The evolution of DeFi: a panoramic overview of revenue strategies from staking, liquidity mining to recursive lending

DeFi, or decentralized finance, has set off a revolution in the financial sector with its unique earning potential. It uses blockchain technology to provide investors with diversified income opportunities, which are often accompanied by innovative financial mechanisms. From simple token staking to complex recursive lending, every strategy in DeFi brings different return prospects and risk considerations.

This article provides an in-depth analysis of DeFi’s profit strategies, covering staking, liquidity provision, lending, airdrops and points systems, and points out their respective profit methods and risks. The article also specifically discusses advanced leverage strategies such as recursive lending, as well as the prospects for the integration of DeFi and traditional finance, aiming to help readers fully understand DeFi investment and make wise decisions.

Staking: The cornerstone of DeFi revenue

In the DeFi world, staking is a core way to obtain income. It requires users to lock their holdings of blockchain-native tokens to support the network’s security and transaction verification. In return, stakers receive transaction fees and rewards from the issuance of new tokens.

The income level of this income model is closely related to the activity of the network. The higher the transaction volume, the more generous returns the pledgers will receive. However, staking is not without risks, and fluctuations in token value and network security vulnerabilities are factors to be wary of. Although staking is often viewed as a relatively stable way to earn money, it is crucial to have a deep understanding of the characteristics and potential risks of the blockchain network you are participating in.

Taking the Cosmos protocol as an example, it stipulates that stakers must go through a lock-in period when they withdraw from staking. During this period, users cannot freely transfer their assets, which means that they are still exposed to the risk of asset price fluctuations during this period, and they are also unable to use these assets to invest in other income strategies. Therefore, stakers need to carefully evaluate the impact of these liquidity and time constraints on their investment strategies before participating.

Liquidity Provision: The Double-Edged Sword of DeFi Yields

In DeFi's rich yield strategy, liquidity provision plays a crucial role. As a liquidity provider, you inject two assets of equal value into the liquidity pool of a decentralized exchange (DEX) to provide trading pairs for traders. In exchange, you will earn a percentage of each transaction.

The profitability of this revenue model is closely linked to the trading volume of the fund pool and the set expense rate. In capital pools with large transaction volumes, LPs can obtain generous transaction fee income. However, this strategy is not without risks, especially the so-called impermanent loss, which occurs when the values ​​of two assets in the capital pool deviate, which may cause the LP's asset value to decline.

Source: IntotheBlock

In order to mitigate this risk, investors can choose to invest in stablecoin capital pools with less volatile asset prices. Such a choice can bring more stable income expectations. Additionally, it is worth noting that as liquidity increases in a pool, the expected rate of return for an individual LP may decrease as more liquidity providers share the transaction fee proceeds.

In general, liquidity provision is an effective method of generating income, but it requires investors to remain alert to market dynamics and capital pool characteristics while pursuing returns to ensure the safety of funds and maximize returns.

DeFi Lending: The art of balancing returns and risks

The DeFi lending protocol opens a new revenue door for users with its simple and efficient revenue model. Users only need to deposit assets into the platform to provide loans to borrowers in need of funds and earn interest income from them. The interest rate for this process fluctuates in real time based on the supply and demand for the asset in the market.

During boom times, high borrowing demand will push interest rates higher, resulting in higher returns for lenders. However, this earning potential does not come without a price. Lenders need to be alert to liquidity risks, as well as possible borrower default risks. To mitigate these risks, lenders should pay close attention to market dynamics and invest in platforms that offer adequate liquidity and risk buffers.

With careful selection and constant monitoring, DeFi lending can become a solid source of income. It requires investors to remain alert to the market environment and the security of lending agreements while pursuing returns to ensure the safety of funds and maximize return potential.

Airdrops and points: a new dimension of incentives in DeFi

The DeFi protocol distributes tokens to early adopters and qualified users through an airdrop mechanism to encourage active participation of the community. With the rise of the points system, this incentive method has become more refined, ensuring that airdrops can more accurately reward users who truly participate in and contribute to the development of the protocol.

The core of the points system is that a series of user behaviors - such as trading on decentralized exchanges (DEX), providing assets to liquidity pools, borrowing funds, and even daily use of decentralized applications (dApps) - can Convert to points. These points are closely tied to the distribution of airdrop tokens, providing additional rewards for users’ active participation.

However, the points system is not perfect. It may be subject to specific conditions, such as geographic area restrictions or a token locking mechanism. Taking the Eigenlayer airdrop as an example, its token distribution is not only limited to users in specific regions, but also the tokens are locked during the airdrop, which has triggered heated discussions in the community.

Leverage effect: the amplifier of DeFi income strategy

In DeFi income strategies, the use of leverage can significantly increase returns, but it also brings higher risks and strategy complexity. The recursive lending strategy is a typical example, which amplifies returns by cyclically operating assets in the lending agreement.

Investors first deposit assets into a lending agreement to obtain a rate of return higher than the cost of borrowing. They then borrow the same asset and redeposit it, creating a cycle that not only increases their share of the protocol, but also their earnings accordingly. Each cycle can bring additional governance tokens or other forms of incentives, further pushing up the annualized rate of return.

Taking the Moonwell platform as an example, through the recursive lending strategy, investors can significantly increase the originally low supply APY. However, this strategy comes with interest rate fluctuations and liquidation risks, requiring ongoing monitoring and management by investors. Therefore, the recursive lending strategy is more suitable for investors who have a deep understanding of DeFi and have risk management capabilities.

In short, leverage is a powerful tool in DeFi income strategies that can bring huge returns to investors who understand its complexity and risks. However, it also requires investors to have professional knowledge and skills to ensure that risks can be effectively managed and returns maximized.

The future of DeFi: integration and innovation

Until 2023, DeFi and traditional finance (TradFi) will develop independently. However, as government bond interest rates rise, the market's demand for the integration of the two is growing, driving the expansion of DeFi into the real world assets (RWA) field. The introduction of RWA not only brings the rate of return of traditional financial products to DeFi, but also opens up new application scenarios with the help of blockchain technology.

For example, on-chain assets such as sDAI simplify the process of obtaining government bond returns and improve the liquidity of assets. This innovation makes DeFi more accessible and easier to use, opening up new revenue channels for ordinary users.

The participation of large financial institutions, such as BlackRock’s BUIDL fund, further demonstrates the potential and appeal of DeFi. The joining of these traditional financial giants not only brings capital to DeFi, but also brings trust to the market. The success of BlackRock Fund shows the huge potential of the integration of traditional finance and DeFi.

As DeFi merges with traditional finance, centralized companies face a choice: whether to provide services through decentralized protocols or through permissioned paths such as KYC. No matter which method is chosen, DeFi innovation will promote the development of the financial industry in a more open, transparent and efficient direction.

The future of DeFi is full of opportunities. The maturity of technology and the expansion of the market will bring more diversified revenue opportunities to users, while promoting continuous innovation in the financial industry and moving towards a more efficient and inclusive new era.

Conclusion:

The rapid development of DeFi is reshaping the future of the financial industry, providing unprecedented income opportunities and participation methods. With the integration of DeFi and traditional finance, we have witnessed the birth of a more diverse and inclusive financial market. In this new era, users, investors and financial institutions will jointly explore and utilize the infinite possibilities brought by decentralized technology to promote deeper development of financial innovation.

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