Summary: Decentralized finance has been the most valuable use case for blockchains and cryptocurrencies for the past several years, and Ethereum is the settlement layer where the majority of activity takes place. Consequently, there are opportunities beyond simply staking your ETH to earn a high yield, albeit with an increased level of risk. Today, we’re going ...
Decentralized finance has been the most valuable use case for blockchains and cryptocurrencies for the past several years, and Ethereum is the settlement layer where the majority of activity takes place. Consequently, there are opportunities beyond simply staking your ETH to earn a high yield, albeit with an increased level of risk. Today, we’re going to take a look at several different strategies to earn yield on ETH and evaluate their risks in order of increasing complexity.
For reference, staking Ethereum, arguably the safest way to earn yield, currently pays around 3.5-4.3% if done through a liquid staking derivative like Lido or Rocketpool. While this is a great yield on an asset that is decreasing in supply, the strategies we will look at today provide a higher yield with more risk and complexity involved. For those who want the simplest and safest yield, depositing ETH into Rocketpool to receive rETH may be best. However, another option is to find a newer, riskier liquid staking platform that may provide token incentives to stake ETH.
First, a simple strategy using a time-tested DeFi protocol is depositing ETH into Yearn Finance’s vault on Optimism. For those unaware, Yearn is a yield optimizer that allows users to deposit an asset and then automatically move it to the protocols providing the best risk-adjusted yield. This specific vault holds a 95% allocation in Aave and the rest in Sonne Finance and pays an APR of around 1.2%. Though this is not much, the vault also pays an extra incentive in OP tokens, the native token of the Optimism Layer 2, at a 6.32% APR, bringing the net APY to around 7.3%. For investors looking to get exposure to two Ethereum-focused assets, this could make sense.
Another option which is only slightly more complex than Yearn is to deposit in one of Beefy Finance’s vaults or pools. Like Yearn, Beefy aggregates DeFi protocols that offer yields and auto-compounds these yields, leading to a higher overall APY. The vaults we are mainly interested in are the Ethereum derivative pairs, which put two Ethereum-based assets, like liquid-staked Ethereum, in a trading pair. Users then get any trading fees from transactions involving that pair. Though some of these APYs may seem lower than simply staking, it is important to remember that any staked version of ETH will pay its yield on top of the Beefy vault yield, making these a lucrative option. The main risk with these pools is that if there is an issue with the staked Ethereum, the losses will be more consequential and could affect the un-staked ETH in the pool.
Two other options, both available on Arbitrum, are Jones DAO’s Leveraged Delta GLP Vault and GMD Protocol’s ETH vault. Both strategies are built on GMX, Arbitrum’s decentralized perpetual exchange. On GMX, users can provide liquidity through the GLP token, a basket of the most common crypto assets including BTC, ETH, and USDC. Using leverage and complex financial tools, Jones also isolates their product to be essentially synthetic ETH and then uses smart leverage to increase the yield potential. GMD uses a similar strategy and offers single-asset delta-neutral vaults for BTC, ETH, and stablecoins. Being delta neutral means both vaults do not change their yield based on the price of the asset changing, only if the underlying yield on GMX for GLP changes. Currently, Jones is paying around 17%, and GMD is at 8%. The main risk with these vaults is if there is some sort of unexpected, chaotic event that happens for GMX, then the leveraged vaults will be at risk and lose a significant portion of their value. Relying on these strategies can be quite lucrative, but comes with the risk of relying on multiple protocols’ success.
For experienced DeFi users willing to take on extra risk, Pendle Finance offers a unique opportunity to speculate on Ethereum by creating an interest derivative market. Simply put, Pendle allows users to separate the yield from the principal for interest-bearing tokens like staked ETH. Then, anyone can buy or sell the principal token, PT, or just the yield-bearing token, YT. The key to succeeding on the platform is buying the yield token when the market thinks the yield for a certain period, called the implied APY, is low. Of course, this method has the risk of failing if Ethereum’s yield moves in the opposite direction that one hopes, but it has the potential to create a significantly higher yield, possibly 30% or more.
The DeFi industry is still in its nascency and has several untapped opportunities to make large gains on ETH and ETH-based assets. The strategies covered today, while potentially lucrative, do carry some amount of risk and this article should not be taken as financial advice, only education. Only time will tell how long these opportunities last, but they are at the very least an interesting case study into the beginning of a new financial industry.
By Lincoln Murr