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Advanced Trading
How DeFi users ("degens") make their money
Advanced traders (sometimes called “degens”) can take advantage of more niche, risky, and technically complicated financial products in DeFi. These traders mitigate risk through their experience and by diversifying their portfolio, and can frequently achieve staggering yields. (It is not uncommon to see 80% APY, for example.)

More Liquidity Pools

The concept of liquidity pools can get more complicated than our description in the previous section. For example, some pools accept more than two currencies and support AMMs that trade in various directions. This can lead to more lucrative gains, but the more currencies are involved in a single AMM the more the investor is exposed to risk of that currency failing. Many protocols also introduce governance tokens, or tokens that allow protocol participants to vote on the future of the protocol. These can have a market of their own and be given to liquidity pools, being lent out or used in arbitrage.

Yield Farming

Trading gets complicated with yield farming, a phenomenon unique to DeFi. Most protocols will give a token in exchange for deposits made to liquidity pools as what can be thought of as a "receipt token." These tokens, in turn, may have a market value and a corresponding liquidity pool they can be invested into. Users can invest these "receipt tokens," governance tokens, or currencies into other liquidity pools and earn interest on top of interest. Things can get complicated very quickly. While smart investors can make a lot of money doing this, it can be tricky to understand and manage risk, and you can lose money very quickly if you don't know what you're doing.
There are other, more sophisticated protocols that allow you to leverage debt without full collateralisation. Traders can leverage this debt in arbitrage, for example with the infamous flash loans, or use it to yield farm. When you leverage debt to yield farm, this is called leveraged yield farming.

Arbitrage

If the proportion of ETH to USDT in a particular liquidity pool causes ETH to be underpriced in USDT, a trader can buy ETH at a discounted rate and sell it elsewhere, pocketing the change. This is called arbitrage. There is an opportunity for arbitrage trading whenever the price of one crypto-asset in relation to another is different from the market price. Arbitrage traders will trade assets until the proportion of ETH to USDT shifts so that the price of ETH converges to market value. Due to a large volume of arbitrage bots scouring the Ethereum blockchain for such opportunities, AMMs tend to converge quickly to market value and thus trade crypto-assets at the true market value.
Experienced traders can leverage an arbitrage position with a flash loan. As the name suggests, users hold flash loans for a very brief period of time and often will take out a loan to execute an arbitrage trade, repaying the loan instantly and pocketing the gains. In this way they can leverage capital without risking their own assets.

Calculating Yields

Yields in DeFi are displayed as APY (Annual Percentage Yield). These are estimates based on recent gains and transactions, and should not be taken as a guarantee of any kind. You'll notice over time that these APY figures can fluctuate, reflecting fluctuations in the market. Your actual APY can be greater or smaller than the APY displayed at any given moment.
Last modified 4mo ago