In this article, I'll provide an overview of all the returns available in DeFi. Understanding how a pool/vault generates returns is very important because it helps understand the risks. Not all pools carry the same level of risk, as operations vary depending on what you use.
-On chain Staking: you participate in the consensus mechanism of a Proof-of-Stake chain. You stake your cryptocurrencies on a validator node. There's no risk of capital flight or hacking. Rewards come from inflation (new issuances) and transaction validation (network fees). Besides price, the only risk is "slashing" if the validator misbehaves. In these cases, you'll lose a percentage of your staked tokens. The "unstaking" period (from a few days to 28 days) is important for security. Examples: Ethereum, Solana, BNB Chain, Tron, Cosmos, etc.
-Liquid Staking: In this case, you deposit your assets into a protocol. The protocol stakes them on-chain. You receive a "receipt" (a Liquid Token) that you can use in DeFi for additional income. The unstaking period is generally shorter, and if you don't want to wait, you can sell your Liquid Staking Token instantly (at a small loss) on an AMM (Dex) in DeFi. Examples: Lido, Rocket Pool, Jito Network, Marinade, etc.
-Lending: This is very different from staking. You deposit your assets (including wBTC) on a lending platform and receive interest (APY). Where does APY come from? Those who borrow (by depositing collateral) must repay it with interest. This interest goes partly to the platform and partly to the user who deposited the asset. The risk for depositors is "bad debit" (if the borrower finds a way to default on the loan), while for borrowers, it's obviously liquidation (which occurs when their deposited assets become undercollateralized compared to those borrowed). Examples: Aave, Venus, etc.
-LP: Simply deposit two assets into a liquidity pool on an AMM (dex). You earn fees from user swaps. The risk is impermanent loss, if your assets diverge in price. Old pools were generally 50% (x) and 50% (y); today, mixed pools (invented by Balancer a few years ago) and concentrated ranges (which optimize liquidity in narrower intervals rather than the entire range) are more commonly used. Impermanent loss is temporary and becomes permanent only when you withdraw from the pool. Examples: Uniswap, PancakeSwap, etc.
-Aggregators and Yield Optimizers: They aggregate liquidity, using multiple strategies in DeFi. They also use autocompound strategies with tokens farmed by liquidity pools (for example, earning from swap fees, but also farming the platform's native token for depositing liquidity). They are part of DeFi 1.0. Examples: Yield Finance, Beefy Finance, etc.
-Vault Exchange: Essentially, by providing liquidity, you act as a "desk" on a decentralized exchange with an order book. You are exposed to traders' profits/losses. You profit from traders' losses, position opening/closing fees, and liquidation fees. Examples: Hyperliquid, Lighter, DyDx, etc.
-Fixed Date Vaults: Offer stable and predictable returns through fixed-rate lending/return markets. Examples: Pendle, RateX, etc.
-Delta Neutral Vaults: Cover long and short positions to neutralize price risk while maintaining a constant return. Examples: Neutrl, Hyperbeat, etc.
-Leveraged Vaults: Use borrowed capital to amplify returns, with potential liquidation risk. Examples:
LTV Protocol, Gearbox Protocol, etc.
-Option Vaults: Generate returns through derivative strategies such as covered calls or selling puts. Examples: Derive, Rysk Finance, Synquote, ThetanutsFi, Kyan Exchange, etc.
-Synthetic Loans/Vaults: Issue synthetic assets or tokenized RWAs using collateral. Examples: Midas, Fluid, etc.
-Lending Aggregators: Your liquidity is managed by "risk curators" who leverage it on other platforms through lending, arbitrage, trading, delta-neutral strategies, etc. Examples: Morpho, Euler, etc.
-Treasury/Index Vaults: Designed for DAO or institutional funds to diversify and manage treasuries. Examples: Velvet Capital, Ipor, etc.
