Yield Farming in Defi: Why Liquid Restaking Prevails

August 05, 2024

Yield farming is one of the cornerstones of decentralized finance (DeFi), enabling users to have an important role when it comes to exchange. Similar to a savings account, this practice allows individuals to generate interest by lending/staking their digital assets in various protocols.

As DeFi evolves, this practice continues to gain popularity due to its potential for high returns compared to traditional financial systems. Various strategies such as staking, liquidity mining, lending, and yield aggregators are employed to optimize these returns.

However, among all of these methods of yield farming, liquid restaking has become a tough competitor in terms of returns. As we will see throughout this educational article though, there are countless ways we can put our capital to good use thanks to DeFi.

Types of Yield Farming in DeFi

Staking

Broadly speaking, staking involves locking up tokens in any protocol or network. However, a more specific definition states that staking is locking up assets in a Proof of Stake (PoS) blockchain to support operations, like validating transactions. In return, stakers earn rewards. Staking is advantageous due to its relatively stable returns and capability to support network security and efficiency.

Liquidity Mining

This strategy involves providing liquidity to decentralized exchanges (DEXs) like Uniswap, SushiSwap, and others. Users deposit pairs of tokens into liquidity pools and earn rewards, typically in the form of the platform's native tokens. This facilitates trading on these exchanges while rewarding liquidity providers with a share of the transaction fees.

Lending and Borrowing

DeFi lending platforms like Aave, Compound, and MakerDAO enable users to lend their assets to others in exchange for interest. Borrowers provide collateral to secure their loans. This system benefits lenders through interest earnings and offers borrowers access to capital without selling their holdings.

Yield Aggregators:

Platforms like Yearn Finance, Harvest Finance, and Idle Finance automate the process of yield farming by reallocating assets across various DeFi protocols to maximize returns. These aggregators help users optimize their yield strategies with minimal manual intervention, though they may involve higher risks and fees due to their complexity.

Synthetic Assets and Derivatives:

Protocols such as Synthetix and Mirror Protocol allow users to mint synthetic assets, which are tokenized versions of real-world assets (RWA). These can be used for trading and earning yields. However, the risks associated with synthetic assets include price volatility and the complexity of understanding derivative instruments.

The Role of Liquid Restaking in Yield Farming

Liquid Restaking Tokens (LRTs) represent a new paradigm in DeFi by allowing users to restake their staked assets, earning yields from both the initial staking and subsequent restaking operations. This dual-layered yield scheme not only improves liquidity but also creates many paths for compounding returns, making LRTs a powerful instrument for sophisticated investment strategies.

Why Liquid Restaking is Superior

Liquid Restaking offers several advantages over traditional yield farming methods, including:

Predictable and Stable Returns: Unlike other strategies that can be affected by market volatility and slippage, Liquid Restaking provides predictable yields, offering users a stable return on their investments.
Increased Liquidity: By utilizing LRTs, users can maintain liquidity, allowing them to participate in various DeFi activities without having their assets locked up. This flexibility is key to maximizing the utility of their investments.
Compounding Opportunities: The dual-layered yield system associated with Restaking allows for both primary and secondary yield opportunities, significantly bettering the potential for compounding returns.

-> Explore all of our Liquid Restaking solutions and how you can leverage them for optimal returns

Scenario Analysis: Liquid Restaking vs. Traditional Liquidity Provisioning

To understand the superiority of Liquid Restaking, let's compare it to traditional liquidity provisioning methods in decentralized exchanges (DEXs).

1. Stable Liquidity Pools in DEXs

Challenges: Stable liquidity pools frequently have low swap fees and slippage issues, which can significantly limit earnings for liquidity providers. Furthermore, these pools often have high opportunity costs, as the capital locked within them may provide higher returns if staked directly in a more efficient protocol.
Liquid Restaking Advantage: Liquid Restaking overcomes these challenges by offering stable and predictable returns. LRTs allow users to restake their assets and benefit from dual-layered yields while avoiding the disadvantages of slippage and low fees. This makes Liquid Restaking a more efficient and profitable choice for yield optimization.

2. Concentrated Liquidity Pools in DEXs

Challenges: Concentrated liquidity pools also face issues such as low swap fees and slippage. The unpredictable composition of assets within these pools further complicates returns, often making them less effective for achieving optimal yield.
Liquid Restaking Advantage: By employing LRTs, Liquid Restaking provides boosted liquidity and flexibility. Users can earn stable returns across different protocols, eliminating the unpredictability and inefficiencies associated with concentrated liquidity pools. This flexibility makes Liquid Restaking a superior choice for yield farmers looking to maximize their returns without sacrificing liquidity.

Yield Farming vs Liquid Restaking

Yield farming offers various strategies, each with its own range of benefits and risks. However, there is a strong argument for liquid restaking being a superior method, guaranteeing stable returns without sacrificing liquidity.

Regardless of what investment strategy, we advise our community to always perform thorough research and due diligence before investing in any DeFi protocol. With that said, we encourage everyone to explore the potential of liquid restaking through the first ever liquid restaking powerhouse: InceptionLRT.

Begin your liquid restaking journey now! Discover our protocol and follow us on our socials for more educational content on the wonder of DeFi.