day.
  • Polycat: Yield aggregator with auto-compounding pools on Polygon I’m in the FISH-MATIC pool at 0.8% yield per day. 
  • OHM: An algorithmic reserve currency. I’m staking OHM at 1% yield per day. 

I hope this helps folks, and none of this (as with everything on my personal blog) is financial advice. I’m just sharing my own experiences in case it’s helpful to others and to refine my own thinking.

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