Thread by @cryptofishx

1/

Why should I lend when I can yield farm and earn degen APYs instead?

This is a question I hear often and this 🧵 will lay out the reasons why.

If you're unsure what defi lending is, be sure to check out my first thread I wrote a while back:

https://twitter.com/cryptofishx/status/1426394604165681152?s=20

2/

Let's break down the differences between yield farming and lending/borrowing first.

Yield farming:
- Requires two tokens in equal ratio
- Usually offers higher APRs
- But also prone to IL

Put in $10k and it's possible you end up with less (if IL is so signficant).

3/

Lending/borrowing:
- Requires one token
- Usually offers lower APRs
- But no IL

Put in $10k and the number can only go up.

(Note: in both cases I didn't factor in rugpull or smart contract risks)

4/

If lending/borrowing offers lower APRs, then why would you want to choose this over yield farming?

Well the main reason is you only need a single asset to start lending.

Not only does this remove IL completely, but this may make sense depending on your portfolio strategy.

5/

Let me illustrate:

Let's say you start with $10k capital and you're mega bullish on $AVAX.

If you lend, you can hold your entire $10k in AVAX and earn more by lending and borrowing.

If you yield farm, well, you can only hold $5k in AVAX and $5k in another token.

6/

This is really annoying because if you're feeling really bullish, then you want MAX exposure to that asset.

Likewise, if you're feeling bearish on crypto in general, then you want minimal exposure to crypto and only hold stablecoins.

7/

One reason I hear often is that lending/borrowing APRs are really low (usually <10%) and can't match up to the 3 digit APRs of yield farming.

This is actually a myth because the yield is actually not that far off. Let's dispel this with an example.

8/

Say you start with $10k capital. You're feeling bullish about $AVAX and you have two options:

- Hold $5k in AVAX and $5k in USDT and yield farm for 150% APR
- Go all-in AVAX and borrow against it to yield farm AVAX/USDT

9/

Before we delve further, let's define the parameters:
- AVAX/USDT farm = 150% APR
- Collateral factor for AVAX = 75%
- Supply AVAX for lending = 15% APR
- Borrow USDT for borrowing = 5% APR

For simplicity sake, I won't be considering compounding yield here.

10/

Scenario 1:

You start with $10k and farm for 150% APR. You expect to earn $15k after a year.

11/

Scenario 2:

You lend out $10k of AVAX. This allows you to borrow $7.5k of USDT - you sell half and enter the AVAX/USDT farm.

Let's break down your expected returns after a year:

12/

Supplying $10k AVAX at 15% APR = $1.5k
Borrowing $7.5k USDT at 5% APR = $375
Farming AVAX/USDT with $7.5k at 150% APR = $11.25k

Total rewards = $13.125k

13/

So you earn $13,125 instead of $15,000, which is still 12.5% less yield, but you're not earning "way less" now are you?

However, what's also crucially important here is: you still have max exposure to AVAX!

14/

Let's say AVAX moons from $62.5 to $200.

If you yield farm you earn $9,000, but if you lend/borrow, you actually earn $22,000.

So in the end your total earnings with lending/borrowing comes out to $35,125 vs $24,000 from yield farming.

15/

That's 46% more earnings.

And I haven't even factored in impermanent loss from yield farming either.

But anyways, I hope you get the point.

This is the beauty of leveraging.