Key Takeaways
- In this article, we backtested three major DeFi investment strategies: holding ETH, actively buying/selling governance tokens, and liquidity mining.
- High Ethereum gas fees often exclude smaller investors from DeFi liquidity mining, making it more accessible to large investors. Success in mining requires deep DeFi knowledge and full-time dedication.
- Considering risk-adjusted returns (benchmarked against Bitcoin), required expertise, and time investment, actively trading governance tokens with proper risk management emerges as the optimal strategy.
Introduction
Decentralized Finance (DeFi) dominated the crypto landscape in Q3 2020, attracting billions in capital. Investors now seek yield from idle assets via blockchain-based credit systems, often supported by Ethereum’s composability. Governance tokens—distributed through liquidity mining—have become central to DeFi protocols, enabling holders to vote on proposals and share profits.
This article evaluates three strategies from June 1 to October 1, 2020:
- Holding ETH
Actively Trading Governance Tokens
- Trend-based trading
- Rule-based trading
- "DeFi Degens" (high-frequency traders)
- Liquidity Mining
Performance Comparison
1. Trading Governance Tokens
- Rule-based strategy: 1,978% ROI (e.g., buying YFI at lows and holding).
- DeFi Degens: 66% ROI (boosted by UNI airdrops).
- Trend-based strategy: 365% ROI.
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2. Holding ETH
- Passive ETH holdings yielded $1,548 (54.8% ROI).
- Missed UNI airdrops reduced comparative gains by $1,661.
3. Liquidity Mining
- Capital-intensive: Smaller investors ($1,000) faced $346+ in fees, reducing net returns.
- Timing-critical: Delaying YFI mining by a day slashed profits by 64%.
- Larger investors ($10,000) achieved higher returns due to fee amortization.
Risk-Adjusted Returns
| Strategy | Sharpe Ratio (vs. BTC) | Notes |
|---|---|---|
| Holding ETH | 10.1 | Low risk, passive. |
| Trend-based Trading | 13.1 | Requires discipline. |
| Liquidity Mining | Varies | High fees, timing-dependent. |
FAQs
Q1: Is liquidity mining viable for small investors?
A: High gas fees often make it impractical. Focus on lower-fee protocols or pooled mining.
Q2: Which governance tokens performed best?
A: YFI, UNI, and COMP led gains, but past performance doesn’t guarantee future results.
Q3: How do fees impact yields?
A: Elevated fees deter small participants, reducing liquidity and compounding returns.
Conclusion
While liquidity mining suits deep-pocketed experts, trend-based governance token trading offers the best balance of risk and reward for most investors. Rule-based approaches (e.g., holding YFI) outperformed but demand hindsight-free discipline.