Returns of HODLing Vs DeFi-ing Compared

Key Points

• The prices of assets at the time of supply and withdrawal.

• The size of the liquidity pool.

• The trading volume.

It is always necessary for investors to understand that future returns on Uniswap often vary from the time when liquidity is provided due to the impact of high crypto volatility. This means there is a risk of losing money during large and sustained movements in the price of underlying assets in comparison to HODLing them.

To understand how Uniswap returns work, take a look at this example: If a liquidity provider adds 10,000 DAI and 100 WETH to a pool (with a total value of $20,000), the liquidity pool will be a combination of 100,000 DAI and 1,000  ETH. As such, the amount supplied is approximately 10% of the liquidity pool. The liquidity provider receives a guaranteed 10% LP fees tokens from the pool. Fees on Uniswap vary, but range from 0.05% to 1% per pair.

Again, if an investor supplies $10,000 to a liquidity pool consisting of DAI-ETH tokens, this means the supply will be in an equal proportion of $5,000 DAI and $5,000 ETH. The returns will vary for investors who provided liquidity to the pools at different times due to the changes in DAI and ETH prices. Liquidity providers also are exposed to impermanent loss. Impermanent loss occurs when there is a difference between the value of the liquidity provider’s tokens and the underlying tokens that if they weren’t paired in the pool. 

Frequently Asked Questions

What is the state of the DeFi ecosystem?

Since 2020, the DeFi ecosystem has experienced significant milestones, with users seeing it as an opportunity to earn passive income. DeFi hit a significant milestone in August 2020 as the market surpassed $7 billion in value locked in several protocols.  Currently, over $62 billion of value is locked in the ecosystem. Similarly, DeFi applications are on a steady rise, significantly increasing the value of Ethereum as most dApps are accommodated on the Ethereum network.

Who first used the term HODL?

The true identity of the person who coined the word HODL is still not known. However, the original misspelling of the word occurred in a post by the user “GameKyuubi” on the Bitcointalk.org online forum on December 18, 2013.

Is DeFi risky?

Generally, cryptocurrencies are risky investments. This is because the market is extremely volatile, with the ability of coin prices to rise and fall rapidly. This, in turn, affects the interest rates investors who provide liquidity to decentralized protocols or stake tokens in crypto vaults stand to earn.

What is staking?

Staking is the process where users stake (lock) a particular amount of crypto tokens in a vault for a period of time in order to earn rewards which are usually restaked pending the expiration of a vesting period.

What are popular examples of DeFi protocols?

Notable examples of DeFi protocols include Compound, Balancer, Aave, Uniswap, Pancakeswap, etc.

• Reducing the opacity in the financial system. This benefit is often overlooked as many think traditional institutions are more transparent. In the real sense, DeFi protocols are open-source, their users can see the codes, total liquidity and other details. Financial institutions have several blind spots and users rarely get to ask questions.
• Eliminating the presence of intermediaries. Centralization is associated with the traditional financial system, and this often comes with the presence of intermediaries, resulting in higher transaction fees and lower transaction speed. But DeFi is changing all of this by promoting efficiency and lower transaction fees.
• Increasing accessibility to finance: According to data from the World Bank, only about 5.3 billion people are banked, indicating that the global financial system is not fully accessible. This, understandably, has caused friction in several cohorts. But DeFi is ensuring that everyone with an internet connection has access to finance. People use DeFi not only to send funds internationally but also to access loans and other financial applications.

While these benefits stand out, there are certain risks associated with DeFi. These include smart contract risk, oracle risk, regulatory risk, scaling risk, and custody risk.

Returns of HODLing Bitcoin

Since its inception over a decade ago, Bitcoin has remained the topmost coin with the largest market capitalization. The first Bitcoin transaction occurred on January 12th, 2009, when Satoshi Nakamoto sent 10 Bitcoins to Hal Finney, a cryptographer.

In 2009, Bitcoin traded at $0 and slowly crawled up to $0.09 by July 17th, 2010. By April 2011, it traded at $1 and reached $29.60 in June, indicating a 2,960% return for investors who held their Bitcoin.

By 2013, Bitcoin reached $13.28 and further increased to $230 in April. It later tanked to $68.50 by July 2013. At the end of 2013, BTC soared to $1,237. This represented over 1705% returns for HODLers.

By early 2015, Bitcoin traded at around $315, before rebounding gradually. By May 2017, Bitcoin hovered between $1,000 to $2,000. By December, BTC soared to $19,345 and fluctuated for the next few years.

The Covid-19 pandemic in 2020 affected the global economy, with Bitcoin trading at $6,965 and rising to $19,157 by November. At the end of 2020, the price climbed to $29,000, showing a 416% increase in profit at the beginning of the year for Bitcoin HODLers. Bitcoin reached an all-time high (ATH) of $68,000 in November 2021. By May 2022, BTC tanked by over 50%, trading at $28,305. At the time of writing, Bitcoin is trading at $19,500. It is of utmost importance that investors check out market conditions and also do their own research before investing.

Source: Statista

How to calculate returns on crypto investment

To measure returns on crypto investment, the returns on investment (ROI) formula is used. The formula indicates growth in value over a certain period.

ROI = (FVI – IVI) / IVI * 100%

With:

FVI = Final value of investment

IVI = Initial value of investment

Let’s say an investor bought $1000 worth of Bitcoin a year ago. If the market climbs by 35% and the investor sells their asset for $1350, then the return on investment will be:

(1350-1000)/ 1000 * 100% = 35%

Returns on HODLing Ethereum

Ethereum is an open-source blockchain network and Ether is its native token. Invented by computer programmer Vitalik Buterin (among other co-founders) in 2015, Ethereum has had its own share of volatility.

Throughout 2015, Ether traded below $1. Ethereum broke through $1 in January 2016, reaching $12 by July 2016. By the end of 2017, Ethereum traded at $772, representing over 6000% returns for HODLers since January 2016.

2021’s NFT boom and major speculations influenced the cryptocurrency market and Ethereum reached an all-time high of $4000 by May and another all-time high of $4,800 in November 2021, bringing high returns to long-term HODLers. More recently, crypto enthusiasts witnessed the worst winter in 2022, with Ethereum shedding over 70% of its value.

Source: Statista

DeFi Returns: Compound

Compound is a decentralized blockchain protocol that runs on the Ethereum network. Compound, which exists as a decentralized application, enables decentralized finance (DeFi) features directly on the Ethereum blockchain. The protocol has its native ERC-20 token called COMP.

Serving as a stream of passive income, compound incentivizes participants with its COMP token. This way, users are often rewarded when they interact with compound protocol through borrowing, withdrawing or repaying loans. This incentivization helps to promote engagement on the platform.

COMP has a fixed supply of 10 million, with 4.2 million of the tokens earmarked for distribution to users of the protocol over a 4-year period. About 795,000 COMP tokens have also been reserved for incentivizing community governance.

By visiting Compound.finance, users can interact with the protocol directly using a dApp browser or regular browser equipped with wallets such as MetaMask and Trust wallet. Users who connect with the protocol can access collateralized loans or generate interest by depositing the tokens for lending.

With Ethereum serving as collateral, other tokens up for borrowing include USDC, DAI and USDT. Others include wrapped BTC, BAT, TUSD, and UNI. At the time of writing, Compound is offering an APY of 2.26%, 2.80%, and 3.00% for every USDC, DAI, and USDT staked in the protocol.

For instance, if a user stakes $500 worth of USDT for a specified period, such a user will expect an interest of $15 if APY stands at 3.00%. Between December 2018 and October 2019, Compound earned a return of 7.1%. By 2019, interest rates began to increase just as MakerDAO increased its stability fees.

DeFi Returns: Uniswap

Uniswap is a decentralized exchange protocol for digital assets. As an on-chain exchange, users can trade tokens which are often matched from asset reserves supplied by liquidity providers. These liquidity providers can earn returns on trading.

Getting returns from Uniswap depend on three factors: 

• The prices of assets at the time of supply and withdrawal.

• The size of the liquidity pool.

• The trading volume.

It is always necessary for investors to understand that future returns on Uniswap often vary from the time when liquidity is provided due to the impact of high crypto volatility. This means there is a risk of losing money during large and sustained movements in the price of underlying assets in comparison to HODLing them.

To understand how Uniswap returns work, take a look at this example: If a liquidity provider adds 10,000 DAI and 100 WETH to a pool (with a total value of $20,000), the liquidity pool will be a combination of 100,000 DAI and 1,000  ETH. As such, the amount supplied is approximately 10% of the liquidity pool. The liquidity provider receives a guaranteed 10% LP fees tokens from the pool. Fees on Uniswap vary, but range from 0.05% to 1% per pair.

Again, if an investor supplies $10,000 to a liquidity pool consisting of DAI-ETH tokens, this means the supply will be in an equal proportion of $5,000 DAI and $5,000 ETH. The returns will vary for investors who provided liquidity to the pools at different times due to the changes in DAI and ETH prices. Liquidity providers also are exposed to impermanent loss. Impermanent loss occurs when there is a difference between the value of the liquidity provider’s tokens and the underlying tokens that if they weren’t paired in the pool. 

Frequently Asked Questions

What is the state of the DeFi ecosystem?

Since 2020, the DeFi ecosystem has experienced significant milestones, with users seeing it as an opportunity to earn passive income. DeFi hit a significant milestone in August 2020 as the market surpassed $7 billion in value locked in several protocols.  Currently, over $62 billion of value is locked in the ecosystem. Similarly, DeFi applications are on a steady rise, significantly increasing the value of Ethereum as most dApps are accommodated on the Ethereum network.

Who first used the term HODL?

The true identity of the person who coined the word HODL is still not known. However, the original misspelling of the word occurred in a post by the user “GameKyuubi” on the Bitcointalk.org online forum on December 18, 2013.

Is DeFi risky?

Generally, cryptocurrencies are risky investments. This is because the market is extremely volatile, with the ability of coin prices to rise and fall rapidly. This, in turn, affects the interest rates investors who provide liquidity to decentralized protocols or stake tokens in crypto vaults stand to earn.

What is staking?

Staking is the process where users stake (lock) a particular amount of crypto tokens in a vault for a period of time in order to earn rewards which are usually restaked pending the expiration of a vesting period.

What are popular examples of DeFi protocols?

Notable examples of DeFi protocols include Compound, Balancer, Aave, Uniswap, Pancakeswap, etc.

• To date, 2020 remains one of the toughest years humanity has faced, all thanks to the COVID-19 pandemic. It also marks the success of the decentralized finance (DeFi) branch of the cryptocurrency industry.

• The pandemic prompted some financial institutions to shut their doors, resulting in some limited access to financial services. Aiming to “democratize” finance, DeFi opened doors to financial services in a permissionless and global manner.

• The returns of Hodling crypto and deploying these assets in DeFi vary. Hence, it is important to analyze the returns accumulated across strategies over a period of time. This guide will analyse returns from two common cryptocurrencies, Bitcoin and Ethereum, and two popular DeFi protocols – compound and Uniswap.

What Does HODLing Crypto Mean?

HODL is a trading strategy that is popular among cryptocurrency traders and serves as a long-term approach when investing in cryptocurrency. In the cryptocurrency market, emotions can run high – for example there is the fear of missing out (Fomo), fear, uncertainty and doubt (FUD), and other profit-eroding emotions. To curtail these emotions, crypto maximalists often hold on to the crypto assets in hopes that after a bear market, there might be a bullish run.

Generally, HODL is associated with cryptocurrency investors. However, the buying and selling strategy that it represents is not limited to the cryptocurrency industry alone.

What Does DeFi-ing Mean?

The decentralized finance ecosystem has become increasingly popular just two years after its development. With compound, Uniswap and Tokensets being among the most popular examples, DeFi is now a commonly sought-after stream of passive income among crypto enthusiasts. At the same time, Ether, the native token of the Ethereum blockchain, is the major collateral in many DeFi protocols, especially when it comes to lending and borrowing.

DeFi was created to address issues that traditional financial institutions have not solved over the years. Some of these issues include:

• Reducing the opacity in the financial system. This benefit is often overlooked as many think traditional institutions are more transparent. In the real sense, DeFi protocols are open-source, their users can see the codes, total liquidity and other details. Financial institutions have several blind spots and users rarely get to ask questions.
• Eliminating the presence of intermediaries. Centralization is associated with the traditional financial system, and this often comes with the presence of intermediaries, resulting in higher transaction fees and lower transaction speed. But DeFi is changing all of this by promoting efficiency and lower transaction fees.
• Increasing accessibility to finance: According to data from the World Bank, only about 5.3 billion people are banked, indicating that the global financial system is not fully accessible. This, understandably, has caused friction in several cohorts. But DeFi is ensuring that everyone with an internet connection has access to finance. People use DeFi not only to send funds internationally but also to access loans and other financial applications.

While these benefits stand out, there are certain risks associated with DeFi. These include smart contract risk, oracle risk, regulatory risk, scaling risk, and custody risk.

Returns of HODLing Bitcoin

Since its inception over a decade ago, Bitcoin has remained the topmost coin with the largest market capitalization. The first Bitcoin transaction occurred on January 12th, 2009, when Satoshi Nakamoto sent 10 Bitcoins to Hal Finney, a cryptographer.

In 2009, Bitcoin traded at $0 and slowly crawled up to $0.09 by July 17th, 2010. By April 2011, it traded at $1 and reached $29.60 in June, indicating a 2,960% return for investors who held their Bitcoin.

By 2013, Bitcoin reached $13.28 and further increased to $230 in April. It later tanked to $68.50 by July 2013. At the end of 2013, BTC soared to $1,237. This represented over 1705% returns for HODLers.

By early 2015, Bitcoin traded at around $315, before rebounding gradually. By May 2017, Bitcoin hovered between $1,000 to $2,000. By December, BTC soared to $19,345 and fluctuated for the next few years.

The Covid-19 pandemic in 2020 affected the global economy, with Bitcoin trading at $6,965 and rising to $19,157 by November. At the end of 2020, the price climbed to $29,000, showing a 416% increase in profit at the beginning of the year for Bitcoin HODLers. Bitcoin reached an all-time high (ATH) of $68,000 in November 2021. By May 2022, BTC tanked by over 50%, trading at $28,305. At the time of writing, Bitcoin is trading at $19,500. It is of utmost importance that investors check out market conditions and also do their own research before investing.

Source: Statista

How to calculate returns on crypto investment

To measure returns on crypto investment, the returns on investment (ROI) formula is used. The formula indicates growth in value over a certain period.

ROI = (FVI – IVI) / IVI * 100%

With:

FVI = Final value of investment

IVI = Initial value of investment

Let’s say an investor bought $1000 worth of Bitcoin a year ago. If the market climbs by 35% and the investor sells their asset for $1350, then the return on investment will be:

(1350-1000)/ 1000 * 100% = 35%

Returns on HODLing Ethereum

Ethereum is an open-source blockchain network and Ether is its native token. Invented by computer programmer Vitalik Buterin (among other co-founders) in 2015, Ethereum has had its own share of volatility.

Throughout 2015, Ether traded below $1. Ethereum broke through $1 in January 2016, reaching $12 by July 2016. By the end of 2017, Ethereum traded at $772, representing over 6000% returns for HODLers since January 2016.

2021’s NFT boom and major speculations influenced the cryptocurrency market and Ethereum reached an all-time high of $4000 by May and another all-time high of $4,800 in November 2021, bringing high returns to long-term HODLers. More recently, crypto enthusiasts witnessed the worst winter in 2022, with Ethereum shedding over 70% of its value.

Source: Statista

DeFi Returns: Compound

Compound is a decentralized blockchain protocol that runs on the Ethereum network. Compound, which exists as a decentralized application, enables decentralized finance (DeFi) features directly on the Ethereum blockchain. The protocol has its native ERC-20 token called COMP.

Serving as a stream of passive income, compound incentivizes participants with its COMP token. This way, users are often rewarded when they interact with compound protocol through borrowing, withdrawing or repaying loans. This incentivization helps to promote engagement on the platform.

COMP has a fixed supply of 10 million, with 4.2 million of the tokens earmarked for distribution to users of the protocol over a 4-year period. About 795,000 COMP tokens have also been reserved for incentivizing community governance.

By visiting Compound.finance, users can interact with the protocol directly using a dApp browser or regular browser equipped with wallets such as MetaMask and Trust wallet. Users who connect with the protocol can access collateralized loans or generate interest by depositing the tokens for lending.

With Ethereum serving as collateral, other tokens up for borrowing include USDC, DAI and USDT. Others include wrapped BTC, BAT, TUSD, and UNI. At the time of writing, Compound is offering an APY of 2.26%, 2.80%, and 3.00% for every USDC, DAI, and USDT staked in the protocol.

For instance, if a user stakes $500 worth of USDT for a specified period, such a user will expect an interest of $15 if APY stands at 3.00%. Between December 2018 and October 2019, Compound earned a return of 7.1%. By 2019, interest rates began to increase just as MakerDAO increased its stability fees.

DeFi Returns: Uniswap

Uniswap is a decentralized exchange protocol for digital assets. As an on-chain exchange, users can trade tokens which are often matched from asset reserves supplied by liquidity providers. These liquidity providers can earn returns on trading.

Getting returns from Uniswap depend on three factors: 

• The prices of assets at the time of supply and withdrawal.

• The size of the liquidity pool.

• The trading volume.

It is always necessary for investors to understand that future returns on Uniswap often vary from the time when liquidity is provided due to the impact of high crypto volatility. This means there is a risk of losing money during large and sustained movements in the price of underlying assets in comparison to HODLing them.

To understand how Uniswap returns work, take a look at this example: If a liquidity provider adds 10,000 DAI and 100 WETH to a pool (with a total value of $20,000), the liquidity pool will be a combination of 100,000 DAI and 1,000  ETH. As such, the amount supplied is approximately 10% of the liquidity pool. The liquidity provider receives a guaranteed 10% LP fees tokens from the pool. Fees on Uniswap vary, but range from 0.05% to 1% per pair.

Again, if an investor supplies $10,000 to a liquidity pool consisting of DAI-ETH tokens, this means the supply will be in an equal proportion of $5,000 DAI and $5,000 ETH. The returns will vary for investors who provided liquidity to the pools at different times due to the changes in DAI and ETH prices. Liquidity providers also are exposed to impermanent loss. Impermanent loss occurs when there is a difference between the value of the liquidity provider’s tokens and the underlying tokens that if they weren’t paired in the pool. 

Frequently Asked Questions

What is the state of the DeFi ecosystem?

Since 2020, the DeFi ecosystem has experienced significant milestones, with users seeing it as an opportunity to earn passive income. DeFi hit a significant milestone in August 2020 as the market surpassed $7 billion in value locked in several protocols.  Currently, over $62 billion of value is locked in the ecosystem. Similarly, DeFi applications are on a steady rise, significantly increasing the value of Ethereum as most dApps are accommodated on the Ethereum network.

Who first used the term HODL?

The true identity of the person who coined the word HODL is still not known. However, the original misspelling of the word occurred in a post by the user “GameKyuubi” on the Bitcointalk.org online forum on December 18, 2013.

Is DeFi risky?

Generally, cryptocurrencies are risky investments. This is because the market is extremely volatile, with the ability of coin prices to rise and fall rapidly. This, in turn, affects the interest rates investors who provide liquidity to decentralized protocols or stake tokens in crypto vaults stand to earn.

What is staking?

Staking is the process where users stake (lock) a particular amount of crypto tokens in a vault for a period of time in order to earn rewards which are usually restaked pending the expiration of a vesting period.

What are popular examples of DeFi protocols?

Notable examples of DeFi protocols include Compound, Balancer, Aave, Uniswap, Pancakeswap, etc.

• ‘Hodling’ is a cryptocurrency slang that works in the context of buying Bitcoin and other digital assets, and holding them without selling even when the market goes down or becomes extremely volatile. This slang encourages investors to hold cryptocurrencies in the event that the prices will surge.

• In April 2013, the price of Bitcoin stood at $130, and by December of the same year, it surged to $950. To date, HODL remains the tenet of several crypto evangelists.

• To date, 2020 remains one of the toughest years humanity has faced, all thanks to the COVID-19 pandemic. It also marks the success of the decentralized finance (DeFi) branch of the cryptocurrency industry.

• The pandemic prompted some financial institutions to shut their doors, resulting in some limited access to financial services. Aiming to “democratize” finance, DeFi opened doors to financial services in a permissionless and global manner.

• The returns of Hodling crypto and deploying these assets in DeFi vary. Hence, it is important to analyze the returns accumulated across strategies over a period of time. This guide will analyse returns from two common cryptocurrencies, Bitcoin and Ethereum, and two popular DeFi protocols – compound and Uniswap.

What Does HODLing Crypto Mean?

HODL is a trading strategy that is popular among cryptocurrency traders and serves as a long-term approach when investing in cryptocurrency. In the cryptocurrency market, emotions can run high – for example there is the fear of missing out (Fomo), fear, uncertainty and doubt (FUD), and other profit-eroding emotions. To curtail these emotions, crypto maximalists often hold on to the crypto assets in hopes that after a bear market, there might be a bullish run.

Generally, HODL is associated with cryptocurrency investors. However, the buying and selling strategy that it represents is not limited to the cryptocurrency industry alone.

What Does DeFi-ing Mean?

The decentralized finance ecosystem has become increasingly popular just two years after its development. With compound, Uniswap and Tokensets being among the most popular examples, DeFi is now a commonly sought-after stream of passive income among crypto enthusiasts. At the same time, Ether, the native token of the Ethereum blockchain, is the major collateral in many DeFi protocols, especially when it comes to lending and borrowing.

DeFi was created to address issues that traditional financial institutions have not solved over the years. Some of these issues include:

• Reducing the opacity in the financial system. This benefit is often overlooked as many think traditional institutions are more transparent. In the real sense, DeFi protocols are open-source, their users can see the codes, total liquidity and other details. Financial institutions have several blind spots and users rarely get to ask questions.
• Eliminating the presence of intermediaries. Centralization is associated with the traditional financial system, and this often comes with the presence of intermediaries, resulting in higher transaction fees and lower transaction speed. But DeFi is changing all of this by promoting efficiency and lower transaction fees.
• Increasing accessibility to finance: According to data from the World Bank, only about 5.3 billion people are banked, indicating that the global financial system is not fully accessible. This, understandably, has caused friction in several cohorts. But DeFi is ensuring that everyone with an internet connection has access to finance. People use DeFi not only to send funds internationally but also to access loans and other financial applications.

While these benefits stand out, there are certain risks associated with DeFi. These include smart contract risk, oracle risk, regulatory risk, scaling risk, and custody risk.

Returns of HODLing Bitcoin

Since its inception over a decade ago, Bitcoin has remained the topmost coin with the largest market capitalization. The first Bitcoin transaction occurred on January 12th, 2009, when Satoshi Nakamoto sent 10 Bitcoins to Hal Finney, a cryptographer.

In 2009, Bitcoin traded at $0 and slowly crawled up to $0.09 by July 17th, 2010. By April 2011, it traded at $1 and reached $29.60 in June, indicating a 2,960% return for investors who held their Bitcoin.

By 2013, Bitcoin reached $13.28 and further increased to $230 in April. It later tanked to $68.50 by July 2013. At the end of 2013, BTC soared to $1,237. This represented over 1705% returns for HODLers.

By early 2015, Bitcoin traded at around $315, before rebounding gradually. By May 2017, Bitcoin hovered between $1,000 to $2,000. By December, BTC soared to $19,345 and fluctuated for the next few years.

The Covid-19 pandemic in 2020 affected the global economy, with Bitcoin trading at $6,965 and rising to $19,157 by November. At the end of 2020, the price climbed to $29,000, showing a 416% increase in profit at the beginning of the year for Bitcoin HODLers. Bitcoin reached an all-time high (ATH) of $68,000 in November 2021. By May 2022, BTC tanked by over 50%, trading at $28,305. At the time of writing, Bitcoin is trading at $19,500. It is of utmost importance that investors check out market conditions and also do their own research before investing.

Source: Statista

How to calculate returns on crypto investment

To measure returns on crypto investment, the returns on investment (ROI) formula is used. The formula indicates growth in value over a certain period.

ROI = (FVI – IVI) / IVI * 100%

With:

FVI = Final value of investment

IVI = Initial value of investment

Let’s say an investor bought $1000 worth of Bitcoin a year ago. If the market climbs by 35% and the investor sells their asset for $1350, then the return on investment will be:

(1350-1000)/ 1000 * 100% = 35%

Returns on HODLing Ethereum

Ethereum is an open-source blockchain network and Ether is its native token. Invented by computer programmer Vitalik Buterin (among other co-founders) in 2015, Ethereum has had its own share of volatility.

Throughout 2015, Ether traded below $1. Ethereum broke through $1 in January 2016, reaching $12 by July 2016. By the end of 2017, Ethereum traded at $772, representing over 6000% returns for HODLers since January 2016.

2021’s NFT boom and major speculations influenced the cryptocurrency market and Ethereum reached an all-time high of $4000 by May and another all-time high of $4,800 in November 2021, bringing high returns to long-term HODLers. More recently, crypto enthusiasts witnessed the worst winter in 2022, with Ethereum shedding over 70% of its value.

Source: Statista

DeFi Returns: Compound

Compound is a decentralized blockchain protocol that runs on the Ethereum network. Compound, which exists as a decentralized application, enables decentralized finance (DeFi) features directly on the Ethereum blockchain. The protocol has its native ERC-20 token called COMP.

Serving as a stream of passive income, compound incentivizes participants with its COMP token. This way, users are often rewarded when they interact with compound protocol through borrowing, withdrawing or repaying loans. This incentivization helps to promote engagement on the platform.

COMP has a fixed supply of 10 million, with 4.2 million of the tokens earmarked for distribution to users of the protocol over a 4-year period. About 795,000 COMP tokens have also been reserved for incentivizing community governance.

By visiting Compound.finance, users can interact with the protocol directly using a dApp browser or regular browser equipped with wallets such as MetaMask and Trust wallet. Users who connect with the protocol can access collateralized loans or generate interest by depositing the tokens for lending.

With Ethereum serving as collateral, other tokens up for borrowing include USDC, DAI and USDT. Others include wrapped BTC, BAT, TUSD, and UNI. At the time of writing, Compound is offering an APY of 2.26%, 2.80%, and 3.00% for every USDC, DAI, and USDT staked in the protocol.

For instance, if a user stakes $500 worth of USDT for a specified period, such a user will expect an interest of $15 if APY stands at 3.00%. Between December 2018 and October 2019, Compound earned a return of 7.1%. By 2019, interest rates began to increase just as MakerDAO increased its stability fees.

DeFi Returns: Uniswap

Uniswap is a decentralized exchange protocol for digital assets. As an on-chain exchange, users can trade tokens which are often matched from asset reserves supplied by liquidity providers. These liquidity providers can earn returns on trading.

Getting returns from Uniswap depend on three factors: 

• The prices of assets at the time of supply and withdrawal.

• The size of the liquidity pool.

• The trading volume.

It is always necessary for investors to understand that future returns on Uniswap often vary from the time when liquidity is provided due to the impact of high crypto volatility. This means there is a risk of losing money during large and sustained movements in the price of underlying assets in comparison to HODLing them.

To understand how Uniswap returns work, take a look at this example: If a liquidity provider adds 10,000 DAI and 100 WETH to a pool (with a total value of $20,000), the liquidity pool will be a combination of 100,000 DAI and 1,000  ETH. As such, the amount supplied is approximately 10% of the liquidity pool. The liquidity provider receives a guaranteed 10% LP fees tokens from the pool. Fees on Uniswap vary, but range from 0.05% to 1% per pair.

Again, if an investor supplies $10,000 to a liquidity pool consisting of DAI-ETH tokens, this means the supply will be in an equal proportion of $5,000 DAI and $5,000 ETH. The returns will vary for investors who provided liquidity to the pools at different times due to the changes in DAI and ETH prices. Liquidity providers also are exposed to impermanent loss. Impermanent loss occurs when there is a difference between the value of the liquidity provider’s tokens and the underlying tokens that if they weren’t paired in the pool. 

Frequently Asked Questions

What is the state of the DeFi ecosystem?

Since 2020, the DeFi ecosystem has experienced significant milestones, with users seeing it as an opportunity to earn passive income. DeFi hit a significant milestone in August 2020 as the market surpassed $7 billion in value locked in several protocols.  Currently, over $62 billion of value is locked in the ecosystem. Similarly, DeFi applications are on a steady rise, significantly increasing the value of Ethereum as most dApps are accommodated on the Ethereum network.

Who first used the term HODL?

The true identity of the person who coined the word HODL is still not known. However, the original misspelling of the word occurred in a post by the user “GameKyuubi” on the Bitcointalk.org online forum on December 18, 2013.

Is DeFi risky?

Generally, cryptocurrencies are risky investments. This is because the market is extremely volatile, with the ability of coin prices to rise and fall rapidly. This, in turn, affects the interest rates investors who provide liquidity to decentralized protocols or stake tokens in crypto vaults stand to earn.

What is staking?

Staking is the process where users stake (lock) a particular amount of crypto tokens in a vault for a period of time in order to earn rewards which are usually restaked pending the expiration of a vesting period.

What are popular examples of DeFi protocols?

Notable examples of DeFi protocols include Compound, Balancer, Aave, Uniswap, Pancakeswap, etc.

• ‘Hodling’ is a cryptocurrency slang that works in the context of buying Bitcoin and other digital assets, and holding them without selling even when the market goes down or becomes extremely volatile. This slang encourages investors to hold cryptocurrencies in the event that the prices will surge.

• In April 2013, the price of Bitcoin stood at $130, and by December of the same year, it surged to $950. To date, HODL remains the tenet of several crypto evangelists.

• To date, 2020 remains one of the toughest years humanity has faced, all thanks to the COVID-19 pandemic. It also marks the success of the decentralized finance (DeFi) branch of the cryptocurrency industry.

• The pandemic prompted some financial institutions to shut their doors, resulting in some limited access to financial services. Aiming to “democratize” finance, DeFi opened doors to financial services in a permissionless and global manner.

• The returns of Hodling crypto and deploying these assets in DeFi vary. Hence, it is important to analyze the returns accumulated across strategies over a period of time. This guide will analyse returns from two common cryptocurrencies, Bitcoin and Ethereum, and two popular DeFi protocols – compound and Uniswap.

What Does HODLing Crypto Mean?

HODL is a trading strategy that is popular among cryptocurrency traders and serves as a long-term approach when investing in cryptocurrency. In the cryptocurrency market, emotions can run high – for example there is the fear of missing out (Fomo), fear, uncertainty and doubt (FUD), and other profit-eroding emotions. To curtail these emotions, crypto maximalists often hold on to the crypto assets in hopes that after a bear market, there might be a bullish run.

Generally, HODL is associated with cryptocurrency investors. However, the buying and selling strategy that it represents is not limited to the cryptocurrency industry alone.

What Does DeFi-ing Mean?

The decentralized finance ecosystem has become increasingly popular just two years after its development. With compound, Uniswap and Tokensets being among the most popular examples, DeFi is now a commonly sought-after stream of passive income among crypto enthusiasts. At the same time, Ether, the native token of the Ethereum blockchain, is the major collateral in many DeFi protocols, especially when it comes to lending and borrowing.

DeFi was created to address issues that traditional financial institutions have not solved over the years. Some of these issues include:

• Reducing the opacity in the financial system. This benefit is often overlooked as many think traditional institutions are more transparent. In the real sense, DeFi protocols are open-source, their users can see the codes, total liquidity and other details. Financial institutions have several blind spots and users rarely get to ask questions.
• Eliminating the presence of intermediaries. Centralization is associated with the traditional financial system, and this often comes with the presence of intermediaries, resulting in higher transaction fees and lower transaction speed. But DeFi is changing all of this by promoting efficiency and lower transaction fees.
• Increasing accessibility to finance: According to data from the World Bank, only about 5.3 billion people are banked, indicating that the global financial system is not fully accessible. This, understandably, has caused friction in several cohorts. But DeFi is ensuring that everyone with an internet connection has access to finance. People use DeFi not only to send funds internationally but also to access loans and other financial applications.

While these benefits stand out, there are certain risks associated with DeFi. These include smart contract risk, oracle risk, regulatory risk, scaling risk, and custody risk.

Returns of HODLing Bitcoin

Since its inception over a decade ago, Bitcoin has remained the topmost coin with the largest market capitalization. The first Bitcoin transaction occurred on January 12th, 2009, when Satoshi Nakamoto sent 10 Bitcoins to Hal Finney, a cryptographer.

In 2009, Bitcoin traded at $0 and slowly crawled up to $0.09 by July 17th, 2010. By April 2011, it traded at $1 and reached $29.60 in June, indicating a 2,960% return for investors who held their Bitcoin.

By 2013, Bitcoin reached $13.28 and further increased to $230 in April. It later tanked to $68.50 by July 2013. At the end of 2013, BTC soared to $1,237. This represented over 1705% returns for HODLers.

By early 2015, Bitcoin traded at around $315, before rebounding gradually. By May 2017, Bitcoin hovered between $1,000 to $2,000. By December, BTC soared to $19,345 and fluctuated for the next few years.

The Covid-19 pandemic in 2020 affected the global economy, with Bitcoin trading at $6,965 and rising to $19,157 by November. At the end of 2020, the price climbed to $29,000, showing a 416% increase in profit at the beginning of the year for Bitcoin HODLers. Bitcoin reached an all-time high (ATH) of $68,000 in November 2021. By May 2022, BTC tanked by over 50%, trading at $28,305. At the time of writing, Bitcoin is trading at $19,500. It is of utmost importance that investors check out market conditions and also do their own research before investing.

Source: Statista

How to calculate returns on crypto investment

To measure returns on crypto investment, the returns on investment (ROI) formula is used. The formula indicates growth in value over a certain period.

ROI = (FVI – IVI) / IVI * 100%

With:

FVI = Final value of investment

IVI = Initial value of investment

Let’s say an investor bought $1000 worth of Bitcoin a year ago. If the market climbs by 35% and the investor sells their asset for $1350, then the return on investment will be:

(1350-1000)/ 1000 * 100% = 35%

Returns on HODLing Ethereum

Ethereum is an open-source blockchain network and Ether is its native token. Invented by computer programmer Vitalik Buterin (among other co-founders) in 2015, Ethereum has had its own share of volatility.

Throughout 2015, Ether traded below $1. Ethereum broke through $1 in January 2016, reaching $12 by July 2016. By the end of 2017, Ethereum traded at $772, representing over 6000% returns for HODLers since January 2016.

2021’s NFT boom and major speculations influenced the cryptocurrency market and Ethereum reached an all-time high of $4000 by May and another all-time high of $4,800 in November 2021, bringing high returns to long-term HODLers. More recently, crypto enthusiasts witnessed the worst winter in 2022, with Ethereum shedding over 70% of its value.

Source: Statista

DeFi Returns: Compound

Compound is a decentralized blockchain protocol that runs on the Ethereum network. Compound, which exists as a decentralized application, enables decentralized finance (DeFi) features directly on the Ethereum blockchain. The protocol has its native ERC-20 token called COMP.

Serving as a stream of passive income, compound incentivizes participants with its COMP token. This way, users are often rewarded when they interact with compound protocol through borrowing, withdrawing or repaying loans. This incentivization helps to promote engagement on the platform.

COMP has a fixed supply of 10 million, with 4.2 million of the tokens earmarked for distribution to users of the protocol over a 4-year period. About 795,000 COMP tokens have also been reserved for incentivizing community governance.

By visiting Compound.finance, users can interact with the protocol directly using a dApp browser or regular browser equipped with wallets such as MetaMask and Trust wallet. Users who connect with the protocol can access collateralized loans or generate interest by depositing the tokens for lending.

With Ethereum serving as collateral, other tokens up for borrowing include USDC, DAI and USDT. Others include wrapped BTC, BAT, TUSD, and UNI. At the time of writing, Compound is offering an APY of 2.26%, 2.80%, and 3.00% for every USDC, DAI, and USDT staked in the protocol.

For instance, if a user stakes $500 worth of USDT for a specified period, such a user will expect an interest of $15 if APY stands at 3.00%. Between December 2018 and October 2019, Compound earned a return of 7.1%. By 2019, interest rates began to increase just as MakerDAO increased its stability fees.

DeFi Returns: Uniswap

Uniswap is a decentralized exchange protocol for digital assets. As an on-chain exchange, users can trade tokens which are often matched from asset reserves supplied by liquidity providers. These liquidity providers can earn returns on trading.

Getting returns from Uniswap depend on three factors: 

• The prices of assets at the time of supply and withdrawal.

• The size of the liquidity pool.

• The trading volume.

It is always necessary for investors to understand that future returns on Uniswap often vary from the time when liquidity is provided due to the impact of high crypto volatility. This means there is a risk of losing money during large and sustained movements in the price of underlying assets in comparison to HODLing them.

To understand how Uniswap returns work, take a look at this example: If a liquidity provider adds 10,000 DAI and 100 WETH to a pool (with a total value of $20,000), the liquidity pool will be a combination of 100,000 DAI and 1,000  ETH. As such, the amount supplied is approximately 10% of the liquidity pool. The liquidity provider receives a guaranteed 10% LP fees tokens from the pool. Fees on Uniswap vary, but range from 0.05% to 1% per pair.

Again, if an investor supplies $10,000 to a liquidity pool consisting of DAI-ETH tokens, this means the supply will be in an equal proportion of $5,000 DAI and $5,000 ETH. The returns will vary for investors who provided liquidity to the pools at different times due to the changes in DAI and ETH prices. Liquidity providers also are exposed to impermanent loss. Impermanent loss occurs when there is a difference between the value of the liquidity provider’s tokens and the underlying tokens that if they weren’t paired in the pool. 

Frequently Asked Questions

What is the state of the DeFi ecosystem?

Since 2020, the DeFi ecosystem has experienced significant milestones, with users seeing it as an opportunity to earn passive income. DeFi hit a significant milestone in August 2020 as the market surpassed $7 billion in value locked in several protocols.  Currently, over $62 billion of value is locked in the ecosystem. Similarly, DeFi applications are on a steady rise, significantly increasing the value of Ethereum as most dApps are accommodated on the Ethereum network.

Who first used the term HODL?

The true identity of the person who coined the word HODL is still not known. However, the original misspelling of the word occurred in a post by the user “GameKyuubi” on the Bitcointalk.org online forum on December 18, 2013.

Is DeFi risky?

Generally, cryptocurrencies are risky investments. This is because the market is extremely volatile, with the ability of coin prices to rise and fall rapidly. This, in turn, affects the interest rates investors who provide liquidity to decentralized protocols or stake tokens in crypto vaults stand to earn.

What is staking?

Staking is the process where users stake (lock) a particular amount of crypto tokens in a vault for a period of time in order to earn rewards which are usually restaked pending the expiration of a vesting period.

What are popular examples of DeFi protocols?

Notable examples of DeFi protocols include Compound, Balancer, Aave, Uniswap, Pancakeswap, etc.