Ethereum’s robust DeFi ecosystem presents many high-yield opportunities with lower economic risks, such as Real-World Asset [RWA] tokenization and Liquid Staking token [LST] growth. Ethereum and its derivatives are the main assets that provide high-yield opportunities, with other major cryptocurrencies such as BTC or LINK largely left out. For those willing to make money with cryptocurrencies, InToTheBlock shed light on something called “supervised loans.”
With RWA tokenization and LST/LRT growth, there are many high TVL markets where users can deploy capital with almost no impermanent loss (IL) and very little to no liquidation risks. However, the market is currently exceptionally lopsided in the distribution of asset types that are generating high yields. Stablecoins, ETH, and ETH derivatives have been the primary assets used in the currently available high-yield opportunities.
This strategy allows one’s cryptocurrencies, like Bitcoin or Ethereum, to be used as collateral to borrow other cryptocurrencies. These borrowed assets can then be invested in high-yield opportunities to make even more money. Here’s how it works.
Ethereum: The Power of DeFi Lending
For instance, a user locks up Bitcoin on a lending platform as collateral, kind of like a digital pawn shop. Next, they can borrow other assets with the locked BTC. Market experts recommend borrowing digital currencies that come with higher earning potential. The final step involves investing these borrowed assets in platforms like Automated Market Maker [AMM] pools, where users can earn interest by providing liquidity.
However, similar to traditional trading, there are risks involved:
- Liquidation Risk: If the value of your collateral [BTC] falls rapidly, the platform might sell it to cover the loan.
- Recall Risk: One can get back their borrowed assets quickly to avoid losses.
- Depeg Risk: If the borrowed assets lose their value, there could be losses.
- Pool Distribution Risk: An imbalance in where one’s money is invested can lead to extra fees.
- Depositor Concentration Risk: If most of the money in a pool comes from a few big players, one might face difficulties in withdrawing funds.
- Available Liquidity Risk: If everyone borrows at once, there is also a chance that there might not be enough money left to withdraw.
While supervised loans may appear complex to new investors, they provide the chance to earn high yields on users’ blue-chip assets in DeFi. With proper risk management and smart moves, one can earn attractive returns while minimizing potential risks.
