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Things to Consider Before Diving into DEFI...

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Zebedee
@revisesociology
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6 min read

I've been exploring and experimenting with Decentralised Finance (DEFI) for well over a year now and I'm still very much finding my way in the space, but here's an outline of some of the things I consider when choosing which DEFI protocols to use.....

  1. Which Blockhain(s) is the protocol built on?
  2. How reputable is the DEFI project/ protocol itself?
  3. What are the details of the specific contract I'm staking my coins to...?
  4. What coins am I staking, how much of them do I want to risk?
  5. Interoperability - how easy is it to get my tokens to the chain/ off the chain?

This is by no means meant to be a comprehensive list, these are just some of the factors I consider!

Cub Defi as an Example of how I evaluate a DEFI project....

The bleo-BNB farm on CubDefi is just one contract on one protocol on one chain I've staked just some of my coins to, and here's what I ask myself about this particular project....

  1. Which chain - Binance Smart Chain - NOT ideal in terms of centralisation (it's Binance) but one of more established DEFI chains.
  2. Cub Finance (the DEFI app itself) - I KNOW the team that develop this, from @leofinance on the Hive blockChain, so it's reputable.
  3. In terms of the contract - there's A LOT to consider - firstly, this is a paired pool on Pancake Swap, so I'm getting 'bleo-BNB LP' tokens when I stake both of these to this contract, but then you have to 'stake' via Cub; secondly there are NO FEES (this can vary A LOT, a 4% deposit fee isn't unheard of!), thirdly there's NO TIME PERIOD LOCK, fourthly, the return is decent - almost 70%
  4. The tokens - firstly, this is bleo, which is a wrapped version of leo from Hive-Engine (on Hive), in terms of a HE token, actually (bizarrely) MORE decentralised than leo itself so a WIN already, and BNB, native to BSC. I'm happy to risk BOTH of these as I have a lot more of either staked elsewhere.
  5. Interoperability - very easy to bridge out via Binance, but that does depend on you being OK with KYC.

Beyond this, I'd say you also need to look at 'the overall picture' to see how many layers of contract you're having to go through to get your coins staked - in this example I'd say it's a mid-level of complexity - once you have your tokens in your MetaMask wallet, you add liquidity on Pancake Swap (one contract layer) then stake via Cub (a second contract layer).

Things can get more complex with some pools involving 4 tokens or more.

A second example....Staking UST on Anchor

To my mind something MUCH simpler in terms of contract layers is staking UST on ANCHOR...

  1. Which Chain - Terra - UST is simply the stable coin of the Terra chain
  2. Anchor itself - I don't know the team but this is the seventh largest protocol in terms of TVL, and it's blissfully simple to navigate
  3. Possibly the simplest stables contract in DEFI - a 20% return to just stake your UST to the protocol to get a return in UST - one layer, no lock period, no fees.
  4. UST - is just 'pure UST' no funny wrapped versions, just a stable coin!
  5. Interoperability - you can bridge out via both BSC and Cosmos.

In terms of simplicity, decentralisation and thus probably security, it seems that staking UST on Anchor wins hands down over bleo-bnb, BUT the return is 3.5 times less!

Below I run through some of these considerations more abstractly, if briefly!

Blockchain considerations

First off, you need to consider which Blockchain you are going to stake or pool your stable coins to, and here, in order of TVL you've got several options, including (in terms of Total Value Locked)....

  1. ETHEREUM (Obviously)
  2. TERRA
  3. Binance Smart Chain
  4. Avalanche
  5. Polygon (built on ETH)
  6. Osmosis (built on Cosmos)
  7. Hive (HBDs/ Hive-Engine stable tokens)
  8. RUNE - the multi-chain aggregator!

NB this isn't supposed to be an exhaustive list, these are just the ones I am familiar with, and each of them has their own strengths and limitations in terms of fees and how decentralised (or not) they are.

For the most part I've decided to abandon ETH because of the astronomically high fees. Unless you are pooling more than $5000 in one go it just isn't worth the typically > $100 FEES for pooling.

TERRA I'm a fan of, mainly because of UST, its native stable coin - and the simplicity of the Anchor protocol as mentioned above.

Binance Smart Chain is too close to Binance for my liking, but I use it because CubDefi is built on it and has some great returns.

Polygon had the advantage of cheap fees, very cheap fees, but it feels a bit more wild west than many of the others, and you have to keep an eye on pools being retired and the returns going to zero!

CrytoRaiders - 'Wild West' staking on Polygon.

Osmosis I think is under most people's radar, again very cheap fees but it does lack pure stable coin options.

Hive is worth a mention simply because of HBD, and the 12% return you can get on just pure staking, but it is only stablish - there are also Hive-Engine stable coin options, but these aren't really DEFI so enough said on that!

Finally, I have to mention THORCHAIN/ Rune which remains the only place where you can stake native Bitcoin/ Litecoin and others with Impermanent LOSS protection.

DEFI Protocol Considerations.....

Secondly you need to consider the PROTOCOL which you are going to use to stake your stable coins (and/ or other non-stable coins) to these different chains.

Some protocols operate across multiple chains, such as Uniswap, Curve and AutoFarm, some only operate on one chain - such as PancakeSwap (BSC) and Anchor (Terra).

To make matters more complex, some Protocols are aggregators - they stake to another Protocol and provide you with another layer of rewards to give you a typically higher rate of return.

For example Cub DEFI offers a 4 BELT stable pool, on BELT and aggregates returns on top that in Cub.....

If you're looking for a longer term stable return, you're probably better off picking a more established project such as PancakeSwap or Autofarm.

Some DEFI projects are FULLY gamified, for example CryptoRaiders is effectively an NFT/ game-token DEFI protocol built on Polygon, and at times it can feel more like a game rather than a glorified farming mission.

Contract Considerations.....

You have to really watch out for is the FEES involved in staking or withdrawing AND any lock-up period which can affect the return.

By fees I don't mean TX fees, although you must consider that (awful on ETH, OK on BSC and Avalanche, tiny on POLYGON) I mean what's added on for staking - some pools charge you a percent on entry - I've seen as high as 4%.

Others will charge you on withdrawal - for example Polycat Finance charges you 1%, potentially worse if you've had a lot of growth!

Also you need to consider WHAT you are paid out in - is your contract auto-compounding in the token you are staked in, or are you paid in the 'platforms funny coin' which needs claiming and maybe exchanging for something else?

Auto-compounding means you don't pay fees, but if it's click, claim, transfer, that'll cost you and it can mount up.

Also, is there a lock, and how long does the contract run for?

Some contracts offer you a higher return for a longer lock - for example my staked RAIDER on Cryptoraiders I locked for a year for a higher return.

Worst of all are those contracts for which the rewards expire after a few months or less, CRONOS is TERRIBLE for this, forcing you to move to V2 farms after a relatively short period.

Whereas with many options you can just leave your coins in - CubFinance, Thorchain, Osmosis, I've had funds sitting in those for months and no problem.

Finally - which coins...?

This is really down to you - personally I tend to keep most of my stables and BTC/ ETH as just single assets, and then pool less than 20% with some of the more 'out there' coins - such as the RAIDER tokens for example.

Final Thoughts

DEFI is still very wild west, it's very much still a learning curve for me, and you absolutely have to check in at least once a month, ideally more, with your various funds to keep on top of the changing landscape.

NB - my top tips, for entertainment purposes only are:

  1. CubDefi for a stable return

  2. Osmosis for something under the radar also with very decent and stable and high returns

  3. CryptoRaiders for something 'way out there'!

Posted Using LeoFinance Beta