20% is the New 2%: How To Earn 20% APY in 4 Different Ways with DeFi

Over the past year, DeFi has taken over the cryptocurrency space, and offered sustainable high yields that are 50-100x higher than a traditional savings account. The DeFi base interest rate has cemented itself around the 20% range, so let’s look at a couple ways that this yield can be made.

The biggest reason for DeFi’s adoption is its high interest rates that almost always beat the rates offered by traditional bank savings and checking accounts. DeFi projects like Aave and Compound, which facilitate blockchain-based money markets, offer yield on all sorts of different assets, and truly help investors let their money work for them while they sleep.

Recently, the DeFi base rate, or the baseline for what one can expect to earn with stablecoins in DeFi, is sitting around 20% for a multitude of reasons. This number is subject to change in the future, and will likely go down, but for now represents gains over twice as high as one would expect by investing in the stock market, and leads to an initial investment being doubled in around three years. For anyone in DeFi right now, the gains are incredibly lucrative but also come with many different risks and uncertainties. Let’s look at five of the top ways in DeFi to earn a stable yield above 20%, how they work, and how long we can expect it to last.

The first and most well-known option is Anchor Protocol, the high-yield savings platform based on the Terra blockchain. Anchor allows users to deposit UST, the algorithmic stablecoin of the Terra ecosystem, and earn about 20% APY. Anchor works like other DeFi money markets, like Aave and Compound, but with a unique added feature: when users want to borrow money from the protocol, they put up a bonded asset as collateral. These bonded assets, like bETH or bLUNA, are staked and are continuously earning interest while sitting as collateral, and any staking rewards are used to reward the lenders. With the interest rate for LUNA sitting at around 5% and there being a collateralization ratio of 200%, this staking accounts for half of the interest rate that lenders receive. 

On the other side, borrowers are currently incentivized to loan because Anchor is giving out their ANC token to anyone who borrows money. The distribution rate of ANC is currently 12% higher than the borrow rate, meaning that they are effectively paying people to borrow money from the platform. This is clearly not sustainable over the long run, and it remains to be seen whether or not the high interest rates will last once the incentives dry up. Nonetheless, it currently offers a stable, high yield that does not appear to be going away anytime soon.

Another enticing option for earning a yield comes from yield farming liquidity pools on decentralized exchanges like Sushi and Dfyn. Every DEX needs one thing to succeed: liquidity. Without liquidity, nobody can make trades without significantly impacting the price of an asset, and as a result they are paying a price that does not reflect the asset’s true market value. DEXes offer liquidity incentives on some token pairs so that this slippage is more uncommon. Typically, these liquidity incentives are paid out in the native token of the DEX, like CAKE for PancakeSwap or SUSHI for SushiSwap. 

One of the main risks with providing liquidity is the risk of impermanent loss, which is when the price of one asset increases more than the other. Since providing liquidity requires assets to keep a 1:1 ratio in terms of dollar value in most cases, a price increase in one asset means that you would have been better off not providing liquidity and instead simply holding the asset. However, if the price goes back down, the loss goes away, which is why it is impermanent. Additionally, if the liquidity incentives are high enough, the impermanent loss may not matter.

Two DEXes providing high APYs on relatively safe pools are Dfyn on the Polygon blockchain and Sushi on the Harmony blockchain. Dfyn is offering 38% APY on their UST-USDT pair, and 28% on their USDC-USDT pair, all paid out in DFYN. Sushi is offering 20% on bscBUSD-BUSD, and 22% on BTC-ETH pairs, paid out in both ONE and SUSHI. Of these two, even though Dfyn’s rates are higher, their coin is less established and more volatile compared to SUSHI and ONE, so Sushi may be the safer option.

If providing liquidity on cryptocurrencies feels like too much risk, there is the option of providing liquidity for tokenized stock pairs on Mirror Protocol. Mirror, which is also based on the Terra blockchain, allows users to mint, trade, and short tokenized stocks like Apple, Amazon, and Tesla. They also offer yield farming incentives for providing liquidity on their trading pairs. For providing liquidity on pairs like AAPL-UST, investors can earn 34%, and even higher for more volatile stocks.

For the average investor, 20% gains yearly is neary impossible to consistently achieve. However, thanks to the power of DeFi, this is now possible, at least in the short term. As more users come into DeFi, the returns will likely go down, as they are spread among more people. Thus, today's DeFi users should take advantage of these rates while they can and hopefully become rich enough that it will not matter when they are lowered.

By Lincoln Murr

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