Moving Beyond Basic DeFi

Published

December 9, 2024

Now that you’re comfortable with basic DEX trading and lending protocols like Aave, let’s explore more sophisticated ways to grow your crypto holdings through staking yields and strategic trading.

Understanding Liquid Staking

Staking is one of the most reliable ways to earn yield in crypto, but traditionally it came with a significant drawback: your assets were locked and unusable. Liquid staking tokens solve this problem by giving you a tradeable token that represents your staked assets.

How Liquid Staking Works

When you stake ETH through a liquid staking protocol like Lido, you receive stETH in return. This stETH token:

  • Automatically accrues staking rewards
  • Can be used as collateral in lending protocols
  • Trades freely on DEXs
  • Can be sold back to ETH when needed

The current staking yield for ETH is around 3-4% annually, but by using your liquid staking tokens strategically, you can potentially earn additional yield.

Smart Liquid Staking Strategies

Instead of just holding stETH, consider this yield-stacking approach:

  1. Stake ETH to receive stETH
  2. Use stETH as collateral on Aave
  3. Borrow stable coins at a lower interest rate than your staking return
  4. Use the borrowed stable coins for limit order opportunities

Setting Smart Limit Orders

Rather than trying to time the market perfectly, we can use data-driven approaches to set limit orders. Here’s a strategy that uses moving averages to find potentially profitable entry points.

The 20/50 Moving Average Strategy

The strategy involves:

  1. Observing the 20-day and 50-day moving averages (MA)
  2. Setting limit orders 2-3% below the 20-day MA when it’s above the 50-day MA
  3. Setting limit orders 4-5% below the 20-day MA when it’s below the 50-day MA

Here’s how to implement this:

  1. Use a charting tool like TradingView to view the moving averages
  2. Calculate your limit order prices:
    • Normal market: Current 20MA price × 0.97
    • Weak market: Current 20MA price × 0.95

Example with ETH

Let’s say ETH has:

  • Current price: $3,000
  • 20-day MA: $2,900
  • 50-day MA: $2,800

Since the 20-day MA is above the 50-day MA, we’d set our limit orders at: $2,900 × 0.97 = $2,813

This gives us a reasonable entry point below the moving average while still maintaining a strong technical position.

Combining Strategies for Maximum Efficiency

The real power comes from combining these approaches. Here’s a comprehensive strategy:

  1. Keep 50% of your ETH in liquid staking tokens earning base yield
  2. Use 25% of your liquid staking tokens as collateral
  3. Borrow stablecoins worth 15% of your collateral
  4. Set limit orders with the borrowed stablecoins using the MA strategy

This approach provides:

  • Baseline yield from staking
  • Additional yield from lending
  • Potential buying opportunities through limit orders
  • Limited risk due to conservative borrowing

Risk Management

While these strategies can enhance your returns, they come with risks:

  • Smart contract risk from multiple protocols
  • Price impact risk if stETH depegs
  • Liquidation risk from borrowed positions
  • Opportunity cost if limit orders don’t fill

To manage these risks:

  • Never borrow more than 30% against your collateral
  • Set stop-loss orders above your liquidation price
  • Diversify across multiple liquid staking protocols
  • Monitor the stETH/ETH peg regularly

Looking Ahead

As you become comfortable with these strategies, you can explore more advanced approaches:

  • Multiple timeframe moving averages
  • Yield farming with liquid staking tokens
  • Cross-protocol arbitrage opportunities
  • MEV-protected limit orders

Remember that in DeFi, simpler strategies often outperform complex ones over the long term. Start conservatively, monitor your positions regularly, and scale up only as you gain confidence in your understanding of the mechanics and risks involved.

The key to success with these strategies is patience and consistent execution rather than trying to maximize every possible yield opportunity. Focus on sustainable yields and high-probability setups rather than chasing the highest possible returns.