Almost every other tweet in the Solana Twitter space is about DeFi. It could be news of a DeFi project having raised tons of financing, the launch of a project’s token, or an collab announcement.
But what is DeFi exactly, what is hiding behind the words “Decentralized Finance” which, to be honest, could mean pretty much anything?
Well, according to CoinDesk, DeFi is “an umbrella term for a variety of financial applications in cryptocurrency or blockchain geared toward disrupting financial intermediaries.” In simple English, it means that DeFi is any financial service where you can use your cryptocurrency.
Say, getting a bank loan, buying foreign currency with it, and then depositing the money into a managed stock portfolio — these would be your ordinary, “fiat” financial services. Decentralized finance services are practically the same, only in this case instead of fiat money you’re using crypto… and the opportunities are boundless.
So what about Solana DeFi? In short, it’s doing great. Solana DeFi’s TVL is approximately $8 billion, and there are more than 400 DeFi projects built on Solana. (By the way, JPool is in 16th place by TVL among all Solana DeFi services — not too shabby!)
But enough with the theory, let’s talk about making money.
First, there are liquidity pools. A liquidity pool is a kind of double-token vault into which participants deposit their assets to form a trading pair (‘market’) and make it liquid for those wishing to trade (or ‘swap’) in that pair. Technically speaking, the vault is a smart contract that enables users to securely store their tokens.
Users who deposit their tokens into a liquidity pool (or ‘LP’) are called liquidity providers, and they commonly make money in 2 ways:
- They earn fees from transactions in the LP they provide liquidity to. The transaction fees are distributed proportionally to all the liquidity providers in the pool, so the more crypto assets you stake, the more fees you’ll earn.
- Some pools also offer rewards for certain liquidity pools as an incentive to stake your cryptocurrency. These rewards are typically paid in the ERC-20 token used on the platform plus the DAO or governance token connected to one of the assets (e.g. a JSOL-SOL LP on Saber would produce not only JSOL and SOL yields, but also $SBR and $JPLT, JPool’s governance token). So if you’re bullish on the token that the protocol uses, these pools may be a good choice for you.
There is however one danger with liquidity pools.
Ordinarily, a liquidity pool can balance itself: if too much Token A is swapped for Token B, the exchange rate grows in favor of B, until the pool balances itself out again as users (and bots) buy A for B at a favorable price. But if the market skews too much, with one token’s price dropping relatively to the other one and never bouncing back, you can actually lose your money. It is called impermanent loss and is quite well described here https://academy.binance.com/en/articles/impermanent-loss-explained. One of the simple ways of avoiding this risk is using LPs with tokens which are stabilized against each other, e.g. JSOL-SOL (as there never will be any significant price volatility within the pair).
If you have chosen one of Solana’s stake pools to stake your SOL, staying liquid with a pool token instead of locking your SOL in one of the validators, liquidity pools can help maximize your profits. You are getting both APY from staking, and the additional yield from the liquidity pool — trading fees plus, sometimes, an additional bonus in DeFi tokens.
Of course we will once again use JSOL as an example because, well, it’s ours! But there are of course several other great stake pools on Solana, with very attractive DeFi options. If you decide to check out Socean, say “hi” :)
So, back to the practical cases of DeFi apps.
If you are holding JSOL, you can use it in a number of different LPs. For example, there are JSOL/USDC pools on Raydium and Orca have an APR in the range of 4.5–4.75%, and are a perfect choice if you also hold USDC to diversify your portfolio. JSOL/SOL pool on Saber has a higher APR of ~6.8%, however it’s important to keep in mind that ½ of the liquidity you provide here is in unstaked SOL (although with an APR over 4% such a pool is still economically viable).
Another very interesting option is presented by double-stake-pool-token options on Saber: JSOL/mSOL and JSOL/scnSOL. The point here is that both sides of the pair are delegated and generate staking rewards before DeFi yields!
Now, you can’t talk about DeFi without mentioning lending platforms, another important pillar of the ecosystem.
Since you are here, you’re probably already familiar with the concept. Borrowing funds normally requires collateral to ensure debt repayment. For example, if you want to borrow $100,000 from a bank, they could accept a mortgage on your house as collateral, but the house needs to be worth at least $150k. Lending in crypto works just like that. You can borrow some USDC and leave your JSOL as collateral. When you repay your debt, you get your JSOL back. Lending platforms also offer an opportunity to provide liquidity for borrowing and earn some additional yield by doing so: when someone borrows your tokens, the platform takes a cut, but you earn a share of the interest rates they pay.
We are working on an integration with lending platforms, such as Solend and Port.finance, to offer our delegators this additional yield opportunity.
In conclusion, DeFi is what makes stake pools really shine, marking the difference between “traditional” and liquid staking. Do your research, as always, and give it a try!
If you have any questions concerning DeFi, staking, or easy dinner ideas, don’t hesitate to ask us on Twitter: @JPoolSolana or in our Discord: https://discord.com/invite/qR4BA9QXVR
