Dive Into DeFi

Dive Into DeFi: The “Smart” Compound Earnings Machine

Join KCrypto on his Dive Into De-Fi where he explores the benefits of liquidity providing (LPing) in comparison to other investment vehicles and strategies

Having been involved with crypto for several years now, what I have missed from traditional markets are the passive-income earning possibilities. Staking was undoubtedly attractive, but it was generally a low rate of a few percent. In the rare cases that the yield was high, the asset was generally highly inflationary and was not something I felt comfortable parking my money in for an extended period. Let us be real, holding stock and receiving dividends from actual business cashflow is a great way to compound your holdings overtime in an investment that is likely to appreciate. 

So here was the crypto conundrum for me:

How can I increase my crypto positions from real economic activity, not just receiving more of the infinitely inflated asset while hoping demand for the asset outpaces the inflation rate? How can I make my crypto investment work for me?

Trading was an option, but I was never particularly good at it. Nor have I had the time to invest into developing the skill. 

Over the last several months, I’ve formed the belief that DeFi, and in particular liquidity pools (LP), are the best way to make your crypto investments work for you. An excellent (mostly) passive way to earn more crypto at highly competitive rates. 

What I find most fascinating about this topic because liquidity provision characteristics tend to satisfy both the crypto ethos (HODL, buy the dip) and the traditional market-weighted dollar-cost averaging strategy. In fact, each aspect empowers another in a way that maximizes every market opportunity automatically. To explain this, I’ll look at each characteristic and how it plays its part in this unique investment mechanism. 


Hold On For Dear Life. Pretty simple principle from crypto enthusiasts. Being an LP allows you to do this, but with one caveat: You have to be okay with HODLing a pair of assets together, feeling equally or mostly bullish on both. Impermanent loss will be a factor at times, and your asset allocation within the pair will deviate. Over time, the hope is that the assets you are holding move up generally together, or you are simply indifferent on the changing asset allocations. 

Buy The Dip

When I watch the market dip, I never have to feel FOMO, or hold free cash on the sideline to rush in a buy order. The fees being generated within the liquidity pools are constantly growing my position. If you happen to have your LP on a platform like Beefy Finance, you are not only receiving those fees but compounding your liquidity incentive as well. As an LP, you buy every dip by definition. 

Market Weighted Dollar Cost Averaging

We all know that dollar-cost averaging will likely generate the best investment results over an extended period. This has been proven over and over again. Some investors add weekly while others average in monthly. As an LP, you are dollar-cost averaging with every new block as the pool collects fees and your position grows. On Binance Smart Chain, this happens every few seconds. It’s mind-boggling If you think about it. Like my example above, a platform like Beefy will only boost that by dollar-cost averaging your liquidity incentive into your position multiple times per day. 

Explaining dollar-cost averaging is easy, but market-weighted dollar-cost averaging over time can hold significant benefits over fixed contributions. This is where the dreaded impermanent loss can turn from your enemy into your best friend, and the mechanics of liquidity pools can boost your investment potential.  

Anyone familiar with cryptocurrency markets understands that while the assets tend to move in the same direction, they move at different rates and times. This leads to impermanent loss within pool pairs and means that the pool fees are always accruing more of the underperforming asset. This occurs at any given point in time; I think an example here would be best:

Suppose you provide liquidity to a BNB : ETH pair. If ETH shoots up in price while BNB stays relatively stagnant, your position will turn heavier in BNB, and each fee accrual will provide more BNB than ETH when compared to prior points in time. After ETH cools off, BNB may very well catch up, reversing the ratio (and IL) and rewarding you for buying the BNB “dip.”

Word to the Wise

This all sounds great, but not all pairs are created equal. The wrong token in a pair will drag down your liquidity value, even to zero, if the token was a total bust. I tend to gravitate towards well-established projects when it comes to being an LP, perfectly satisfied with rates well into the 20s or 30s while not hindering potential capital appreciation. 


I have decided to call this “smart” compounding, and its only in its infancy on Binance Smart Chain. Beefy Finance is an excellent tool to compound liquidity quickly and boost the returns from Thugs.finance and Pancake Swap. 

If you decide to become a LP or already are one, just remember that you are already buying the dip when crypto twitter screams. In fact, you are likely one of the smartest investors in the space. That’s a big W in my book. 

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