These Are The Smartest Ways to Make Money in DeFi: IntoTheBlock Report

Cryptocurrency market information provider IntoTheBlock published a report on Thursday comparing the best risk-adjusted ways to earn returns in the world of decentralized finance (DeFi).

Despite the “almost infinite number of configurable strategies,” the company claims that the best option is to stick with “straightforward strategies,” which are ultimately limited to “only a few different primitives.”

Best way to make money in DeFi

The first strategy highlighted by the company is AMM Liquidity Provisioning.

An AMM is an automated market maker. To earn income, DeFi users can deposit their assets into AMM pools for different trading pairs, where they help provide liquidity to enable trades. Depositors receive a return from trading fees every time a user swaps between two assets using this pool.

AMM returns tend to produce higher returns for trading pairs where the price correlation between the two assets is low. However, the volatility of the assets in these pairs also creates the risk of temporary loss for investors.

“As new capital is added to the pool, the expected annual return is diluted,” IntoTheBlock continued. “Since expected returns decrease as more capital enters the pool, the initial size of the pool relative to the capital deployment must be considered.”

Another promising source of high returns is “recurring lending,” where protocol users can lend and borrow the same assets, profiting from the difference between borrowing costs and protocol incentives. As with AMM pools, returns decrease as more capital is added to the strategy, so the company recommends lowering leverage when depositing more than $3 million in assets.

DeFi Risk Assessment

There’s also “supervised lending,” which combines the two techniques. Users use a “non-yielding asset” (such as Bitcoin) as collateral to borrow, and then use their borrowed money to buy a “more productive asset” that generates yields in another area, such as an AMM pool.

Returns on this strategy can be low or net negative, as borrowing rates can often exceed protocol incentives, and contain risks of liquidation and impairment loss.

Finally, the report highlighted “leveraged leverage” as a strategy to produce “average” returns on assets such as ETH or SOL, which can be leveraged natively for a return to secure their blockchains.

The return remains positive with this strategy as long as the borrowing rates for the assets mentioned remain below the mortgage rate. Returns rise as leverage increases, potentially exceeding 10% APY, compared to the 2% to 4% returns generally seen with a simple mortgage.

“Combining these strategies together can create a complex series of risk considerations when it comes to rebalancing and taking profits,” IntoTheBlock warns.