First post on mirror. Reposting from a successful Reddit post, of my own authoring as well. Hope this illustrates to DeFi newbies how to make better investing decisions and avoid (costly) mistakes.

What you need to keep in mind is that not all passive income is created equal. The quoted APYs are useless for the purposes of comparison in Defi because they mean different things in different contexts. Let's breakdown a few popular "passive income" strategies and how APYs differ:

What it is: The easiest strategy to understand. You deposit your assets at a protocol, permissionless borrowers take that capital in exchange for collateral and interest.

Benefits: Interest is paid in the same asset as borrowed, so it is great if you want single-asset exposure (lend ETH, receive interest in ETH). When markets go nuts, supply/lending APYs go up as traders take advantage of arbitrage or other opportunities and borrow more. This lets you stay on the sidelines "safely" while earning interest

Risks: The quality of the collateral is the largest risk. If someone borrows your ETH but collateralizes with 3x the amount in RUGCOIN, the collateral ratio means little. RUG could go to $0 in a snap and faster than the protocol can liquidate the position, so the borrower keeps the ETH and you may lose everything. Protocols mitigate this risk by letting their token holders vote which assets are "safe" but then we are back to centralized decision making. Sushi lending allows pair-wise lending so you always know which is the collateral backing the borrower, sadly this model isn't as large yet.

What it is: Locking your asset to support a protocol/blockchain. Very similar to lending because you earn a return in the same asset, regardless of its USD value. You can stake ETH to secure ETH2, stake LUNA to secure the Terra network, stake your SUSHI to earn SUSHI or stake/lock CRV to earn Curve fees. In most cases you get a "receipt token" (eg: stETH, bLUNA, xSUSHI, veCRV) that represents your stake and which you can redeem for your base deposit + earned token at a later date.

Benefits: Most staking opportunities let you vote or even propose changes via governance mechanisms proportional to your stake (similar to being a shareholder); besides earning a return.

Risks: When you stake your asset you are trusting the protocol will deliver value long term. RUG paying 8000% in staking APY means nothing if the project doesn't move forward. You will receive 9x more RUG that is worth less and less over time.

What it is: Depositing (usually) two tokens that allow other people to trade those tokens. You are "market-making" because you supply both tokens and facilitate exchanges from token A for token B and conversely. Traders pay fees (0.01% - 1%) and all fees are shared proportionally among all liquidity providers. Because you are on the supply side of the market (supplying liquidity), you need to be extremely happy or extremely neutral to hold those two assets (eg. ETH + BTC) in any proportion because as prices of each asset move, the quantities of assets you provided will constantly fluctuate to keep the pool 50/50 in value. The APR quoted is always based on the trading fees from the last 24 hours divided by the total value locked in the same period multiplied by 365 days.

Benefits: You earn the trading fees. This is why you need to look for pools that have high "historical" volume relative to TVL. A pool can have a high APR only because volume in the last day skyrocketed and mislead you to invest. When markets are choppy and trading sideways, LPs are a great strategy because you benefit from all the volatility (i.e. you sell volatility when it spikes).

Risks: Impermanent loss/gain. As the quantities of the tokens supplied fluctuate with market prices you are likely to withdraw less coins of token A than what you deposited if token A went up in value vs token B.

What it is: depositing your LP tokens with a protocol in return for rewards paid in other tokens. This is also called liquidity mining because you get rewarded for providing liquidity - "proof of liquidity". Protocols do this to lock LP positions and ensure the protocol's native token remains easy to trade. Protocols decide how many of their own tokens they want to spend as liquidity rewards and decide how much over time. The APR quoted is usually calculated by taking the market value of the tokens sent as rewards to the LPs, divided by the TVL. This means if the protocol decides to send 1000 tokens to the ETH-BTC pool per week, the APR will be 1000*token price / ETH-BTC deposits. This is key because the APR is highly dependent of the value of the protocol's token, so it can be deceptive.

Benefits: if you really believe in the protocol, you can deposit your LP and farm their token instead of buying it (and then single-stake that token for more rewards). Your LP position will keep earning fees, so you will be double stacking yields. The rewards APR can mitigate the impermanent loss.

Risks: Protocols play with the math of APRs and usually quote the trading fees APR together with the rewards APR. A healthy APR is comprised by a higher trading fees APR than a rewards APR, otherwise it won't be sustainable in the long term. Besides the risks of a rugpull or more complex attacks, your risk is the opportunity cost of being lured into providing liquidity for the ETH-SHIT pair, staking it for SHIT rewards and losing money because the impermanent loss will eat your ETH and rewards will be worth 0.

It's a long enough post for now. If people like it I can write part 2 explaining OHM(-like) staking, option pools or other more advanced strategies :) Go trade!

First post on mirror. Reposting from a successful Reddit post, of my own authoring as well. Hope this illustrates to DeFi newbies how to make better investing decisions and avoid (costly) mistakes.

What you need to keep in mind is that not all passive income is created equal. The quoted APYs are useless for the purposes of comparison in Defi because they mean different things in different contexts. Let's breakdown a few popular "passive income" strategies and how APYs differ:

What it is: The easiest strategy to understand. You deposit your assets at a protocol, permissionless borrowers take that capital in exchange for collateral and interest.

Benefits: Interest is paid in the same asset as borrowed, so it is great if you want single-asset exposure (lend ETH, receive interest in ETH). When markets go nuts, supply/lending APYs go up as traders take advantage of arbitrage or other opportunities and borrow more. This lets you stay on the sidelines "safely" while earning interest

Risks: The quality of the collateral is the largest risk. If someone borrows your ETH but collateralizes with 3x the amount in RUGCOIN, the collateral ratio means little. RUG could go to $0 in a snap and faster than the protocol can liquidate the position, so the borrower keeps the ETH and you may lose everything. Protocols mitigate this risk by letting their token holders vote which assets are "safe" but then we are back to centralized decision making. Sushi lending allows pair-wise lending so you always know which is the collateral backing the borrower, sadly this model isn't as large yet.

What it is: Locking your asset to support a protocol/blockchain. Very similar to lending because you earn a return in the same asset, regardless of its USD value. You can stake ETH to secure ETH2, stake LUNA to secure the Terra network, stake your SUSHI to earn SUSHI or stake/lock CRV to earn Curve fees. In most cases you get a "receipt token" (eg: stETH, bLUNA, xSUSHI, veCRV) that represents your stake and which you can redeem for your base deposit + earned token at a later date.

Benefits: Most staking opportunities let you vote or even propose changes via governance mechanisms proportional to your stake (similar to being a shareholder); besides earning a return.

Risks: When you stake your asset you are trusting the protocol will deliver value long term. RUG paying 8000% in staking APY means nothing if the project doesn't move forward. You will receive 9x more RUG that is worth less and less over time.

What it is: Depositing (usually) two tokens that allow other people to trade those tokens. You are "market-making" because you supply both tokens and facilitate exchanges from token A for token B and conversely. Traders pay fees (0.01% - 1%) and all fees are shared proportionally among all liquidity providers. Because you are on the supply side of the market (supplying liquidity), you need to be extremely happy or extremely neutral to hold those two assets (eg. ETH + BTC) in any proportion because as prices of each asset move, the quantities of assets you provided will constantly fluctuate to keep the pool 50/50 in value. The APR quoted is always based on the trading fees from the last 24 hours divided by the total value locked in the same period multiplied by 365 days.

Benefits: You earn the trading fees. This is why you need to look for pools that have high "historical" volume relative to TVL. A pool can have a high APR only because volume in the last day skyrocketed and mislead you to invest. When markets are choppy and trading sideways, LPs are a great strategy because you benefit from all the volatility (i.e. you sell volatility when it spikes).

Risks: Impermanent loss/gain. As the quantities of the tokens supplied fluctuate with market prices you are likely to withdraw less coins of token A than what you deposited if token A went up in value vs token B.

What it is: depositing your LP tokens with a protocol in return for rewards paid in other tokens. This is also called liquidity mining because you get rewarded for providing liquidity - "proof of liquidity". Protocols do this to lock LP positions and ensure the protocol's native token remains easy to trade. Protocols decide how many of their own tokens they want to spend as liquidity rewards and decide how much over time. The APR quoted is usually calculated by taking the market value of the tokens sent as rewards to the LPs, divided by the TVL. This means if the protocol decides to send 1000 tokens to the ETH-BTC pool per week, the APR will be 1000*token price / ETH-BTC deposits. This is key because the APR is highly dependent of the value of the protocol's token, so it can be deceptive.

Benefits: if you really believe in the protocol, you can deposit your LP and farm their token instead of buying it (and then single-stake that token for more rewards). Your LP position will keep earning fees, so you will be double stacking yields. The rewards APR can mitigate the impermanent loss.

Risks: Protocols play with the math of APRs and usually quote the trading fees APR together with the rewards APR. A healthy APR is comprised by a higher trading fees APR than a rewards APR, otherwise it won't be sustainable in the long term. Besides the risks of a rugpull or more complex attacks, your risk is the opportunity cost of being lured into providing liquidity for the ETH-SHIT pair, staking it for SHIT rewards and losing money because the impermanent loss will eat your ETH and rewards will be worth 0.

It's a long enough post for now. If people like it I can write part 2 explaining OHM(-like) staking, option pools or other more advanced strategies :) Go trade!