Hunting for Bitcoin Yield in DeFi — Beefy and Badger’s Real ROIs Compared

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Alex Lielacher

Early Bitcoin critics loved pointing out that the digital currency does not pay interest. While that was true in the early years of Bitcoin, those days are long gone. Thanks to the growing CeFi lending market and the burgeoning DeFi market, bitcoin HODLers can now earn a yield on their “digital gold.”

In this article, you will learn how you can earn yield on bitcoin. Additionally, we will compare APYs on two popular yield optimizer protocols — *Beefy *and *Badger *— to find out where you can earn higher yields on wrapped bitcoin.

How to Earn Yield on (Tokenized) Bitcoin in DeFi

Earning yield on bitcoin in the decentralized finance market is not as plug-and-play as buying bitcoin and depositing it into a centralized lending app, like BlockFi or Nexo.

Before you can earn yield on bitcoin in the DeFi market, you have to either tokenize your bitcoin or purchase tokenized bitcoin on a decentralized exchange, like UniSwap for eth wrapped BTC, and Pancake Swap for BNB wrapped BTC. Both exchanges are available natively in the Trust Wallet mobile app.

Tokenizing BTC. It’s a wrap

The market-leading tokenized bitcoin product is Wrapped BTC (WBTC), which was launched in early 2019 to put bitcoin on the Ethereum blockchain. WBTC is a 1:1 bitcoin-backed ERC20 token that enables decentralized applications on the Ethereum network to integrate bitcoin in a tokenized form.

DeFi users can deposit tokenized bitcoin in trading or lending pools to generate yield.

To tokenize bitcoin, you lock up BTC with a dedicated custodian and then mint WBTC on Ethereum (or another chain that supports WBTC). Coinlist and WBTC.cafe are two popular platforms to tokenize bitcoin.

The peg between BTC and WBTC remains 1:1, so you can benefit from bitcoin’s potential price increase while deploying the digital currency in decentralized applications.

Buying WBTC on a DEX

Alternatively, you can convert an Ethereum-based asset, such as ETH or USDC, into WBTC on a decentralized exchange, such as Uniswap, Kyber, or 1 Inch.

The process to buy WBTC is very simple. You access a DEX, connect your Ethereum wallet, choose the two assets you want to convert and, then, sell an asset for WBTC.

Deploying WBTC to Earn Yield

There are dozens of DeFi protocols that enable you to earn yield on your tokenized bitcoin.

For example, you could deposit your WBTC into one of the two market-leading lending protocols, Compound or Aave.

Alternatively, you could deposit your WBTC into decentralized liquidity pools to earn liquidity mining returns on platforms such as Curve Finance or Harvest.

Experienced DeFi investors typically move their funds into the highest yielding protocols they can find to maximize returns. Fortunately, for bitcoin users who want to deploy their “digital gold” in the DeFi market, there are plenty of protocols out there that support WBTC.

**Pro Tip: **WBTC is not the only tokenized bitcoin token out there. For example, you can also deploy pegged bitcoin coins (BTCB) on Binance Chain and Binance Smart Chain in the form of a BEP2 or BEP20 token backed 1:1 by bitcoin.

Introducing Beefy and Badger

Beefy

Beefy Finance is a relatively new entrant in the DeFi market after launching in September 2020 as one of the first yield-generating protocols on Binance Smart Chain. This means you will need Binance Smart Chain wrapped BTCB.

But Beefy is not just another tasty-sounding yield farming app, it’s a yield optimization protocol.

“Yield optimization can be loosely defined as using data analysis and optimization techniques to maximize performance and revenue,” the Beefy team explains.

In the DeFi market, this is typically achieved by deploying algorithmic strategies to obtain the highest APYs by tapping into a range of different protocols in an automated manner.

To earn yield on your tokenized bitcoin (BTCB), you connect to the Beefy app with a Binance Smart Chain-enabled wallet, such as Trust Wallet, approve BTCB as an asset using your wallet, and then deposit BTCB to start “harvesting” yield.

At the time of writing, Beefy boasts a 12.29% APY for BTCB with $2 million worth of tokenized bitcoin locked in the protocol.

Badger DAO

Badger is a decentralized autonomous organization that aims to “build the products and infrastructure necessary to accelerate bitcoin as collateral across other blockchains.”

The Badger app is a yield optimization protocol running on the Ethereum network that enables tokenized bitcoin holders to earn high yields.

On the platform, you can choose between depositing a range of tokenized bitcoin assets, including WBTC and renBTCCRV, in so-called Setts.

Setts are automated yield aggregators that execute a range of strategies across the DeFi universe to generate the highest yield possible for Badger users. Badger users can then also stake their wrapped sett tokens to earn additional yield.

To start earning yield on tokenized bitcoin via Badger, you need to access the application and connect to it using your Ethereum wallet. You can connect directly via the Trust Wallet DApp browser. Then, access “Setts” and choose the sett you would like to deposit your tokenized bitcoin into. Approve the transaction and you are set.

Beefy vs Badger: Where Can You Earn More Yield on Bitcoin?

Taking fees and prevailing APYs into account, here’s an estimation of how much you would earn if you were to deposit tokenized BTC into Beefy or Badger.

Badger charges a 0.5% withdrawal fee and a 4.5% fee on profit to cover gas fees. Beefy charges a 0.1% withdrawal fee and a varying performance fee on additional yield, which currently stands at 5.5% for most vaults.

Moreover, we use $35,000 as the price of bitcoin for this comparison.

These ROI figures take each protocol’s withdrawal and performance fees into account. However, blockchain transaction fees also play a role in the calculation.

Beefy runs on Binance Smart Chain, which boast gas fees of only 2–3 cents per transaction.

Conversely, Badger runs on the Ethereum network, which has seen gas fees skyrocket during times of heavy blockchain usage. For example, during the yield farming boom last summer, $10 to $15 transaction fees became standard, locking out many emerging markets users.

While gas fees won’t move the returns figures of Beefy much, the case is very different for Badger.

Additionally, Badger’s payment structure — which involves yield payments in BADGER tokens as opposed to tokenized bitcoin — also affects the real ROI.

Breaking Down the Badger

Badger pays out most of its yield (90%+ of the advertised APY) in BADGER tokens. As a result, users will regularly want to swap the token for tokenized bitcoin to lock in their profits (due to the BADGER token’s high volatility and historic weakness against BTC). These transaction fees need to be subtracted from our ROI figures.

Unfortunately, for Badger users, there are quite a few transactions (which means lots of fees!) to convert BADGER back into tokenized BTC.

Assuming a $7 gas fee per transaction, swapping BADGER tokens back into tokenized BTC every week would cost an estimated $21 in gas fees.

The three transactions required to move your money back into tokenized BTC include:

  1. Unstake your curve lp token on Badger (this would include your lp token gains)

  2. Claim your badger rewards

  3. Turn your badger tokens into sBTC

There are also two initial transactions to start using the protocol (amounting to a $14 initial gas charge):.

  1. Turn sBTC that into an LP Token on curve (assuming you already hold sBTC)

  2. Stake the curve LP Token on badger

Taking this into account, the real ROI figures start to look a lot less attractive for Badger users, while Beefy starts to look like the better alternative for yield-hungry bitcoin holders.

Taking off $0.09 (for Beefy’s three Binance Smart Chain transactions once per investment period) and weekly gas fees for BADGER, we get a clearer image of what predicted returns would look like.

Our analysis suggests that smaller investors will have to hold their returns in BADGER tokens for a long period of time to see any returns at all.

Real Returns

However, if the BADGER token drops in value against bitcoin, real returns will take even more of a hit. That is where the real risk for Badger users comes in. More than 90% of the advertised APY for your wrapped BTC stake is paid out in Badger DAO tokens instead of the sBTC LP token:

Looking at the price performance of BADGER/BTC to date, it is hard to be optimistic about the future of BADGER’s price against bitcoin.

While BADGER’s token volatility is not taken into account in our ROI figures (nor the loss of compound returns from the fee costs of swapping tokens on a weekly basis), our analysis suggests that Beefy is likely the better option for people looking to maximise their bitcoin yields.

The Takeaway

Both Beefy and Badger can be used to earn yield on your tokenized bitcoin holdings.

However, most of Badger’s yield is not paid in tokenized bitcoin but in Badger’s own protocol tokens, adding a high level of market risk to the equation. Additionally, Ethereum gas fees will eat into your returns, making the protocol essentially unusable for smaller investors and reducing the APY quite substantially.

Beefy is arguably the better option for bitcoin holders who are comfortable with taking some risk to earn yield on their “digital gold.” The protocol pays yield in tokenized bitcoin and due to Binance Smart Chain’s low fee structure, returns are not eroded away by transaction fees.

As the global DeFi markets matured, we can expect to see more yield generation opportunities emerge with a higher degree of security, sophistication, and accessibility.

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