In decentralized finance (DeFi), as a crypto investor, you have the opportunity to generate and earn returns on your crypto coins by lending your cryptocurrency. In turn, your crypto coins are then used to provide loans to investors who are looking to borrow cryptocurrencies. Then they pay interest on their crypto loan, from which you receive a return in the form of a return.
DeFi uses the term yield, but it can mean interest anyway.
You can compare the returns with the interest you receive from the hard-earned money you’ve deposited into your traditional financial bank’s savings account.
There are three main ways to generate returns:
- Liquidity extraction
- Lending your assets
Check out this article for more details on how to earn yield through staking, cash mining, and lending.
Are double-digit returns a thing of the past?
Probably not, but for the foreseeable future they may be.
In the year before everything collapsed, the world of decentralized finance was booming and the numbers were only increasing. Sometimes it was even possible to leverage something like 1000% APY for a short period of time.
High yields were definitely the main plot of the 2020-2022 rally. Today, not so much.
Without a doubt, DeFi has been one of the crypto areas that has been hit hardest in the recent recession. With all the abysmal events that cryptocurrency investors have had to endure in 2022, it should come as no surprise that the total value locked into DeFi protocols has shrunk massively since the overall cryptocurrency market peaked in November 2021, resulting in lower returns across the board.
Another interesting event that could be a reason why we won’t see double-digit crypto returns return soon, is the fact that recently many crypto yields have fallen closer to and even below what the US government pays to borrow for three months.
It’s safe to assume that Treasuries that offer a similar payout for much lower risk might discourage hedge funds and family offices from investing in the wonderful, yet risky, world of cryptocurrencies.
Conclusion: brighter days ahead of us
For the reasons mentioned above, cryptocurrency yields are much lower today than they were at the top of the bull market just over a year ago. Many people think that the days of high yields are over and that the system only worked when cryptocurrency prices were at record levels and when it was practically free to borrow money.
However, it won’t be long before cryptocurrencies recover and shatter all previous all-time highs. At that point we can also expect the Fed to make a turnaround, pushing us once again on the path to cheap liquidity. Once these events begin to manifest, the cryptoverse will return to double-digit returns in no time. Most likely, anyway.