Different types of DeFi strategies and ways to make money in crypto

Decentralized finance (DeFi) offers a range of strategies that help users grow their portfolios. Clip Finance helps you by not only simplifying the whole process but also helps you earn more by Auto Compounding your earnings automatically. Lets take a look at some of the most popular ways to grow your portfolio:

1. Leveraged Lending

In Leveraged lending, users can borrow assets against their collateral while still earning interest on their initial holdings. Key idea is if by supplying and borrowing a money market gives you extra incentive in their token or blockchain’s token. This way by borrowing against your collateral you are actually earning more than paying interest.

We have multiple strategies built on top of Mendi Finance and Zerolend where we have implemented leveraged lending. You can our post about it here.

If you want to do this strategy yourself, it’s important to manage risks. If the value of your collateral falls below a certain threshold, liquidation can occur meaning your collateral might be sold off to cover the loan. So, managing collateral levels is very important.

Why Clip Finance?

• Single-Click Deposits: You can deposit in our strategies with just one single click. No need for complicated steps — deposit your asset and we will do the rest — cross-chain bridging, swaps into correct assets and ratios.
• Managed Risk Levels: Clip Finance borrows assets at a carefully controlled collateral level to minimize the liquidation risk, so that your funds remain safe even during market volatility.
• Looping for Maximized Returns: Once you deposit, we handle everything in the background. From borrowing more asset at a carefully controlled collateral level, reinvesting it, and looping the process to maximize your returns.
• Auto-Compounding: We automatically reinvest rewards into your deposit, compounding your earnings over time.
• Save on Gas Fees & Time: By handling all transactions — borrowing, compounding, and reinvesting — Clip Finance saves you from paying high gas fees and spending time managing your strategy manually.

2. Concentrated liquidity automated market making (CLAMM) strategies

Concentrated liquidity allows liquidity providers (LPs) to invest their capital within specific price ranges which in return maximizes yield when trade occurs within that range. So, instead of providing liquidity across the entire price range, users can concentrate their assets in a narrow price range where they expect most trading activity to happen. This helps them earn higher fees for every trade that takes place within the chosen range.

There are different approaches to this strategy:

1. Wide Spread Strategy: Users set a wide price range, covering more price points, which reduces the risk of impermanent loss but also reduces the fees you earn as liquidity is set over a wider range.
2. Narrow Spread Strategy: Users set a narrow price range which maximizes yield when trades happen within that narrow band, but increasing the risk of impermanent loss if prices move outside the range.
3. Dynamic Spread Strategy: In this strategy, users set price ranges dynamically based on market volatility, maximizing yields while minimizing risk by shifting liquidity to more optimal ranges when the market changes.

What is impermanent loss?

When you provide liquidity to any token pair for eg. USDC/ETH pool, you might experience something called Impermanent Loss. This happens when the prices of token pair such as USDC and ETH change significantly relative to each other after you’ve made your deposit. For example, if ETH’s price goes up compared to USDC, the pool will automatically adjust your holdings to maintain a balance and you could end up with less ETH than if you had held onto it separately. However, this loss is “impermanent” because it only becomes real if you withdraw while the price difference exists, If the token prices return to their original ratios, the impermanent loss can be minimized or even eliminated; it can also be offset by trading fees and rewards earned in the pool.

Why Clip Finance?

• Single-Click Deposits: You can deposit in our strategies with just one single click. No need for complicated steps — deposit your asset and we will do the rest — cross-chain bridging, swaps into correct assets and ratios.
• Dynamic Adjustments: Clip Finance constantly monitors the market prices and rebalances your liquidity positions automatically in real-time, so your capital remains in the best and most optimal price ranges.
• Auto-Compounding: We automatically reinvest rewards into your deposit, compounding your earnings over time.
• Save on Gas Fees & Time: By handling all transactions, Clip Finance saves you from paying high gas fees and spending time managing your strategy manually.

3. Bridge Liquidity

Cross-chain bridges are important for enabling users to move assets between different chains. Every time someone uses a bridge to transfer assets between chains, they pay a fee. As a liquidity provider (LP), you can earn a portion of those fees. The more transactions that pass through the bridge, the more fees you collect.

Extra Incentives from Bridge Protocols

Many protocols offer additional rewards in the form of native tokens to incentivize liquidity providers. By providing liquidity, you not only earn transaction fees but also these extra tokens, which can be sold, staked, or reinvested for further yield.

Maximize Yields

Providing liquidity on a bridge can also open up further yield farming opportunities. For example, many protocols like Stargate Finance offers their STG token in return for your deposit representing your share in the pool. Instead of just holding these LP tokens to earn passive transaction fees, you can farm them to earn extra rewards and maximize your yields.

Why Clip Finance?

• Single-Click Deposits: You can deposit in our strategies with just one single click. No need for complicated steps — deposit your asset and we will do the rest — cross-chain bridging, swaps into correct assets and ratios.
• Auto-Compounding: We automatically reinvest rewards into your deposit, compounding your earnings over time.
• Save on Gas Fees & Time: By handling all transactions, Clip Finance saves you from paying high gas fees and spending time managing your strategy manually.

Deposit to our Stargate strategy directly on Clip Finance: https://www.clip.finance/earn/weth-stargate

4. Arbitrage Market Making

Arbitrage market making is one of the most popular ways to make money in the web3 world. By taking advantage of price difference between different exchanges, you can execute buy and sell orders to capture small but consistent profits.

This strategy involves buying an asset where the price is lower and selling it where the price is higher, allowing you to profit from the price difference.

Types of Arbitrage

1. DEX/CEX Arbitrage: In this strategy, traders buy an asset on one DEX/CEX at a lower price and sell it on another DEX/CEX at a higher price. Since these exchanges use liquidity pools to set prices, the price of an asset on one DEX/CEX could lag behind the other. For example, if ETH is priced at $2,500 on Exchange A and $2,400 on Exchange B, a trader can buy on Exchange B and sell on Exchange A, making a profit of $100 (minus the trading fees).
2. Cross-Chain Arbitrage: This type of arbitrage takes place across different blockchains. Since liquidity and demand can vary across chains, the same asset might be priced differently on different chains like Ethereum, Binance Smart Chain, or Polygon. Traders can take advantage of this price difference by buying an asset on one chain, bridging it to another where it’s priced higher, and selling it for a profit.

Risks Involved

• Transaction Fees: High fees can minimize the profits especially on chain like Ethereum where gas price is high
• Slippage: The price of the asset that you are trading can change while your trade is being processed, reducing or even eliminating your profit margin.
• Liquidity Constraints: If there isn’t enough liquidity on either side of the trade, you might not be able to execute your order at the desired price.

5. RWA

Real World Assets (RWA) refers to the tokenization of physical assets like real estate, commodities, or bonds on the blockchain. By connecting real-world assets with DeFi, users can earn money in several ways:

1. Staking RWAs: Many Platforms allow users to stake tokenized assets like real estate or invoices in DeFi protocols, earning yield in the form of interest/rewards, similar to staking cryptocurrencies.
2. Lending & Borrowing: Tokenized RWAs can be used as collateral in various DeFi lending platforms. You can borrow cryptocurrencies against your RWA tokens, reinvest them in yield farming, or any other income-generating strategy as discussed in this article while still holding the underlying asset.
3. Yield Farming: Some platforms offer yield farming opportunities with RWA tokens, where users can lock their assets in liquidity pools and earn rewards.

6. Delta Neutral Strategies

Delta Neutral Strategies are a way to profit in crypto without being affected by price movements. Given that the cryptocurrency market is highly volatile, delta-neutral strategies should be part of your portfolio. They help limit your exposure to price risk in a trading environment where many assets can plunge 90% in their value within days. These strategies involve balancing long and short positions so that any gain or loss in one is offset by the other, keeping the portfolio neutral to market changes. The profit typically comes from sources like funding rates on perpetual futures making this strategy appealing for earning steady returns while minimizing risk in volatile markets.

Perpetual futures stand out from traditional futures due to the presence of funding rates. Here’s how it works:

• When the perpetual price is higher than the spot price, long traders pay funding fee to short traders.
• When the perpetual price is lower than the spot price, short traders pay funding fee to long traders.

Traders take advantage of this by employing delta-neutral strategies, where they hedge their positions and earn funding fees without taking on significant market risk.

For Example: You have 5,000 USDT available, and the funding rate for ETH perpetual contracts is 0.04%. To take advantage of this, you can:

1. Buy 2,500 USDT worth of ETH on the spot market.
2. Short 2,500 USDT worth of ETH in a perpetual futures contract.

Since the funding rate is positive (meaning longs are paying shorts), you will receive funding fee from your short position.

Assuming the funding rate remains 0.04% every 8 hours, here’s how much you would earn:

• 2,500 USDT x 0.04% = 1.00 USDT every 8 hours.
• Over 24 hours, you’d receive 1.00 USDT x 3 = 3.00 USDT per day.

The annualized return would be: 3.00 x 365 / 2,500 = 43.8%.

7. Solvers Network

Solvers are advanced algorithms used within the crypto space to optimize transactions, reduce gas fees, and find the most efficient trade execution paths.

For example, if a user wants to swap tokens across different decentralized exchanges (DEXes), a solver network can identify the best route that minimizes slippage and gas fees. By running this optimized transaction, solvers earn rewards for their role in facilitating efficient trades.

How is Clip Finance revolutionizing this space?

Clip Finance is developing one of a kind Intent solver pools where they will use user’s deposit as liquidity to solve intents and provide users potentially 30% APY on their single asset ETH!

Read our Decentralized Solvers Network Litepaper: https://docs.clip.finance/clip-finance-infrastructure/clip-finance-decentralized-solver-network-litepaper

Checkout the article by Cointelegraph for more details about our upcoming solver pools: https://cointelegraph.com/news/decentralized-solver-pools-offer-a-solution-to-liquidity-fragmentation-in-defi

Want to get Early access to our solver pools? Subscribe Now, Limited spots only! https://eepurl.com/hQxwBD