Disclaimer
:::warning WARNING! This article and all content presented do not constitute financial or any other type of advice. Its purpose is solely educational and research. :::
About the author
For over 7 years, I have used and studied DeFi tools from an analytical perspective. Now, it is time to share this knowledge in an introductory course.
Course index:
- Part 0: Real yield vs. projected yield in DeFi
- Part I: Liquidity pools: theory and practice
- Part II: Lending on EVM and Non-EVM platforms. Key strategies
- Part III: Staking vs. Farming: similarities and differences
- Part IV: Cross-chain DeFi & bridges
- Part V: Derivatives: from basic to advanced
- Part VI: Security in DeFi from the user's perspective
- Part VII: Traditional investments vs. DeFi
Introduction
To ensure an objective analysis of the DeFi industry, a combination of empirical data and external sources is used. This facilitates a meta-analysis-based approach, allowing for a more accurate evaluation of sector trends and risks.
Importance of real yield in DeFi
Many people rely on data provided by on-chain aggregators, dApp websites, and content creators. However, this data can be unreliable due to manipulation in the presentation of yields or unrealistic calculations.
It is essential to correctly calculate profits and potential losses, considering elements such as liquidation risk and impermanent losses. Projected yields (APY) are often exaggerated, while real yield (APR) more accurately reflects the benefits obtained in DeFi strategies.
APR vs. APY: Key differences
APR represents a simple annual interest rate, while APY includes reinvestment of rewards. In many strategies, APR is more relevant, as it reflects the yield obtained before applying any type of automatic reinvestment.
Yield strategies in DeFi
Investors can adopt different approaches to their rewards:
- Accumulation: Holding obtained tokens with the expectation of future appreciation.
- Diversification: Converting rewards to other assets such as ETH or BTC.
- Stabilization: Exchanging rewards for stablecoins to reduce exposure to volatility.
Depending on the chosen strategy, profits can vary substantially. The key is to manage risk and carefully evaluate each protocol before depositing funds.
Factors influencing yields
- The novelty of a protocol or network often offers high initial yields, but also carries risks.
- The use of wrapped tokens introduces greater complexity and risk.
- Market conditions affect the profitability of loans and staking options.
Risks in DeFi
One of the most common mistakes in DeFi is participating in advanced strategies without a solid understanding of basic tools. Using excessive leverage without understanding collateralization mechanisms can lead to significant losses.
The risk model in DeFi
To help users better manage their DeFi investments, there is a risk assessment model that classifies strategies from the safest to the most speculative. Choosing appropriate strategies within the user's experience level is essential to minimize losses and maximize profits.
Conclusion
Education in DeFi is a fundamental pillar to be able to navigate this emerging financial ecosystem safely. At Q2BSTUDIO, as a company specialized in technological development and services, we help our clients harness the potential of DeFi with innovative and secure solutions.
We will continue exploring these topics in future installments. See you in the next session.
