Introduction

This post will only make sense if you engage in some form of decentralized finance; or if you are at least considering doing so.

My venture into staking started with few years ago with Livepeer (exit) and Synthetix (still doing). The landscape was simple then, options were few, I just needed to make the bet, sit back and relax.

Now the field has bloomed and getting larger. I've been missing out a lot of profit by sitting back not deploying most of my idle assets.

Since then, I've been engaging in some fairly active yield-chasing the past few months. Whether the result is worth the effort remains to be seen, but I'm optimistic it will.

Here are some things I've gleaned in the process, specific to the current state of the defi market.

APY yields are fleeting

Interest rates change all the time. It's obvious to finance people but not to everyone else. Yield rates can swing in two digits in a matter of days.

The implication is staking is not a matter of sit-and-forget. What's a good deal today may last only for a week. That means you've got check back in at least one a week, if not more. You know, like a farmer.

Technical hurdle is an opportunity

It's well known that user experience in crypto is god awful. MetaMask, private keys and such. The landscape of defi is breaking into close to a dozen layer-two chains. I have to deal with bridging assets across chains, a concept I think a blockchain noob would dread.

While it's not tough like debugging legacy code, navigating the entire defi landscape is no small feat.

Most people are not willing to put up with that kind of obstacle. And when you are willing to do what most people do not, the reward will be more lucrative than what most people get.

Hard work is optional

In the regular world, how much money you make is a function of how hard you work.

In finance, how hard you work is inversely correlated with how much money you lose.

When you put capital to work, you don't have to work very hard at all to make profit... if the landscape doesn't change, risk profile stays the same and the reward stays constant. But that's not the real world at all.

Without continuous work (therefore the term 'farming') yield reward will rot to below average, maybe even put your portfolio in greater danger than before.

Profit from inefficiencies

Market inefficiency is especially stark in the world where assets are scattered across multiple chains.

At any moment in time each chain is in a different balance of demand and supply. Polygon may run short of USDT or Arbitrum may have an overabundance of ETH. Think of them as different buckets of water that are connected with little straws.

In an efficient world, assets would easily flow from one chain to another without much friction, but we're not there yet. Bridges do exist to move assets between chains (I have to keep a long list of bookmarks for them) but I've used them enough to tell how inefficient they are.

The result is that the same asset (say USDC) may yield 12% APY in BSC but yield 23% APY Avalanche. The opportunity here simply depends on your willingness to bridge your USDC over from BSC to Avalanche.

Most liquidity pairs are for suckers

Liquidity pools between non-stable pairs (e.g. BTC-USDT) are money-losing vehicles. I entertain only stable pairs (e.g. USDT-USDC) and stake the LP tokens elsewhere for another level of yield.

For all non-stable pools, impermanent loss is not just a risk, it's virtually guaranteed.

It's really a matter of how you choose to see your asset breakdown. Say you put your capital into a BTC-ETH pool, typically of an equal dollar value of both BTC and ETH. As price fluctuates over time, how much BTC and ETH you own changes every minute.

There's a different scenario when that is acceptable. That's when you choose not to see your asset as a breakdown between BTC and ETH, but as single pool that happens to contain BTC and ETH. And you value this pool on its own term.

Both scenario though are problematic. You may have a thesis on how ETH trends against BTC. But how the liquidity pool ended up performing has very little do that with your speculation. So even in the event of handsome profit, I'm not sure what right decision can you attribute it to. Conversely, when you lose money, what can you learn from it?

Personally, only in extreme market bottom would I invest USD in such a pool and denominate the pool in dollar value not its underlying asset.

It's addictive

Once I've managed to get my USD to yield for 23%, I know somewhere out there I can yield for 29%, I just haven't found it yet.

But you have to know to stop the chase. How much I can do that becomes a function of my time.

Being obsessive led me to think of ways I can maximize yield. In one case I ended up using ETH as collateral to borrow an obscure stablecoin, convert it into other stablecoins and staked them for much higher yield than possible with ETH alone. I discovered pawning on my own.

All these would be obvious to a finance guy, but I have to reach there by reasoning from first principle.

The obsession is the kind of cycle that leads people to make money in order to make more money. And then souls are lost.

Conclusion

I think I've only scratched the surface on what I can say on this topic.

I happen to have the aptitude for a such things, if only it existed 15 years earlier.