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Make your money grow in DeFi

17/12/2025
Defi
Yield

In the previus article we talked about the Decentralized Token Folio (DTF) and how it can be used to create diversified portfolios. In this new chapter we will explore how to make your money grows, without leveraging only on price fluctuation. But first let's start from the basics.

Let's be honest and clear, the cryptocurrency market is extremely volatile and unpredictable. This makes it really hard to create a portfolio that can perform well in the long term even if is totally diversified. But when we buy cryptocurrency using wallets we have total control of our assets and we can use them to generate yield. This is where yield strategies come into play. In DeFi ecosystem there are many protocols that allow users to lend, stake or provide liquidity to earn yield on our assets. In this way we are not only diversifying our tokens but also diversifying the tools and protocols that we use allowing us to generate yield in different market conditions.

But pay attention, yield strategies are not risk free. Using DeFi protocols can expose us to different types of risks like smart contract vulnerabilities or impermanent loss. We will talk about these risks when we will discuss about specific yield protocols.

APR vs APY

When we talk about yield strategies we often hear the terms APR and APY. APR stands for Annual Percentage Rate and represents the yearly interest rate without taking into account the effect of compounding. APY stands for Annual Percentage Yield and represents the yearly interest rate taking into account the effect of compounding. When we evaluate a yield strategy is important to understand the difference between these two metrics because they can give us different perspectives on the potential returns of a strategy.

Most DeFi protocols report yields using APY because it gives a more accurate representation of the potential returns, but pay attention because many times the APY is calculated:

  • assuming that the yield is compounded frequently (daily or even hourly) and this can lead to overestimating the returns if we don't reinvest the yield that often.
  • auto-compounding may be not implemented in the protocol and we have to manually reinvest the yield, this can lead to lower returns due to gas fees and timing issues.
  • based on historical data that may not be representative of future performance.

Macrocategories of yield tools

There are many different DeFi protocols that allow us to generate yield on our assets each one with pro/cons, but we can group them into four main macrocategories:

  • Liquidity pools (LP)
  • Lending protocols
  • Liquid Staking Tokens (LST)
  • Liquid Restacking Tokens (LRT)

Liquidity Pools (LP)

Liquidity pools are smart contracts that hold funds and allow users to trade tokens in a decentralized way. Users can provide liquidity to these pools by depositing their tokens and in return they receive:

  • Percentage of trading fees generated by the pool
  • Eventual additional rewards in the form of governance tokens or tokens incentives.

The main risk of providing liquidity to a pool is impermanent loss, which occurs when the price of the tokens in the pool diverge significantly from their initial price. This can lead to a situation where the value of the tokens in the pool is lower than if the user had simply held them. Could sound difficult to understand it, so let's see an example:

  • Alice provides liquidity to a USDC/ETH pool with 1 ETH (worth 2000 $) and 2000 USDC.
  • The total value of the pool is 4000 $ and Alice owns 100% of the pool.
  • After some time, the price of ETH increases to 3000 $.
    • First scenario (holding): If Alice had simply held her 1 ETH and 2000 USDC, she would now have a total value of 5000 $ (3000 $ + 2000 $).
    • Second scenario (liquidity pool): In the liquidity pool, the ratio of ETH to USDC has changed due to the price increase. To maintain the pool's balance, Alice now has approximately 0.816 ETH and 2448 USDC. The total value of her share in the pool is now approximately 4900 $ (0.816 ETH * 3000 $ + 2448 USDC).
  • In this example, Alice would have been better off simply holding her assets instead of providing liquidity to the pool, as she would have 100 $ more by holding.

Obviously, this loss is only "impermanent" because if the price ratio returns to its original state, the loss is mitigated. However, if Alice decides to withdraw her liquidity when the price of ETH is still high, she will realize this loss.

Lending protocols

Lending protocols allow users to lend their assets to other users in exchange for interest payments. Users can deposit their tokens into a lending pool and borrowers can take out loans by providing collateral. Lenders earn interest on their deposits based on the demand for loans in the pool. With Lending protocols you can provide only one token, unlike LP where you have to deposit the pair of the Liquidity Pool. But even lending protocols are not risk-free, the main risks are:

  • Smart contract risk: the risk of vulnerabilities in the smart contract that could lead to loss of funds.
  • Liquidation risk: if the value of the collateral provided by borrowers falls below a certain threshold, their loans can be liquidated, which could lead to losses for lenders if the liquidation process does not recover enough funds.

Liquid Staking Tokens (LST)

Liquid Staking Tokens (LST) are tokens that represent staked assets in a proof-of-stake blockchain. When users stake their tokens, they lock them up to support the network and in return they earn staking rewards. However, staked tokens are typically illiquid, meaning they cannot be easily traded or used for other purposes. LSTs solve this problem by allowing users to trade or use their staked assets while still earning staking rewards. Users can mint LSTs by staking their tokens in a staking protocol, and they can redeem them later to get back their original staked tokens plus any earned rewards. The main risks of using LSTs are:

  • Smart contract risk: the risk of vulnerabilities in the smart contract that could lead to loss of funds.
  • Market risk: the value of LSTs can fluctuate based on market demand and supply, which could lead to losses if the value of the LST falls below the value of the underlying staked assets.

Liquid Restaking Tokens (LRT)

Liquid Restaking Tokens (LRT) are tokens that represent assets that have been restaked in a secondary staking protocol. Restaking involves taking staked assets from one protocol and staking them in another protocol to earn additional rewards. LRTs allow users to trade or use their restaked assets while still earning rewards from both the original staking protocol and the secondary staking protocol. Users can mint LRTs by restaking their staked tokens in a restaking protocol, and they can redeem them later to get back their original staked tokens plus any earned rewards from both protocols. The main risks of using LRTs are:

  • Smart contract risk: the risk of vulnerabilities in the smart contracts of either the original staking protocol or the secondary restaking protocol that could lead to loss of funds.
  • Market risk: the value of LRTs can fluctuate based on market demand and supply, which could lead to losses if the value of the LRT falls below the value of the underlying restaked assets.

Making your money grow using Reactive Index

As we discussed in the previous chapter about DTFs, Reactive Index implements index tokens that are composed of different assets and rebalanced periodically. As described in our Knowledge base article, there are two macro categories of index tokens:

  • Strategic Index: These are simple DTFs that hold the underlying assets and apply a rebalance strategy. The underlying assets can be whatever we want: a standard crypto asset like BTC, where we rely only on price fluctuations to make a profit, or a lending receipt that generates yield.
    In the latter case, it's interesting to see how flexible our DTFs are, and how they can also be used as yield aggregators.
    These DTFs are designed to provide exposure to a diversified portfolio of assets and are rebalanced periodically to maintain the target asset allocation that the strategy aims to achieve. To maintain the allocation, the DTF will buy/sell the underlying assets using the second type of DTF that we will describe below.

  • Liquid Index: Like Strategic indexes, these DTFs are designed to provide exposure to a diversified portfolio of assets and are rebalanced periodically to maintain the strategy's target asset allocation. To maintain the allocation, a Liquid DTF will buy/sell the underlying assets by swapping on third-party DEXs. This can generate a small delay in rebalances compared to the schedule. This is why we incentivize the usage of these products by setting very low or zero annual fees.
    The main difference is that it acts as a liquidity layer for Strategic Indexes. By supplying liquidity, every Liquid Index earns a share of protocol fees generated by any Strategic Index operations. These fees are automatically distributed to Liquid Index holders by increasing the token price over time, similarly to how LST tokens accrue staking rewards. This way, Liquid Index holders can generate yield on their assets while providing liquidity to Strategic Indexes.

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