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Why DeFi Earnings on Ethereum Can Be Misleading

Luke Pettit

With the rise of DeFi, squeezing the most returns out of your crypto investments has become a bit of a no-brainer for crypto-savvy investors.

In fact, DeFi investors are known to spend a lazy Sunday afternoon comparing APY’s like a regular, old bond broker. But after sorting through all the options available, one thing is clear:

DeFi yields on Ethereum-based projects can be very misleading.

It’s really a combination of how your yield is paid out, what crypto you want to be exposed to, and the fees needed to get your yield where you want.

The time spent figuring it all out also needs to be factored in, as exchange rates can be volatile in short time periods when it comes to crypto.

In my case, I’m looking to invest and earn in Bitcoin. I’m a bit of a Bitcoin maximalist, and it’s also a pretty good store of value. Of course, there are a lot of options when it comes to yield farming tokens, but many enthusiasts are in the same position as me and just want to earn some yield from their BTC that’s sitting around.

Wrap Your Bitcoin for Best Results

To start playing around with all the fun DeFi DApps out there, I first need to somehow get my Bitcoin onto the Ethereum blockchain or Binance Smart Chain.

At one point in time, we would have had to stop right here. All I need to do now, however, is exchange my Bitcoin for Wrapped Bitcoin (WBTC) on Ethereum or the BTCB Bitcoin pegged token available on Binance Smart Chain.

WBTC/BTCB are pegged tokens trading 1:1 with Bitcoin, allowing you to essentially use BTC with all of the fancy features that come with the Ethereum or Binance Smart Chain networks.

Check out this guide on how to use Wrapped BTC in DeFi and also how you can get your hands on some.

Once you’ve gotten Wrapped Bitcoin, you’re ready to start farming some yield. Naturally, the first thing to do is look for the highest annual percentage yield (APY) out there. It looks simple… but unfortunately, it’s just not that easy.

To demonstrate my point, let’s take a look at the Ethereum based Harvest Finance yield optimizer and compare it to Binance Smart Chain’s Beefy.Finance.

Comparing Each Platform’s APY

At first glance, a whopping 18.27% APY offered by Harvest Finance seems like a safe bet for yield farming your WBTC.

Beefy Finance has two vaults on offer for staking your BTCB, one offering 15.58% by yield farming the Venus DeFi platform and the other 3.93% via ForTube

When we look into the details, however, the APY given by Harvest isn’t paid out completely in WBTC.

What you will actually receive is 4.51% in WBTC and 13.76% in FARM rewards, the platform’s token. This already makes the actual payout when measured purely in BTC a bit more tricky to calculate…

Modeling Your Expected Yield

Let’s assume we have 0.1 BTC to invest in both projects and see exactly how much we get back after a year. What I’m looking for here is getting the maximum BTC value (in USD) out of my investment at the end. This model will involve:

  1. Trading in FARM rewards for bitcoin at the end of the investment period
  2. Using the higher yield Beefy.Finance BTCB vault
  3. Assuming each calendar month is exactly 1/12th of a year
  4. A BTC price of 34,000 USD (rough current price) at the end of the investment period
  5. Rounding USD values to 2 significant figures

Considering FARM rewards must be taken out and swapped for bitcoin, we also need to look at the long-term general trend of the value of FARM to BTC:

Here, we will make another simple assumption that the relationship between FARM and BTC is decreasing over time. We also won’t take into consideration its initial volatile period of true price finding at the release of the coin. With some rough calculations, the token has devalued 55.47% against BTC from October 27, 2020 until today.

We will also in fact give it some leeway and assume that this 55.47% was over the whole year for our thought experiment and devalued at a constant steady rate.

This ultimately has a knock-on effect on the APY in dollar value that you would receive, giving us a real APY of 6.13%.

From the results above, you can see that when staking your wrapped bitcoin in pools that don’t pay yield purely in the asset, it’s totally possible that your real gains in BTC value are actually lower.

Beefy.Finance after a year will provide you with 46.43% more BTC in yield than Harvest Finance in this example.

This basic analysis also hasn’t included the time it takes to trade and the cost of moving funds between wallets. These provide an even bigger chance of securing a lower yield.

Yield Farming Returns: The Takeaway

By taking a payout in tokens with an inverse relationship to bitcoin’s price, you are ultimately losing out on yield and exposure to BTC. For any Bitcoin maximalist out there looking to secure the highest return, it really isn’t the best way to stake your funds.

This is why you should have a careful think about your DeFi earnings on Ethereum platforms, and how they are paying out.

Of course, this is a personal choice that everyone has to make. These DeFi platforms are providing the yields they say, but they might not necessarily be the yields that you want. There is always some background research that you should conduct yourself before investing.

Nevertheless, a higher APY doesn’t always provide you with the highest dollar amount at the end of the day. With bitcoin’s recent bull run, it’s not uncommon for the value of DeFi tokens to ultimately have a negative relationship with bitcoin.

For all you farmers out there, it’s some sound advice to keep in mind. And at the end of the day, who isn’t into stacking the most sats that they can?

To start staking wrapped bitcoin, download Trust Wallet today.

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