What can you do with crypto after you buy it? Lending, Staking, Market Marking, Yield Farming

So you bought into the narrative that crypto / bitcoin / ethereum is the internet of money and the future of finance. But now what can you do with it? You can definitely trade, sell and transfer it, but here are the financial uses of crypto: Lending, Staking, Market Making and Yield Farming

Lending

One of the first things you can do with crypto currency is lend and borrow it. Most major CeFi (Centralized Finance) institutions will provide have lending and borrow rates that can range froma few percent APY to close to 15% APY (BlockFi, Celsius etc).

With lending being more standardized, there have been many DeFi (Decentralized Finance) options - software protocols - enabling lending providing higher rates as it is completely systematized process cutting out the middleman and human labor. However, with no institution providing the service it is up to the users to make sure the assets are safe and the code doesn't have malicious intent or bugs that could put the assets at risk. One of the benefit of using DeFi protocols in the early phases is that there are incentive programs awarded to users for participating. In many cases the software protocols provide reward tokens that can have high enough value to compensate for the risk (Aave, Maker, etc)

Currently, Lending of crypto must be fully collateralized, but probably in the near future some type of credit system could emerge like FICO scores.

Staking

Staking is a type of lending, but instead of lending to someone else, you are lending to the protocol of the token to receive interest/rewards. The reason the protocol needs tokens is that the governance on how the protocol operates is determined by the tokens via a mechanism called 'proof of stake' (basically using a consensus model of voting by tokens to approve operations). This is similar to providing proxy voting of stocks.

Market Making

Making Making is the process of lending 2 or more assets to a protocol with target ratios (like 50:50) to collect fees when others exchange one for the other. This lender is often called an LP (Liquidity Provider).  The liquid pool providers get a percentage of the fees charged to exchange assets and can also be provided with reward incentives to boost overall yields. 

 

The main risk doing this activity is that if the prices deviate too far from when the provider lent the assets and withdraws them before they converge, the provider could suffer from impermanent loss ( the loss associate from the price deviation; the fees collected could help offset these losses, but may not cover all loses).  

Uniswap is the largest and most well-known platform to offer this, but many others have also popped up as competition, including SushiSwap, PancakeSwap, etc.

Yield Farming

Yield Farming is the process of harvesting more yield from digital assets / tokens. Not only do DeFi protocols provide rewards / incentives / profits they can also issue digital tokens / receipts that can be further used by other protocols to generate yield.

Lending Example - Compounding / Looping - on Aave

1) Lending 100 MATIC will currently yield 0.31% plus 2.69% reward token ⇒ 3%

2) Borrow 50 MATIC (can borrow up to 50% deposited) for 2.49% APR minus 1.89% reward token ⇒ -0.6% ⇒ lend back to Aave for 3% ⇒2.4%

so initially you get 3% yield for lending MATIC, but by compounding/looping you can add another 1.2% (50% of 2.4% from 50 MATIC), bringing the yield to 4.2% after one iteration ( 1) Lend 100, Borrow 50, Lend 50)

you can keep doing this borrow lend / cycle until the amount borrowed is too small to offset transaction costs. Protocols like Curve and Beefy do this systematically for a fee

Takeaway

• Crypto Currencies are evolving to allow permissionless borrow and lending through software
• With incentive bonuses provided by protocols, users can get bonuses to lend and borrow and get increased yields to borrow.  It is unclear if these bonuses will persist, but until they go away, this is kind of a Golden Era for people looking to get enhanced yields from lending and borrow crypto
• effective yields can easily get over 10% APR for even stablecoins (coins that are backed 1 to 1 to US dollars)