Skip to main content

Working With Capital in DeFi

· 11 min read

In this lesson, I will explain how to work with capital in DeFi correctly and why DeFi is needed in the first place.

Remember that DeFi is only a layer on top of the investment approach. The primary goal of DeFi is to increase the amount of your base assets not through speculation, but through the fees paid by other users of the decentralized finance ecosystem.

As we discussed earlier, the market has a so-called “money-extraction machine” that takes funds from most participants. With DeFi, we do not try to fight this machine — we join it by earning fees and increasing the number of assets in our portfolio. This is the core idea.

There is a fundamental difference between:

  1. attempting to boost returns using speculative trades — buying something to sell it later and accumulate more bitcoin; and
  2. earning through protocol fees, which is a predictable, systematic, long-term strategy.

These are two completely different approaches. The foundation is the investment strategy.

This means a portfolio built from bitcoin, Ethereum, and stablecoins when needed. If someone wants to try their luck with altcoins to outperform bitcoin and Ethereum — that is possible, but it should be a small part of the portfolio.

The investment foundation consists of:

  • regular investments;
  • monthly purchases of bitcoin and Ethereum using the Dollar-Cost Averaging strategy;
  • and only after that, using these assets in DeFi.

The main principle: we outperform the market not by speculating, but by increasing the amount of our base assets.

For example:

  • If you had one bitcoin and after a year you have 1.2, that is 20% APY in bitcoin, without trading and without altcoin risk.
  • If you had one ETH and after a year you have 1.4, that is 40% APY in pure ETH.

This is a very strong return considering it comes from low-risk base assets. At the same time, you do not need to worry about the dollar value of your portfolio over six or twelve months. You are holding the index of the entire crypto market, using regular Dollar-Cost Averaging, while DeFi adds additional yield on top. Over a two–to–three-year horizon, the results will be extremely strong.

The key DeFi instruments that generate returns are staking, liquid staking, and restaking. If you have not yet reviewed the Staking module, go back to it—it explains in detail what staking is, how liquid staking differs from it, what restaking means, and how these mechanisms help you increase your capital. We will actively use these tools to grow the portfolio over the long term.

The next category is liquidity pools on decentralized exchanges. This is the foundation of DeFi. Liquidity pools come in many types: only stablecoin pools, pools of volatile assets, mixed pools, and many others. All of them make it possible to gradually and systematically grow your capital.

Next are lending markets.

Here you can simply deposit your assets and receive a stable interest rate over time. Lending markets also allow you to borrow assets against your collateral — for example, borrow stablecoins against bitcoin or Ethereum — and direct these borrowed funds to instruments with higher yields than the borrowing rate. This is a simple, non-speculative strategy: you continue holding the index of the crypto market (BTC + ETH) while receiving additional stablecoins to use elsewhere in DeFi.

Another tool is combined liquidity pools, such as TriCrypto and similar products.

You may not be familiar with them yet, or perhaps you’ve only heard the names. These are conservative tools composed of several assets at once. For example, TriCrypto contains:

  • one-third bitcoin,
  • one-third ether,
  • one-third stablecoins.

This is essentially a crypto index that grows with the market, collects fees from traders, and reduces risk through diversification. The same logic applies to other similar instruments: a balance between BTC, ETH, and stablecoins provides moderate growth and stable returns.

These four categories — staking, liquidity pools, lending markets, and combined pools — are more than enough to earn meaningful income in DeFi. There is no need to complicate things or look for “secret ways” to increase yield.

Each category has sub-categories: different decentralized exchanges, different networks, different lending markets.

In this module, we will focus only on the most reliable and time-tested tools that have been used since the early days of the DeFi ecosystem.

One very important note: every decentralized exchange, lending market, or other DeFi protocol always has two types of yields.

  1. Organic yield — generated directly by user activity.
    For example, I deposit stablecoins, someone borrows them and pays interest in the same stablecoins — I earn yield in the same asset that I supplied. This is the “pure” yield.
  2. Additional incentive rewards — emissions of the platform’s own token.
    For example, I deposit ETH or USDC; I receive organic yield in those same assets and, in addition, may receive rewards in the protocol’s native token. This is important: organic yield is more reliable, while incentive rewards depend on the protocol’s decisions and may change.

This does not happen often, but when it does, you should take advantage of it — while carefully assessing risks and analyzing all potential scenarios to properly allocate your capital and increase your yield through token emissions. This applies not only to lending markets but also to decentralized exchanges.

For example, if we take Uniswap and the ETH–USDC trading pair, I can supply assets to the liquidity pool and earn organic yield in ETH. Users swap ETH for USDC and back, pay fees, and as a liquidity provider I receive my share of these fees — pure profit in the same assets I deposited.

Additionally, in some cases a protocol may distribute extra rewards on top of organic yield — such as UNI tokens, Arbitrum tokens, Optimism tokens, depending on which network the position is created on. These incentive rewards are added to organic income. It is important to understand that the type of reward tokens will vary depending on the network and the platform where the pool operates.

In general, there are two types of yield:

  1. organic fees;
  2. additional token emissions.

The ideal scenario is when both are present: stable organic income and extra token rewards. But if I must choose only one source, I would usually prefer organic yield in base assets rather than pure token emissions without any ETH-denominated income.

However, everything depends on the specific conditions. Sometimes token emissions are so high that even with zero organic yield, opening a position is still profitable solely due to the additional incentives.

Overall, my approach to working with any DeFi instrument (including Uniswap, lending markets, and liquidity pools) is simple:

  • I keep all organic yield in base assets as it is;
  • I convert most of the incentive tokens into hard assets, increasing my holdings of bitcoin and ethereum.

This approach allows me to consistently accumulate fundamental assets and improve long-term capital efficiency.

Again, it depends on the person: some may prefer to keep the reward tokens in their portfolio, wait for them to grow, and later convert them into bitcoin or ethereum. However, in practice it is extremely difficult to outperform the long-term growth of bitcoin and ethereum, so each user must decide for themselves. Personally, I recommend selling all received reward tokens, buying more bitcoin and ethereum, and also accumulating more stablecoins — in other words, moving into hard assets.

The tokens shown here are relevant at the current moment; in the future the set of reward tokens may change. In general, the idea is that in the crypto and DeFi ecosystem there always exist pools where large projects distribute token emissions as additional incentives.

Here is a critically important rule: we only use liquidity pools and other tools that involve assets already present in our portfolio. The same applies across all instruments. If our portfolio consists of bitcoin and ethereum, we only work with bitcoin and ethereum. If a liquidity pool distributes rewards in assets we do not want — for example, in random altcoins — there is no reason to enter such a position, even if the nominal yield seems high. This is essential.

Thus, the first rule is: we work only with the assets that are already part of our portfolio. This applies to lending markets, liquidity pools, and all other tools. We do not go beyond our portfolio composition, except in rare cases where we can borrow an altcoin we do not care about, deposit it into a liquidity pool, earn token emissions, then repay the loan and keep the profit. This is a niche tactic, not a foundational approach.

The same logic applies to stablecoins as well. If you choose a strategy based entirely on stablecoins, there are trading pairs and deposit pools where you can supply stablecoins and earn organic yield from fees or from the interest rate paid by borrowers. Additional token emissions may also be distributed. All these rewards can later be converted into a larger amount of stablecoins or used to purchase volatile assets — bitcoin and ethereum.

Let’s define a new term. Token emission — this is what is almost always called incentives. Incentives are additional token rewards for providing liquidity or using lending markets, which are allocated by large projects to attract and retain users in their networks. Projects launch their protocols, or protocols are launched on existing networks — for example, the Arbitrum network or the Optimism network — and these networks need to retain active users within their ecosystems. For this purpose, they distribute incentives — reward tokens such as Arbitrum, Optimism, or any other token depending on the project and its purpose.

These tokens, these incentives, are always used to retain active users. And this is exactly what we will use when deploying our capital: collecting all these tokens, collecting all these incentives, selling them, and buying even more hard assets. The core skills needed to work in DeFi are actually simple. They are: providing liquidity on decentralized exchanges, using lending markets, and using bridges to transfer funds. These three skills form the basic foundation. Of course, not everything is that simple, but if we reduce everything to essentials, these three skills are enough for anyone to earn solid returns in DeFi: liquidity on DEXes, lending markets, and cross-chain bridges.

You already know how to use bridges if you completed the Getting Started module. There, I demonstrated our exchange aggregator. Using it, you can transfer any asset from one major network to another major network. This applies to stablecoins, ethereum, and other altcoins. Everything can be found in our aggregator. Again, all necessary links will be included under the lesson.

Let’s fix the main rule. The primary objective of DeFi is to increase the number of assets in your portfolio through various DeFi instruments. Not to earn through speculation. Not to buy altcoins. If we have one bitcoin, the task is to use DeFi to make it one point two, one point three, or one point four by the end of the year — depending on how conditions allow it, because different market phases bring different yields. This applies both to bitcoin and to ethereum. But overall, the main goal is to increase the number of assets in the portfolio, forming substantial capital over the long term, so that later — and in fact almost immediately — this capital generates stable, systematic income.

And the next important point: while we are increasing the number of assets in the portfolio, we do not worry about the dollar value of the portfolio, because we hold the index of the crypto market — bitcoin and ethereum. For long-term strategies, the dollar price does not matter. There will be temporary drawdowns, fluctuations over a month, six months, or a year. But on a two–three year distance, if you follow the rules described in the previous lesson — the five basic rules, DCA accumulation, regular investments — and combine them with DeFi, then on a two-year distance everything will work out. You will accumulate significant capital over time.

If, however, you worry about the dollar value of your assets, if you are afraid of drawdowns and know you cannot tolerate psychological stress — then work only with stablecoins. This reduces your potential yield. It prevents you from earning on market growth. But at the same time, you remain calm — in dollars, your deposit will always equal the initial amount you invested.

These materials are created for educational purposes only and do not constitute financial advice.