[ANALYSIS]: Where can I earn the best yields for Polygon (MATIC) tokens?
Alright, you seem to be sold on the future of Polygon. You have bought Polygon (MATIC) tokens and are now wondering where do I invest them to earn additional returns?
You have heard of terms such as Staking, Liquidity Mining, Yield Farming, and Lending. But you don’t know the potential yields of each and the key risks/ downsides of each.
In this post, we will explore the potential returns you can earn with Polygon tokens, the different ways you can earn them, and the risks/ downsides of each.
Before we begin a few things to note or disclaimers to give:
This is not financial advice. This content is for educational purposes only. Please do your own research before investing.
In this post, we will explore only decentralized apps or platforms for earning additional returns.
I have actively tried each of the strategies discussed in this post and am still engaged in running a few of them.
I actively stake my Polygon (MATIC) tokens with my own validator — Girnaar Nodes. Full disclosure: If you decide that staking is the best strategy for you and if stake with our node, we stand to derive some monetary benefits from this in the future. Currently, we are running our node at 0% commission.
With that out of the way, let’s analyze.
There are 4 key ways to earn extra/ passive income from your Polygon tokens.
Here is a quick summary of their returns. Skip to the end to see a summary of returns vs pros & cons. We highly recommend reading through it to understand each one better.
Let’s explore them one by one.
Expected return: 9–10% annual return (non-compounded)
This is the simplest and one of the safest ways to earn an additional return on your Polygon tokens. Polygon is a Proof-of-Stake (POS) blockchain which means you need to stake (lock) tokens in to earn a chance to mine a block and hence earn a return. To understand more about the POS concepts, check out this previous post.
To understand how staking returns are calculated and where can you get the most updated returns, check out this link.
Centralized platforms such as Nexo may offer higher returns but they bring in a major bigger risk — no ownership of your tokens. As we believe in the core concept of crypto (own your tokens), we will not be discussing them here. I have written a separate post on whether you should stake on centralized platforms such as Nexo or directly on Polygon.
Pros of Staking:
One of the best risk-weighted returns. The primary risk is only the price fluctuation of Polygon (MATIC) tokens.
You are directly interacting with Polygon’s smart contracts. Polygon is issuing the tokens to you from its treasury and hence the risk of default is almost nil.
Returns are less volatile throughout the year compared to other strategies.
Cons of Staking:
Liquidity: Once your tokens are locked, unstaking takes 2–3 days. There are liquid staking solutions that have come up, which we will discuss in upcoming posts. So watch this space.
Fees: The staking is done on the Ethereum network and hence staking and unstaking both require Ethereum gas fees which can be quite high.
Expected return: 0.2–8.7%* annual return
*as on March 31st, 2022
That’s a wide range. There are multiple protocols offering a yield on Polygon (MATIC) tokens. Just like a decentralized bank, you can deposit MATIC tokens into these DApps to earn a return. They in turn lend it out to traders, arbitrageurs, or anyone else who pays a higher rate of return on borrowing.
Pros of Lending:
Chances of higher return: The returns here are variable. In a volatile market, traders come in to take advantage of opportunities. They need to leverage to make higher returns. Hence, the demand for crypto loans goes up and so do the returns. In a sideways market, the opposite is true. Expect lower returns.
Overcollateralized loans: So far, crypto platforms have been taking more than adequate collateral when they lend out your tokens. They also have the right smart contracts in place to liquidate the collateral to protect your capital.
Cons of Lending:
Highly volatile returns: As demand for borrowing crypto changes, so does the returns. You can’t put money in and forget. You have to keep monitoring and moving your money.
Keep moving platforms: The more popular a platform gets, the more deposits flock to it, reducing the returns. Then a new one comes up offering higher returns. For example, Aave is one of the older and more popular platforms and hence offers the lowest return (seen in the table above). ForTube is new and has one of the lowest liquidity and hence high returns.
Expected return: Unknown — can be high
Okay so yield farming is a simple high-risk strategy. It involves a series of lending and borrowing.
Say you have 1,000 Polygon (MATIC) tokens.
You deposit on a lending platform such as Aave
You get to borrow another asset against it such as USDC
You borrow USDC, swap it for more MATIC
You deposit MATIC again
The above strategy works if the return on borrowing is lower than deposit effectively.
Here is a detailed guide on how to execute a yield farm on Aave.
Pros of Yield Farming:
Returns can be exponential: You can potentially earn a multiplier return in these strategies but you really need to have an active track on opportunities. The APY and the scenario keeps changing quite frequently.
Cons of Yield Farming:
Liquidation: If the market fluctuates quite a bit, you could get liquidated as you are levered in this strategy. Hence you could lose your capital.
Quasi-active: Though considered a passive income stream, yield farming requires an active track of prices, APY and position health to make sure you make money and don’t lose money.
Expected return: 16–80%+ (can also become negative)
In this strategy, you act like a market maker. Consider yourself like a forex exchange. If a forex exchange deals in 2 currencies say USD vs INR, they maintain a balance of both.
You buy USD at say 77 INR and you sell USD at 79 INR. The difference is what you earn.
Same way when you become a liquidity miner for say an ETH-MATIC pair, traders will come to you for exchanging ETH for MATIC or vice versa. You charge them a spread and earn the fee. However, you don’t need to do this actively. You can contribute to the liquidity pool of any Decentralized Exchange such as UniSwap, QuickSwap, SushiSwap, etc. and become a liquidity miner. All transactions happen automated. You simply pocket the standard flat fees.
To understand this concept more, watch out for our upcoming blogs on liquidity mining.
For now, to understand the returns simply go to Liquidity Folio and head to Pools. It will show you the best returns across all pools for MATIC tokens.
Pros of Liquidity Mining:
This is actually an automated business and can keep earning a lot of return. As traders move from centralized exchanges (CEX) to decentralized exchanges (DEX), the returns will swell.
2. As you deal in 2 currencies, you can in a way hedge your bets.
Cons of Liquidity Mining
You have to deal in 2 currencies (currency pair). This means in addition to MATIC, you need to invest in another token too. The riskier the second token, the higher the return you get but if the other token tanks, your entire position can tank.
The biggest con of liquidity mining is a concept called impermanent loss. The short explanation of this is if you deal say in MATIC and USDC, as MATIC price keeps going up, people will sell you USDC and buy MATIC, reducing your MATIC stack and increasing your USDC stack. Whereas you would have liked to hold MATIC more, as the price is increasing.
For a detailed explanation of impermanent loss, watch this video.
For folks looking for the best long-term risk-weighted for a passive income or to simply grow their Polygon (MATIC) bags, Staking seems like the best option. Stake and let it grow. Lower market and return volatility risk. For folks looking to actively grow their bags, look at Liquidity Mining or Yield Farming.
Quick Comparison of Passive Income Strategies for Polygon Tokens:
*returns are estimated on a best effort basis and as of 31st March 2022.
If you are looking to stake Polygon (MATIC), check out Girnaar Nodes.
Girnaar Nodes is an Indian-origin VALIDATOR on POLYGON with top performance and currently offering 0% commission. Stake your MATIC tokens with us directly on the Polygon blockchain. See your Polygon (MATIC) bags grow while we work on the tech under the hood.
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