The recent crypto meltdown spurred by the collapse of the Terra ecosystem has indeed been an eye-opener to the cryptocurrency industry. Few fintech platforms have survived the crypto winter and remained standing firm; one noteworthy mention that has stood the test of time is no other than Cake DeFi, a reliable all-in-one investment platform that lets you generate high returns on your cryptocurrency, yielding passive cashflow so that you can sit back and relax! Indeed, Cake DeFi has been quick to establish a solid reputation for itself and to garner the trust of many happy users like myself.

Cake DeFi scores excellent on Trustpilot

There are several ways to generate passive cashflow on Cake DeFi, such as

• Liquidity Mining

• Staking

• Freezer

• Lending

• Borrowing

A new recent addition to this list is the Earn feature, which is the focus of the article today.

The Rationale Behind Earn

Imagine that, as an early investor, you had only Bitcoin. Stumbling upon Cake DeFi, you are overwhelmed with its many (exciting) offerings, such as staking, liquidity mining and lending — you become unsure of which service you should avail. You are attracted to the high yields of liquidity mining that promises returns of up to 50% APY, but at the same time are perplexed about how liquidity mining works, and why it involves a pair of coins, the other mainly being DFI. On doing a Google deep dive, you become hesitant to participate in liquidity mining on hearing the term ‘impermanent losses’, which imply that the quantity of your Bitcoin could actually dwindle! You become demotivated to invest. After all, all you need is a simple solution to grow your Bitcoin — but at the same time the investing process seems rather complicated!

The Problem With Liquidity Mining: Impermanent Losses

Liquidity Mining (LM) is the process whereby users supply liquidity to decentralized financial applications, and in return receive lucrative rewards for doing so. These collection of assets are known as liquidity pools which comprise 2 unique assets in equal proportions. When investors swap one asset for the other, the fees charged for this transaction gets paid to the investors who contribute assets to these liquidity pools, incentivizing participation in liquidity mining.

When the price of an asset moves differently from that of the other in the liquidity mining pool, impermanent losses occur. This occurs because the decentralized exchange (automated money maker) always tries to maintain an equal proportion between the 2 assets; if the price of one asset increases rapidly relative to the other, the quantity of the former has to reduce, to maintain a constant ratio (50:50) between the 2 assets.

To roughly illustrate this concept, have a look at the following scenario.

Let’s make the following assumptions:

1 DFI = 1 USD

1 Bitcoin = 1000 USD = 1000 DFI

You participate in the BTC-DFI liquidity mining (LM) pool, which contains 10 BTC and 10,000 DFI, which is worth 20,000 USD in total.

By contributing 1 Bitcoin and 1,000 DFI into the pool, you own a 10% share (worth 2000 USD) of the BTC-DFI LM pool.

Let’s say, Bitcoin then doubles in value to 2000 USD, whilst that of DFI remains the same. As such, the total value of the LM pool now becomes 30,000 USD. Recall that the LM pool rebalances assets in such a way that both the assets are in equal proportions to each other; hence BTC and DFI must be worth 15,000 USD each. As such, there are now 7.5 Bitcoins and 1500 DFI in the pool. As you own 10% share of this LM pool, your 1 BTC has been reduced to 0.75 BTC, whilst your DFI holdings have gone up from 1,000 to 1,500 DFI (the amount of share of the LM pool remains the same, whilst the amounts of your assets change dynamically). Hence impermanent losses would occur if you decided to withdraw your assets at this point of time, as you would now have less Bitcoin than you would have initially, had you held onto Bitcoin instead of participating in liquidity mining.

As the name implies, impermanent losses aren’t permanent nor are they realized until the point of asset withdrawal, as prices can change dynamically according to market conditions and can hence potentially reverse any impermanent losses. The risks of these losses are mitigated if the assets are held for a longer period of time in the LM pool, or if both assets have good long-term potential.

As such, although fairly rewarding, liquidity mining can still represent a rather daunting investment avenue from the risks of impermanent losses (as explained above) and that of the smart contract and project itself. Having said that, Cake DeFi has recently pioneered an innovative financial solution which seeks to mitigate such risks.

Introducing Earn

Earn is a revolutionary way to generate returns on your cryptocurrencies, without the risks and complexities associated with liquidity mining. In a nutshell, Earn combines the best of both worlds of the high yields from liquidity mining with the stability and security of a lending/ staking service. It can be likened to a one-sided liquidity mining that allows cash flow generation from just a single type of asset.

How Does It Work?

After allocating one type of cryptocurrency in Earn, it will be paired with another another crypto (depending on the type and amount of crypto allocated) and then invested into a Liquidity Mining pool. Rewards will be paid out every 24 hours (in the same type of cryptocurrency that the user allocates), minus Cake DeFi’s fees and a fixed percentage of which will be contributed to the volatility protection pool.

Earn has a volatility protection pool which aims to cover users’ volatility loss. After every 24 hours of participation in the Earn product, investors will get 1% coverage of the volatility protection up to a maximum of 100% coverage, after 100 days. At the time of writing, the volatility protection pool stands at $100,323.85.

Pros

• Allows participation in liquidity mining with a single type of cryptocurrency.

• Competitive returns of up to 10.79% APY on your cryptocurrencies.

• Ability to auto-compound returns.

• A volatility protection pool protects against risks associated with the crypto market’s volatility.

• No Counterparty Risks, as there are no institutional partners involved.

Cons

• Currently only limited to Bitcoin and DFI (further coins to be added in the future!)

• Volatility protection pool is entirely dependent on the balance in the pool — even if a user manages to achieve 100% coverage based on the conditions stated above, the said coverage is not guaranteed.

• Lower APYs compared to directly investing in liquidity mining itself.

• Earn is not available on the desktop interface.

How To Start Using Earn?

• Sign up for Cake DeFi, if you don’t already have an account!

• Pass KYC verification and avail a $50 signup bonus from your first qualifying deposits! Learn more about how to qualify for the signup bonuses here.

• On the Cake DeFi app, go to ‘Bake’, then ‘Earn’

• Allocate either BTC or DFI by clicking on ‘Start Earning’.

• On the next few pages, you will be provided with further information on volatility protection, and FAQs on Earn.

• Indicate the amount of asset and type of crypto that you wish to allocate.

• A summary of your entry will be provided. Check the details and click ‘Confirm’.

• Congratulations for having made your Earn entry! Rewards will be paid in the native currency of your choice, every 24 hours. The % of volatility protection will increase by 1% every day for the next 100 days.

Is Earn The Right Choice For Me?

This entirely depends on your risk tolerance and investment preferences!

• If you are investing for the long-term, and are bullish on both the assets offered in the liquidity mining pools, you can perhaps stick with liquidity mining which offers higher yields, at the risk of impermanent losses should the price of the assets move differently from each other.

• If you are looking for a relatively safer, shorter term investment option, then Earn might be just the right solution for you, as it reaps the high yields of liquidity mining, minus the potential downsides of impermanent losses and volatility from the liquidity pools.

Whichever option you choose, rest assured that Cake DeFi is a sound investment option to generate passive cashflow from your idle cryptocurrencies! Sign up here to get a free $50 signup bonus, and embark on your journey of passive income today!

For more information on Cake DeFi, feel free to check out my articles in this collection!

Some materials used for this post has been taken from the official Cake DeFi blog.

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