Dive Into Defi: My Personal Takeaways from WSB and GME Part 2: Be Your Own Bank

I want to build my own investment bank aimed at providing a high return on investment via yield. This gets tricky while preserving my main goal, minimal capital risk — whatever that means in crypto.

Dive Into Defi: My Personal Takeaways from WSB and GME Part 2: Be Your Own Bank

I have taken a bit of a break from writing these past couple of weeks. Instead, I have been spending a lot of time simply thinking about the market, what Defi has to offer, and how I can develop the best long-term Defi-oriented portfolio strategy. I’m not really sure what long term means in the crypto space, but I want to build a portfolio with the full intent of holding assets for years or decades. Positions will of course be added or removed over time. The following is only geared towards a yield farming portfolio, but similar principles can be applied to other investments as well. 

I decided to start with a simple premise in mind:

I want to build my own investment bank aimed at providing a high return on investment via yield. This gets tricky while preserving my main goal, minimal capital risk — whatever that means in crypto. 

This statement is important. It dictates the types of assets I should hold and how I should hold them. It also highlights two attributes that guide every investment strategy: High yield and low capital risk. With that statement in mind, I’m going to share the portfolio strategy that I have really set my sights on, but first I will describe how I landed where I am today. 

Zero-Sum Assumptions: A Game Theory Model

Part of my writer’s block was time spent grappling with a major underlying premise for crypto and Defi as a whole. Will this market still exist for years or decades to come? I’m pretty much a crypto perma-bull at this point, but I’m not arrogant enough to think I can only be right. I’ve written articles urging crypto investors to steer clear of maximalism, and the same can be said about the market as a whole. You can absolutely bet I want to go all-in, but I have implemented reinvestment strategies to keep my own emotions at bay. Because of this, I find the current situation perfect for a classic game theory exercise to set the ground floor for my strategy.

For those unfamiliar with game theory, it is a way to determine the best decision-making strategy using potential outcomes and risks. To get started, we will start with potential outcomes for the market.

Crypto is a Zero-Sum Game

I’m choosing to measure crypto as a market with only two possible outcomes; it will either go to the moon (outcome 1) or go to zero (outcome 2). Of course, something in the middle is possible, but I really do find it unlikely from this point in time. Having these two possible outcomes also helps the game theory model work. Now on to the strategy options (The game participants for those familiar with game theory). 

Strategy 1: Hold high-yield earning LP’s and reinvest 100% of my earnings (minus taxes) to maximize portfolio growth. 

Strategy 2: Hold high-yield earning LP’s, harvest the earnings, and cash them out on a regular basis as a built-in profit-taking strategy. 

With these two strategies in mind, it’s now possible to see how each one plays out given the two possible outcomes of the market. Strategy 1 will maximize return in our crypto-to-the-moon outcome, but leave the portfolio with zero dollars if it all comes crumbling down. Strategy 2, will see a smaller return if the market continues to grow and expand but will guarantee profits in the worst-case scenario outcome. 

The theoretical outcomes given the game are:

Result 1: Maximized return on fully reinvested yield lands you on Mars (Strategy 1, Outcome 1)

Result 2: The portfolio sees excellent growth and you have cash in your bank account (Strategy 2, Outcome 1)

Result 3: The portfolio goes to zero but you have cash in your bank account (Strategy 2, Outcome 1).

Result 4: The portfolio goes to zero and so does all of your reinvested earnings (Strategy 1, Outcome 2).

To me, result 1 sounds absolutely amazing, while result 4 horrible. This leaves a situation I do not want any exposure to. For this reason, the only strategy that appropriately fits the game is strategy 2, guaranteeing outcomes 2 and 3. 


Just as important to the reinvestment strategy is the initial investment strategy itself. Binance Smart Chain Defi currently offers a wide variety of ways to earn interest; the most widely practiced methods being providing liquidity to pools and lending assets to markets. I use a combination of both methods to balance risks and leverage myself up a little bit. 

Liquidity Pairs

Providing assets to liquidity pools is an excellent way to earn, but investors need to be mindful of the associated risks. The biggest risks with liquidity positions are impermanent loss (divergence of asset prices) and asset price depreciation. 

I don’t personally get too hung up on impermanent loss to the upside —  when one asset is outpacing the other in terms of price appreciation. I do, however, look to minimize impermanent loss to the downside. The biggest impermanent loss risk that I focus on avoiding is holding a highly inflationary token that will likely lose value over time. These are often the highest-earning pairs you will find, which makes them attractive to investors. It is important to consider how a token’s economics could impact future price, and consider only entering these pools with assets you are really willing to risk. 

IL based on price change without accounting LP incentives

Instead, I look for pairs with either two tokens I am bullish on, or one token I am bullish on paired with a stable coin. A pair like BTCB/BNB is an excellent bull market position and will earn a strong yield given the appreciation potential. This position will, however, leaves you fully exposed to crypto market movements. On the other hand, BTCB/BUSD acts as an underleveraged Bitcoin position earning a strong yield and providing your portfolio with a bit of stability. My goal is to balance my portfolio with positions paired as crypto:crypto and crypto:stable coin. 

Lending Markets

Lending markets provide another great way to earn yield with your digital assets. Impermanent loss is a nonissue in lending markets, so they are perfect for compounding single assets that qualify as long-term positions. In my mind, there are not many assets that fit this threshold. ETH, BTCB, BNB, LINK, BUSD, USDT are all positions that I would be happy to compound while maintaining 100% exposure for the mid to long term. 

Fortress Supply Market

Lending markets also allow you to borrow against your supplied assets, leveraging up your portfolio. I do this, but very cautiously, and only borrow against stable coins as collateral to keep my liquidation risk at zero. My current method of borrowing is minting FAI stablecoin on Fortress. Minting FAI allows me to borrow against my stable coin supply for 0% interest and then earning an additional 80% APY with little to no risk on my position. When I eventually want to withdraw my supplied balance, I will just repay the FAI loan. 

Bringing it All Together

As stated in the first part of this article, my goal is to take my yield profit in order to lower risk exposure and satisfy my game theory scenario. While profit-taking in this manner is my primary objective at the moment, it does not mean that all my new profits leave Defi. I am currently putting a chunk of profits on a regular basis into stable coin positions. I deposit these in a lending market to earn rates that are far superior to any financial instrument I could access off-chain. The growing BUSD balance also lets me leverage my cash, increasing my yield income. 

In addition to my yield earning stable coin positions, I have grown an affinity for crypto:stable pairs. Funneling yield from crypto:crypto pairs into crypto:stable lets you continue to compound your earnings while de-leveraging your positions, and in turn lowering your overall risk profile. I find myself sleeping much more soundly at night knowing that my profit flow is moving from high risk to low risk all while this bull market continues raging on. 

Source : bsc.news

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