70% crypto yields are back

Memories are proving to be extremely short in the crypto world, with returns of 70% and higher being offered once again by trading platforms through the re-emergence of the investment strategy known as yield farming.

Less than 18 months after the collapse of the Terra algorithmic stablecoin project that triggered an industry-wide meltdown, exchanges ranging from GMX to Binance are offering double-digit incentives as a way to jumpstart trading activity after months of stagnation. Terra, once the most ambitious experiment in DeFi, had promised nearly 20% returns to investors who deposited funds in its protocol.

“It’s always gonna be this” way, said Zaheer Ebtikar, founder of crypto fund Split Capital. “People can’t help it. [Crypto] is literally the most FOMO industry ever.”

The hefty returns, which are essentially unseen elsewhere outside of distressed securities, were key to the 2020 emergence of decentralized finance, which seeks to eliminate traditional intermediaries such as banks. Yield farming involves lending crypto in return for interest, and sometimes fees, through often the biggest aspect of the rewards are often in the form of units of a new cryptocurrency.

The DeFi market swelled to as much as $179 billion in November 2021, just before the implosion of the FTX exchange sparked a massive investor exodus from digital assets. After crypto markets rallied in October, the DeFi sector is now valued at about $44.1 billion, according to data tracker DeFiLlama.

GMX, a DeFi derivatives exchange that allows users to trade Bitcoin and other cryptocurrencies with up to 50 times in leverage, started an incentives program on Wednesday with Arbitrum DAO. The decentralised autonomous organization is behind Arbitrum, a so-called layer 2 blockchain that seeks to ease congestion on Ethereum network. Through the program, users can earn annual yields of up to 70% for trading, providing liquidity and other activities on a version of GMX. About 12 million, or $12 million of ARB tokens, the governance token of Arbitrum, will be used to pay the extra returns.

Demand has also picked up as rates offered to borrow stablecoins such as USDC and Tether surged to more than 10% in recent days on Aave, the largest peer-to-peer lender in DeFi. The rise in lending activity coincides with the surging demand for leverage in trading.

“Traders who want leverage need to deposit risk assets into lending protocols and borrow dollars against those risk assets,” said Keone Hon, co-founder and chief executive officer of Monad Labs, the developer of a new blockchain called Monad. “They then use those dollars to buy further risk assets. Demand for leverage is the fundamental source of yield.”

Yield farming was once a popular method for crypto projects to bootstrap new users in a short amount of time. It was especially popular in the ultra-low-interest-rate environment during the Covid-19 pandemic. That changed when crypto prices tumbled and traditional interest rates rose.

“It just took the industry a bit of time to adjust to a regime of high tradfi yields with low crypto volumes, and being able to create competitive product in that space,” said Leo Mizuhara, founder and CEO of DeFi institutional asset manager Hashnote. Tradfi is a popular term used to describe traditional finance.

“The GMX product I think only makes sense when there is interest for crypto trading, which there is now with the latest run-up,” Mizuhara added.

The incentive programs are not just on DeFi. Largest crypto exchange Binance, for example, is promoting a “bonus” yield program through its earn project, in which Binance offers up to 13% annual yields for users who park their USDT stablecoins on Binance. According to the exchange’s website, for up to 500 USDT, Binance will give extra 7% yields on top of the 5.93% interest rates on USDT savings.

“With animal spirits starting to pick back up, projects may feel that now is a good time to spend token emissions to gather some momentum,” said Hon at Monad Labs.

© 2023 Bloomberg