Instead of putting money in a bank for just 5%, you could earn 6.41% using MakerDAO’s DSR module and an additional 6.19% with Pendle while receiving 0.71% in PENDLE rewards. This setup is achievable in the DeFi sector if you are interested in working with stablecoins and taking on additional risks for a premium. Using the best protocols out there to maximize gains without overexposing your portfolio to various market dangers is a skill that requires continuous honing.
We want to preface the article with an important disclaimer: we do not provide financial advice or endorse any of the platforms and pools mentioned below. Remember to do your own research, verify information, and make decisions based on careful analysis of the market and its current trends.
With over 14,000 tracked pools across 30 different chains, finding a good investment opportunity can be quite challenging even for people with experience. Note that we do not even count hundreds of alternative blockchains, obscure protocols, non-tracked pools, and other potential investment avenues that you may come across while exploring the vast landscape of the DeFi sector.
This diversity provides a high level of flexibility to investors but also makes it hard to identify promising ventures among a spacious ocean of options. The analytical process can be overwhelmingly difficult since achieving an in-depth understanding of protocols often requires you to know programming languages to directly inspect smart contracts or do extensive research by reading tons of documents.
Identifying low-risk DeFi platforms is not as easy as finding a reliable bank due to the absence of regulatory mechanisms and guidelines. Again, without any technical expertise, selecting protocols that are safe to use is also a challenge.
All these issues turn the process of finding a good place to park your capital into a laborious operation. If you want to focus on building a balanced portfolio capable of producing sizeable returns, it is necessary to do this work responsibly. While it seems that selecting a reliable protocol is close to impossible, you can follow some guidelines.
Modern DeFi protocols face the same difficulties in terms of attracting users and investors. These issues are recognized by the community and developers:
- Challenges with onboarding. Newcomers have trouble adapting to clunky interfaces, unintuitive interfaces, foreign investment concepts, and the infrastructure of the DeFi ecosystem as a whole. UX/UI issues are often addressed as an afterthought and can be a big obstacle for new users to get into the domain.
- Smart contract design. Protocols may have faulty or exploitable code allowing bad actors to attack individual users, disrupt operations, or even drain wallets. While many platforms are trying to prevent such events by using external audits and running bug bounty programs, the danger still persists with WazirX India and Velocore alone losing over $250 million to hacks in 2024!
- Insufficient liquidity and user activity. While the latter seems to be recovering in some parts of the sector, insufficient liquidity is still an issue persisting across the board outside of some huge protocols like LIDO, UniSwap, MakerDAO, and others. The number of individual wallets in the DeFi sector grew by over 230% in the first quarter of 2024 but the number of individual users is falling according to Statista.
Even if you use the most secure DeFi platforms and invest in pools with high TVL, it is still possible to lose your capital. Being extremely careful when working in the DeFi sector is crucial for the long-term success of your investment activities.
By understanding the challenges of the DeFi ecosystem and its many protocols, you can identify some good methods of picking reliable protocols. Let’s talk about some of them:
- Good user experience. We strongly suggest working with protocols that have an intuitive interface and easy-to-use products. For example, Rivo.xyz has a clean interface with the DeFi marketplace neatly organized. Newcomers can easily find suitable investment options like indexes (it is possible to invest in a wide array of Arbitrum pools and get up to 7% APY) and get started in just a couple of clicks.
- High level of security. It is important to invest in blockchains and protocols that run massive bug bounty programs to ensure that their code is clean and does not have exploits. For instance, NEAR Protocol and Aurora Smart Contract offer massive $1 million bounties to cybersecurity specialists who identify weaknesses in their code. The latter has several interesting investment projects like Aurigami and Trisolaris with a $2.85 million combined TVL.
- Pick platforms with high total value locked. This metric indicates the general level of trust a particular pool or protocol enjoys. Low TVL does not necessarily tell you that a project is doomed but you are less likely to see high utilization and liquidity. Among the biggest protocols out there are LIDO (liquid staking) with a TVL of $23.5 billion and JustLend with $5.9 billion.
- Reasonable interest rates and fee structures. It is important to pick platforms that offer favorable investment and trading conditions. For example, you can invest in LIDO but without utilizing its stETH tokens, you will see a return (2.81%) lower than what you can get from buying US treasury bonds (4.11% in 2024). At the same time, some DEXes have high commissions and may reduce the overall profitability of trading activities. The best DeFi platforms for high returns are usually on the riskier side. You can get up to 16.6% in mixed rewards by investing in the USDT-USDC (0.01%) pool at Cetus AMM but will be exposed to higher risks.
Avoid investing in memecoins if you are interested in the long-term perspective and try focusing on identifying good opportunities for position concentration. In many cases, putting all your eggs in a single basket can be a better portfolio as reported by Danny Yeung and colleagues in their study of diversified and concentrated portfolios.
Finding protocols that offer the best returns is a tricky process. Since risk estimation is difficult due to the sheer number of unpredictable factors, premiums must be high. On top of that, the competition for liquidity between decentralized exchanges is driving up interest rates across the whole sector. Determining the best risk-reward ratio can be extremely challenging even for experienced veterans.
Usually, up-and-coming DEXes or protocols on alternative and layer-2 chains offer higher APYs on average to attract users. In many cases, such high return rates are unsustainable and projects prematurely fail or cannot attract enough users to justify the continuous support of a protocol. For example, Cavern Protocol on Terra offered up to 13.5% APY on USDC investments but ultimately had to stop its operations due to insufficient adoption.
Let’s take a look at some of the most lucrative protocols to work on in 2024:
- Extra Finance is a lending and leveraged yield farming protocol built on the Optimism chain. It had a median APY of 14.31% in August 2024 and a TVL of over $118 million. The highest APY for a pool with a total value locked of over $10 million was the two-sided OVN-USD+ with a 470% base APY and a 30-day mean average of 456%. Putting capital in the USDC-AERO pool with an over $38.5 million TVL would yield over 93%.
- Orca Trade is a decentralized exchange on the Solana network with a sizeable $280 million TVL and 583 tracked pools averaging 86.12% APY. Solana is known for its memecoins and rug pulls so investing in this chain is always a high-risk endeavor. Nevertheless, brave investors are often rewarded with high payouts. For instance, Orca has several pools like SOL-HMSTR (12,773% APY) and SOL-MAJOR (2,869% APY) that are focused on memecoins. You can also invest in pools like SOL-USDC with much lower returns (3.91%) but with increased safety.
- Pendle is an innovative yield trading platform allowing users to fix and leverage yield to increase returns. The protocol is deployed on the Ethereum chain making it slightly safer than many other alternatives. Pendle is known for its derivatives and timed pools with fixed maturation periods. With over 118 tracked pools and an average APY of 8.81%, it is a good destination for all types of investors. The combined TVL of all pools is close to $2.4 billion.
Many investors think that actively trading assets is a better approach to money-making. If you have a good grasp of the market dynamics and technical analysis, trading coins can be a better way of achieving high returns. However, it is important to work with protocols offering optimal trading conditions and sufficient liquidity. Gas fees and platform commissions should be another important point of consideration.
At the same time, many trading protocols offer a wide range of liquidity-mining opportunities to investors who do not like the idea of trading but would rather focus on accruing interest. Among top DeFi platforms for liquidity mining, DEXes are usually among the safest and most efficient.
Let’s take a look at some of the best protocols for some popular blockchains:
- Curve DEX is one of the premiere Ethereum exchanges with a strong focus on yield farming and liquidity mining. The protocol has over $1.7 billion in TVL and generates close to $8 million in fees annually. The exchange offers 509 tracked pools averaging 5.99% APY. Some of them are quite profitable. For instance, you can invest in the SDAI-USDM pool for up to 10.18% base APY and 1.46% in mixed CRV/CVX rewards.
- STON.fi is the biggest decentralized exchange on The Open Network with a TVL of over $194 million and a $730K daily trading volume. The protocol has 60 tracked pools with an average APY of 36.09% as of September 2024. It is a great destination for investors interested in yield farming since you can get excellent TON rewards for your contributions to pools. For instance, investing in the TON-USDT pool yields a 2.33% interest rate and roughly 15.82% in TON rewards.
- Thorchain on the Ethereum network is a decentralized exchange with some of the highest APYs in the sector. As of the time of writing, the network had approximately $221 million in TVL and 40 pools averaging 18.3% APY. The exchange operates across multiple chains including Ethereum, Avalanche, BSC, Cosmos, and others. By investing in the two-sided USDT-RUNE pool on Ethereum, you will get 40.74% mixed floating APY with 30-day averages outperforming expectations by 2% — 5% consistently.
Some of the most popular protocols in the whole sector are the ones focused on automatic lending and borrowing by utilizing smart contracts. Since these setups are relatively safe if you disregard potential issues with technological vulnerabilities, yields here are lower in comparison with many other protocols like DEXes. However, users flock to these platforms to provide and borrow assets as it allows them to invest more flexibly or leverage existing positions to magnify potential gains.
With 449 tracked protocols offering lending and borrowing, making a good choice can be difficult. On the other hand, you will be limited to a certain number of platforms depending on which blockchain you prioritize. For instance, Ethereum is supported by 110 protocols while Arbitrum users have 76 different projects to choose from.
Let’s have a closer look at this sector of the DeFi ecosystem and explore some of the biggest lending protocols.
- Aave is a massive multi-chain protocol offering lending on 12 different networks including Ethereum, Arbitrum, Avalanche, Polygon, and many others. The platform has a chunky $11.1 billion TVL and 140 different tracked pools averaging 2.21%. Investors can use a wide range of digital assets including mainstream coins like BTC and ETH as well as various staked or wrapped tokens, stablecoins, and layer-2 currencies.
- JustLend on Tron is a good choice for people interested in stable passive income at low risk. The platform boasts a sizeable $5.7 billion TVL and has 18 pools with an average APY of 0.54%. Since APRs depend on utilization and other factors, some pools have much higher 30-day averages than others. For instance, investing in the BTT pool offers a measly 0.33% base APY but with high utilization 30-day averages in September reached 7.75% APY.
- Kamino Lend on Solana has been performing well recently. The TVL dynamic has flattened out and reached a respectable $1.24 billion mark. The platform has 21 pools averaging 1.01% with 30-day averages reaching 6% consistently on some of the most popular pools with mainstream coins. For example, you could invest in the USDC pool to receive 6.49% on average in September 2024 despite the base APY of just 4.35% which is still higher than the US treasury bond interest rate of 4.11%.
Since The Ethereum Merge in 2022, staking became the next hottest thing in the crypto industry with billions of US dollars poured into stakes on the most popular PoS networks. The effect was noticeable across the whole blockchain ecosystem with Cardano and Solana also experiencing big bumps in investment activity.
Yield farming is not a novel concept to many investors. In 2024, many yield farming opportunities are way less shocking than just three years ago when degen farms and pools with exorbitant APYs were the norm. Nevertheless, you can still find a plethora of interesting investment options which can be a more enticing proposition for riskier investors seeking something more profitable than staking.
Direct staking is barely affordable for investors with limited capital. For example, a 32 ETH stake in Ethereum will cost you $75,425 in September 2024 which is still twice as much as two years ago despite the recent ETH price dip. On the other hand, you can stake in Solana with minimal initial investments and still receive hefty rewards. Regardless of where you decide to put your money, it is a good idea to work with staking and liquid staking protocols.
Here are some of them:
- Marinade Finance is a Solana-based protocol allowing users to automatically stake their assets without losing custody or offering liquid staking services. Native direct staking will yield 7.16% APY while liquid staking gives you 7.55%. Solana staking averages 6.28% in 2024 so Marinade looks good in comparison. A low TVL of $328 million can be a concern for some conservative investors.
- LIDO is the premiere Ethereum liquid staking protocol with the highest TVL in the DeFi sector eclipsing $22.5 billion in September 2024 and an ATH of $39 billion. The platform gives stakers stETH in exchange for their ETH tokens staked for 3.15% base APY (2.93% 30-day average) which can be used as collateral to borrow stablecoins on Aave or other supported protocols to further increase yields.
- Rocket Pool is also deployed on Ethereum and has a modest $2.88 billion TVL with a 2.36% APY and rETH exchange ratio of roughly 1.12:1 meaning that you get 1 rETH for 1.12 ETH that you stake in the pool. You can use rETH as collateral on Aave, Spark, or MakerDAO to borrow stablecoins like USDC, DAI, and USDT.
In many cases, receiving reward tokens can be a more lucrative endeavor than just staking. In fact, many investors are increasing the risk profile of their portfolios by utilizing liquid staking protocols and using acquired tokens to take out loans in stablecoins to use them in yield farming setups. For example, you can use stETH on Aave to get USDC and invest in Aerodrome’s USDC-AERO pool for 63.05% in AERO rewards.
Here are some interesting platforms to check out:
- Zircuit Staking is a great destination for ETH holders since they can receive a variety of rewards including EigenLayer points, LRT points, and Zircuit points.
- Pendle is a multi-chain protocol offering 118 pools averaging 8.81% APY with rewards paid out mostly in PENDLE tokens.
Convex Finance is a protocol operating on the Curve DEX platform and offering 220 pools with an average APY of 7.66% and mixed CRV/CVX rewards.
The main takeaway
Achieving the biggest return rate on the best DeFi protocols is not an easy task even for experienced investors. However, you can find lucrative investment opportunities and outperform many tradfi instruments in the long term. We strongly suggest personally researching interesting protocols to make informed decisions.
