Decentralized Finance (DeFi), built on blockchain and smart contracts, aims to reshape the functions of traditional financial intermediaries, allowing users to directly participate in financial activities such as lending, trading, and payments. For ordinary users, participating in DeFi projects can generate returns, but the process and risks are distinctly different from traditional financial products.

Main Ways to Earn Returns in DeFi

Users typically earn returns in DeFi not by relying on direct price appreciation, but by committing assets to specific protocols or providing specific services to earn interest or fees. Here are several mainstream methods:

How Ordinary People Can Earn Returns Using DeFi Products: Main Methods and Risk Analysis

  • Lending Protocol Deposits: Users can deposit their cryptocurrency assets (e.g., ETH, USDC) into lending protocols (e.g., Aave, Compound). Other users borrow these assets by paying interest, and depositors earn interest from this. Interest rates are determined by market supply and demand dynamics.
  • Liquidity Provision (Liquidity Mining): Users can deposit a pair of crypto assets (e.g., ETH/USDC) into a liquidity pool of a Decentralized Exchange (DEX, such as Uniswap, PancakeSwap) to become a liquidity provider. Traders pay fees when executing trades within the pool, and these fees are distributed proportionally to all liquidity providers. Returns depend on trading volume, pool size, and asset composition.
  • Staking: In blockchains employing a Proof-of-Stake (PoS) mechanism (e.g., Ethereum 2.0) or specific DeFi protocols, users can lock up tokens on the network to support network security and operations. In return, they receive newly minted tokens as rewards, known as staking rewards.
  • Yield Aggregation and Optimization: For users who wish to simplify operations, yield aggregators (e.g., Yearn Finance) use automated strategies to deploy user funds across multiple DeFi protocols, seeking the best return opportunities and automatically reinvesting to optimize yields. Users simply deposit assets.

Potential Risks and Challenges

DeFi's openness brings the possibility of high potential returns, but it also comes with significant risks. Users must fully understand these risks before participating:

  • Smart Contract Risk: The core of DeFi protocols is code. If smart contracts contain undiscovered vulnerabilities, they could be exploited by hackers, leading to fund theft. Even audited projects cannot guarantee 100% security.
  • Impermanent Loss: Primarily occurs when providing liquidity. When the price ratio of two assets in a liquidity pool changes, liquidity providers may incur losses compared to simply holding the assets. Sometimes, trading fee earnings may not be sufficient to cover these losses.
  • Liquidation Risk: When over-collateralizing a loan in a lending protocol, if the collateral value falls below the protocol's set liquidation threshold due to market downturns, the collateral may be forcibly sold to repay the loan, and the borrower will face asset loss.
  • Technical Barrier and Operational Risk: Using DeFi requires managing one's own wallet (e.g., MetaMask), understanding Gas fee mechanisms, and confirming transaction details. Operational errors, such as sending assets to the wrong address or approving malicious contracts, can lead to irreversible asset loss.
  • Market and Liquidity Risk: Some small or emerging DeFi protocols have limited trading depth, and users may face issues such as difficulty in timely asset exchange or significant price slippage. Protocols themselves may also cease operation due to liquidity exhaustion.
  • Regulatory Uncertainty: The global regulatory framework for DeFi is still evolving, and future policy changes may impact specific protocols or operational methods, leading to compliance risks.

Realistic Considerations for Return Levels

Advertised Annual Percentage Yields (APYs) for DeFi projects can be high, but users need to exercise caution when evaluating them:

How Ordinary People Can Earn Returns Using DeFi Products: Main Methods and Risk Analysis

  • Advertised APYs of 100% or even higher are usually unsustainable and may be designed to attract liquidity in the early stages of a project, potentially carrying "pump" or Ponzi scheme risks.
  • Actual stable returns (e.g., from depositing mainstream stablecoins) typically range from single-digit to low double-digit percentages, depending on market conditions and the protocol.
  • High returns often correlate with high risks; for example, providing liquidity for highly volatile assets may yield higher fees but also entails greater impermanent loss risk.
  • Returns are often paid in project tokens, whose prices can fluctuate wildly, so actual returns must consider changes in token value.

For ordinary people looking to try DeFi, it is advisable to start with smaller amounts, use mainstream protocols that have been market-tested for a long time, and continuously learn relevant knowledge to manage risks. DeFi offers innovative ways to participate in finance, but it is not a risk-free shortcut to wealth.