Investing in decentralized finance (DeFi) is a high-risk high-reward game. However, there are quite some low risk opportunities for risk averse investors that want to play things safe. Currently, These low risk yield farming opportunities are beating the traditional interest you would earn from leaving your cash at the bank. This article will focus on what low risk opportunities there are in DeFi and what you need to look out for.
Yield farming risk levels #
Let’s say you have done your research by using our website rugdoc.io and your confident that the defi platform you’re eying is legit. However, before you start deploying your assets into a liquidity pool or farming pool, you need to consider other risks related with the specific pool.
One of the most important risks when investing in liquidity pools are impermanent losses. This risk describes any temporary losses of assets deployed in liquidity pools due to the volatility in a trading pair. You can read more about impermanent losses in our introduction to liquidity pools article (link).
Usually, the risk level of liquidity pools is determined by the type of assets in the liquidity pool:
• High risk pools: These pools often consist out of 2 or more highly volatile tokens. For example, consider a liquidity pool consisting out of a DOGE/SHIB pair. Both tokens are highly volatile and because of this, you can earn a lot of profits with them. However, their volatility can backfire, causing them wipe out your initial deposit + earned profits from trading-fees and token price increase. Typically, these type of liquidity pools show high APRs, that is, until the token hype is over or when their prices start tanking. It is therefore only advisable to invest small amount of your portfolio in these types of liquidity pools.
• Medium risk pools: These pools usually consist out of a volatile and stable token. Let’s say, for example, you have invested in a BNB/BUSD liquidity pool. Because the BUSD stablecoin in pegged to the price of the US dollar, it helps hedging against the more volatile BNB token when it’s price falls down. These pools usually are a safer bet then high risk pools. However, this comes at the cost of having lower APRs than higher risk pools.
• Low risk pools: These pools consist out of 2 or more stablecoins. When a liquidity pool contains a stable trading pair, chances are small of getting an impermanent loss. This is due to both stablecoins being pegged to, for example, the US dollar. Because their prices are stable, it doesn’t matter whether their ratio in the pool changes from for example 50/50 to 40/60. The downside of stablecoin trading pairs is that APRs are typically in the single digits.
Yield farming with stable coins #
So, if you are a DeFi investor that wants to minimize risks, low risk stablecoin pools are your best option. Because there are plenty of platforms to choose from, we advise you to stick with the bigger and well known platforms. For example, if you’re interested in investing on the Binance Smart Chain (BSC), you should definitely check out Pancakeswap.finance, Venus.finance and Ellipsis.finance.
Pancakeswap offers trading pair pools consisting for example out of USDC and BUSD, which are both stablecoins pegged to the US dollar. Venus is a lending platform that let’s investors lend and borrow assets. This means that you only need to deploy one asset, rather than 2 or more. Ellipsis.finance solely focuses on stablecoins and usually has pools consisting out of 3 or more stablecoin assets.
However, you should keep in mind that stablecoins are not 100% safe. Some stablecoins have lost their peg to the underlying value, causing their price to start floating around. Once this happens, you should sell your stablecoins immediately, even if the price is going down.
Stablecoin pools are an excellent investment for the risk averse among us. They hedge against other volatile assets and minimize chances of impermanent losses. However, it’s important to keep in mind that stablecoins bare their own risks with them – Once they lose their peg, so is your investment.