Crypto Investing Basics — A Rational Framework

# DeFi Yield Strategies — How to Put Crypto to Work

Holding crypto earns nothing by default. DeFi changes that — but every yield comes with a corresponding risk. This node maps the yield landscape honestly.

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## The Yield Spectrum

```
Risk        Low ──────────────────────────────────────── High
            │                                              │
Yield       Low ──────────────────────────────────────── High
            │                                              │
Strategy    Staking   Lending   LP (stable)  LP (volatile)  Leveraged farming
```

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## Strategy 1: Proof-of-Stake Staking

**How it works**: Lock tokens to help validate the network → earn newly minted tokens.

| Asset | APY | Minimum | Lockup |
|---|---|---|---|
| Ethereum (ETH) | ~3–4% | 32 ETH (solo) | Until unstaking |
| Solana (SOL) | ~6–8% | None (via validator) | ~2 days |
| Cosmos (ATOM) | ~15–19% | None | 21 days |

**Risk**: Slashing (validator misbehavior), smart contract risk (liquid staking), token depreciation.

**Best for**: Long-term holders who believe in the network.

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## Strategy 2: Lending on Aave/Compound

**How it works**: Deposit assets → earn variable interest from borrowers.

```
You deposit 10,000 USDC
  Base APY: 5% from borrowers
  + AAVE rewards: 2%
  = Total: ~7% APY
  
After 1 year: ~10,700 USDC
```

**Risk**: Smart contract exploit, liquidity crunch (can't withdraw if utilization = 100%), stablecoin depegging (USDC, DAI).

**Best for**: Conservative DeFi users, stablecoin holders.

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## Strategy 3: Liquidity Provision (AMM)

**How it works**: Deposit a token pair into a DEX pool → earn trading fees.

**The catch — Impermanent Loss (IL)**:

When you deposit ETH/USDC and ETH price rises 2x, the AMM automatically rebalances your position. You end up with less ETH than if you'd just held.

```
Initial: 1 ETH ($2,000) + 2,000 USDC = $4,000

ETH price doubles to $4,000:
  Hold: 1 ETH + 2,000 USDC = $6,000
  LP:   0.707 ETH + 2,828 USDC ≈ $5,656

Impermanent Loss: $344 (~5.7%)
```

IL only becomes *permanent* if you exit the position while price is diverged.

**When LP makes sense**:
- Stablecoin pairs (USDC/USDT) — minimal IL, pure fee income
- Correlated pairs (ETH/stETH) — low divergence risk
- High-volume pairs — fees offset IL

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## Strategy 4: Yield Aggregators

Platforms like **Yearn Finance** and **Beefy Finance** automatically move funds between protocols to maximize yield — reinvesting rewards, switching strategies.

```
Deposit USDC to Yearn USDC Vault
  → Yearn allocates across Aave, Compound, Curve
  → Auto-compounds daily
  → You receive yUSDC (yield-bearing token)
```

**Risk**: Additional smart contract layer (aggregator + underlying protocols).

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## Realistic Yield Expectations (2024)

| Strategy | Realistic APY | Risk Level |
|---|---|---|
| ETH staking | 3–4% | Low |
| Blue-chip lending (USDC) | 4–8% | Low-Medium |
| Stable LP (Curve) | 5–12% | Medium |
| ETH/BTC volatile LP | 5–30% | Medium-High |
| New protocol farming | 50–500% | Very High |

> Any yield above 20% requires careful examination of *where the yield comes from*. If it's not clear, it's likely unsustainable or funded by token inflation.

DeFi Yield Strategies — How to Put Crypto to Work

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