From Wall Street to Web3: DeFi Strategies for the Traditional Investor

Cryptocurrencies are becoming increasingly integrated into the traditional financial system. They’re no longer just a tool for crypto-anarchists or a playground for gamblers. Today, the crypto world has evolved into a full-fledged financial ecosystem, with multi-layered derivatives attracting institutional investors. DeFi goes far beyond simply buying Bitcoin and Ethereum—it’s much more intriguing. In this article, we’ll explore how traditional investors can find their advantages in this rapidly growing sector.

Entry Basics for Traditional Finance Investors

Basic Concepts

• Блокчейне is a public, decentralized, and immutable ledger that automatically records ownership and transfers of monetary units.
• Cryptocurrency is a new form of digital asset that exists and functions based on mathematical algorithms within a blockchain.
• Modern blockchains support the creation of tokens and Decentralized Financial (DeFi) services, enabling users to perform actions similar to those on traditional financial markets (lending, borrowing, spot and futures trading, etc.).
• Decentralized Exchange (DEX) is a platform for exchanging cryptocurrencies without intermediaries, where transactions occur directly between users.
• Liquidity Pool is a special reserve on decentralized exchanges that contains pairs of assets. It enables token swaps and serves as the foundation for automated market makers (AMMs), allowing trades without the involvement of third-party brokers.
• Smart Contract is a program on the blockchain that automatically executes the terms of a deal when the specified conditions are met. It’s like a digital agreement that doesn’t require intermediaries.

What Backs Cryptocurrencies?

Cryptocurrencies aren’t backed by physical goods or guaranteed by any government or company, unlike fiat currencies, which raises a crucial question: why do they hold any value at all? Unlike stocks, real estate, or commodities, cryptocurrencies cannot be valued using standard methods such as discounted cash flow analysis or estimating demand for their use in production. Unlike fiat currencies, whose value is determined by central banks, cryptocurrency prices are determined mostly through game theory. Each market participant values a cryptocurrency based on their expectations of how others will value it.

Why Do We Need Cryptocurrencies?

The key problem that cryptocurrencies and blockchain solve is the issue of trust. Traditionally, contracts and transactions required third parties, such as courts or notaries, to enforce agreements, which relied on trust. Blockchain removes the need for these intermediaries by offering a public, decentralized, and immutable ledger. This provides security and transparency, eliminating the need for trust in external arbiters. In essence, cryptocurrencies enable financial transactions without the need for intermediaries.

How Does DeFi Work?

DeFi, or decentralized finance, provides an alternative to traditional financial systems by replacing intermediaries like banks, brokers, and exchanges with smart contracts. Users interact with DeFi through decentralized applications (dApps), which function much like traditional banking or financial apps. However, all transactions happen directly on the blockchain without any intermediaries.

The key advantage of DeFi is its openness and accessibility: anyone with internet access can use these services without relying on third parties. Additionally, it is nearly impossible to block a user’s access to the entire DeFi ecosystem. Restrictions can only apply to specific services through IP blocking or KYC requirements, though most DeFi platforms avoid such measures.

How Do Decentralized Exchanges (DEXs) Work?

On traditional centralized exchanges, trades are executed through an order book system. It is a list of buy and sell orders where buyers and sellers place their orders, and market makers help match them. In DeFi, order books are rarely used due to infrastructure complexity, the need to maintain constant liquidity, and the centralization risks involved. Although some interesting order book solutions like Hyperliquid have emerged on DEXs over the past year, their long-term viability is still to be proven.

Instead of order books, most DEXs use liquidity pools – special reserves where users deposit their assets, creating token pairs (e.g., ETH/USDC). These pools are managed by smart contracts, allowing users to exchange tokens without intermediaries. When someone wants to swap one token for another, the trade executes through the pool, and liquidity providers earn a fee for facilitating the exchange.

The main advantage of this system is that it simplifies trading. Unlike with an order book, where a trade might not happen without a matching offer, a liquidity pool is always ready for a swap since assets are already available. Liquidity providers are key players in the DEX ecosystem and the broader DeFi space, which we’ll explore further as we dive deeper into the current state of the crypto market.

State of the Cryptocurrency Market in Fall 2024

Bitcoin Domination

The current cryptocurrency market is marked by Bitcoin’s overwhelming dominance over other digital assets. Bitcoin’s dominance index exceeds 57% and shows no significant signs of decline. There are three main reasons for this: the network effect of being the first cryptocurrency, the approval of Bitcoin ETFs, and the rapid increase in the number and issuance of altcoins.

Ethereum Has Fallen Short of Expectations

For the past two years, Ethereum has been in a downtrend against Bitcoin. The approval of the Ethereum ETF, which was expected to reverse the situation, turned out to be a “sell the news” event. This is although Ethereum is in its best technical state since its inception. After the recent Dencun upgrade, fees on Layer 2 networks (rollups) have dropped by hundreds or even thousands of times, now amounting to mere fractions of a cent. This drastic reduction in fees has led to a user migration from the main network, lowering fees there tenfold. As a result, transaction costs rarely exceed a dollar.

Altcoins Are Bleeding

The rest of the altcoin market, with a few exceptions, has performed much worse against Bitcoin than Ethereum. While the situation looks slightly better against the dollar, this improvement is only noticeable when measuring from the very bottom of the bear market in December 2022. An altseason in its traditional meaning, when nearly everything rises, hasn’t arrived, and likely won’t, due to the market’s maturation, increased institutional presence, and the explosion in the number of altcoins. Most retail investors have been stuck so-called “fundamental altcoins,” missing Bitcoin’s rally to historical highs, as has often been the case.

Institutionalization of the Cryptocurrency Market

Record Inflows via Bitcoin ETF

The rise of Bitcoin, followed by the rest of the cryptocurrency market from October 2023 to April 2024, was primarily driven by the anticipation and launch of Bitcoin ETFs. These Bitcoin ETFs serve as a key channel for liquidity from traditional financial markets into the cryptocurrency space. Since their launch, over eight months, Bitcoin ETFs have brought in more than $17 billion in net inflows.

Most of the inflows occurred from January to March, and then nearly stopped for two months. On March 12, there was a record inflow of $1.04 billion, and two days later, Bitcoin reached a new all-time high of $73,738. Since the beginning of Bitcoin ETF trading, a clear correlation has emerged between inflows into Bitcoin ETFs and the price dynamics of $BTC.

Outflows via Ethereum ETF

It was expected that the launch of Ethereum ETFs would become the next major channel for liquidity into the cryptocurrency markets, triggering the much-anticipated altseason. However, these hopes have yet to materialize — cumulative outflows still exceed inflows. The outflows are largely driven by the Greyscale Ethereum Trust being converted into an ETF and becoming liquid, which led many previously locked-in investors to create massive selling pressure.

When Crypto Bullrun Starts?

Money Supply Growth Is Key

Frankly speaking, the price action at the end of 2023 and the beginning of 2024 wasn’t a bull market, but rather a bullish absorption of the declines from the previous bear market years. Overall, the rise in Bitcoin’s price, much like the stock market, is tied to the increase in money supply provided by global central banks. This isn’t just a correlation – it’s the growth in money supply that triggers prolonged rallies in financial markets. Of course, specific events, such as the approval of Bitcoin ETFs or the AI boom in the stock market, can temporarily impact individual assets. However, financial markets as a whole rely on central bank policies and the expansion of the money supply.

Awaiting Quantitative Easing

To fully exit the 2.5 years of reduced money supply, a combination of factors is required: a weakening dollar, improved lending conditions, and increased issuance of government debt. The main factor here is improved lending conditions, which depend on the U.S. Federal Reserve lowering the key interest rate – a process that is already underway. As a result of quantitative easing, new liquidity will flood the markets, positioning both stock and cryptocurrency markets for growth. We will likely feel the effects of this throughout 2025 and 2026.

Exodus to DeFi Is Just Beginning

Growth of DeFi and User Experience Challenges

Back in the day, the Ethereum blockchain became the first real innovation after Bitcoin that offered something fundamentally new. Initially launched as a platform for smart contracts, Ethereum has evolved into a full-fledged financial ecosystem with a variety of tokens, stablecoins, and DeFi tools. However, DeFi still suffers from poor user experience; seed phrases and dozens of different blockchains and wallets create a high barrier to entry.

Since the beginning of the year, trading volumes on decentralized exchanges have averaged over $150 billion per month. Yet, the lack of user-friendly interfaces still results in DEX trading volumes lagging behind those of centralized cryptocurrency exchanges. As of September 2024, trading volumes on decentralized exchanges account for only 11.75% of the volume on centralized exchanges.

The number of daily active blockchain users began to surge in 2020, immediately after DeFi emerged on Ethereum, and currently exceeds 14 million. While not all of these users are genuine, a simple extrapolation suggests that by 2030, we could see around 70 million daily active users.

Account Abstraction: A Step Toward Killer Apps Emergence

However, the growth in users is unlikely to be linear. As with other digital industries, we can expect the emergence of several so-called “killer apps”. Killer apps are groundbreaking applications that drive widespread adoption of new technology by providing a unique, essential solution or experience. The chances of such killer apps emerging have significantly increased with the spread of account abstraction.

Account abstraction introduces long-awaited user-friendly features such as social wallet recovery, the ability to pay transaction fees with various tokens, batch transactions, wallets with programmable rules, and payment management. This could potentially boost the number of daily active DeFi users to as many as a billion by the end of the decade.

Depreciation of Altcoins as the Main Problem for Investors

Even if hundreds of billions of dollars in new liquidity flow into the market and account abstraction improves the user experience, this won’t solve the main problem crypto investors have faced in recent years. The key challenge is the depreciation of assets due to the quantitative inflation of altcoins. It is both the increasing number of new altcoins, which dilute the market and decrease the value of existing ones and the growing supply of older altcoins due to vesting unlocks.

Creating a New Token Has Become Too Easy

The development of the cryptocurrency industry has expanded functionality and lowered transaction costs, making it possible to create new tokens almost for free with just a click of a mouse. Over the summer of 2024, more than a million new tokens were created on Ethereum and its Layer-2 blockchains, which is twice the number generated during the entire period from 2017 to 2023.

Most of these tokens are either governance tokens or meme tokens (joke tokens), but all of them drain liquidity. This, in turn, leads to rampant market dilution, causing serious projects to lose liquidity and their tokens to lose value.

Endless Token Unlocks

As of September 2024, monthly token unlocks are adding an average of $2.7 billion in new liquid supply to the market. The second half of 2024 alone will contribute around $19 billion. If we had assessed the volume of unlocks back in March 2024, when market capitalizations were at multi-year highs, these amounts would have been several times higher.

Airdrops Instead of ICOs

The previous two cycles were ICOs (Initial Coin Offerings) times, where investors bought new tokens with real money, providing a transparent inflow of capital to blockchains and setting specific price levels for tokens. In the current cycle, most new projects are launched through airdrops, distributing tokens to users. As a result, the initial demand is not driven by new liquidity but through the redistribution of existing ones.

Composite Investment Strategies

In today’s reality, traditional investment methods, such as spot buying tokens from the market, are becoming unprofitable and often result in losses, as investors provide exit liquidity for venture funds, degen traders, and airdrop hunters. Therefore, to align returns with the risk in today’s cryptocurrency market, you must employ composite investment strategies. Below are some of them:

• Purchasing Major Blue-Chip Assets with High Utility and Reusing Them

The highest utility crypto assets, apart from stablecoins, are $BTC, $ETH, and $SOL. You can perform plenty of things with them, from staking to lending. The multi-layered restaking infrastructure built on the Ethereum blockchain has even allowed for the creation of multi-level derivatives, where each layer of the derivative generates its yield on top of $ETH’s base yield.

• Building Segmented Token Baskets with a Specific Investment Thesis

Crypto projects and their tokens can be broadly categorized into segments such as AI tokens, RWA tokens, GameFi tokens, meme tokens, and so on. Depending on market conditions, certain segments can significantly outperform others in terms of positive price dynamics.

• Participating in Private Venture Rounds and Buying Token Allocations

This is a well-known way to be at the top of the food chain. It’s important to note that venture investing in the crypto space has its specifics, which are different from traditional VC. You can read more about this in our separate article.

• Providing Liquidity on DEXs

The profit here comes from fees paid by users of decentralized exchanges to swap one asset for another. The less liquid the asset you place in a liquidity pool, the higher the yield, but also the higher the risks.

The current DEX market continues to develop at a strong pace and holds significant growth potential. For example, liquidity providers earned over $815 million in fees last calendar year, with 90% of this volume attributed to the Uniswap protocol.

Fees in DEX Protocols

Banana Capital: How to Earn in the Crypto Market Regardless of Trends?

Banana Capital — an investment fund, specializing in effective asset management through proprietary Web3 strategies.

With experience dating back to 2017, the fund offers reliable solutions for preserving and growing capital. The firm emphasizes risk management and diversification, allowing for steady capital growth even amid the high volatility of the cryptocurrency market.

Flagship Liquidity Providing Strategy in DeFi Protocols

DeFi has become one of the fastest-growing sectors in Web3. Essentially, it offers blockchain-based alternatives to traditional financial products. By utilizing blockchain technology, these products are more secure, faster, and more cost-effective compared to their Web2 counterparts, opening up new earning opportunities.

A decentralized exchange (DEX) is a type of cryptocurrency exchange that operates without a central authority or intermediary. It allows users to trade cryptocurrencies directly with each other on a peer-to-peer basis, using smart contracts to ensure secure and transparent transactions.

This strategy is ideal for investors seeking passive income with returns of 30–60% annually in USD (USDT/USDC) with minimal risk. It is also suited for crypto investors who already hold ETH, BTC, or SOL in their portfolios and are looking for a way to grow these assets more efficiently than staking with comparable risks.

Historical Performance Chart

By leveraging innovative hedging techniques, the company has been able to maximize capital efficiency and address the risk of impermanent loss in decentralized exchange (DEX) liquidity pools, achieving an average annual return of 61.13% in retrospective analysis from 2021 to 2023.

Advantages of Banana Capital’s Strategy

As we’ve previously established, liquidity providers are a key element of DeFi, supplying the entire cryptocurrency ecosystem with essential fuel. We act as liquidity providers on leading DEX platforms like Uniswap, PancakeSwap, and Curve. The infographic below shows how much liquidity providers earn on the largest decentralized exchanges.

The profitability of liquidity providers primarily depends on two factors: transaction volume and volatility. The most profitable periods are short-term trend shifts, regardless of direction. However, volatility also brings the risk of a sudden depreciation in the assets supplied to the liquidity pool. For instance, if you provide liquidity in the ETH/USDC pool, you may earn from fees, but if the price of ETH starts to drop sharply, your investments may lose value.

To avoid this, hedging tools can be used, such as taking an opposite position in another market or using options and derivatives. We utilize innovative hedging techniques that ensure stability, consistent income, and address the issue of impermanent loss.

The returns from simply providing liquidity on a DEX can significantly exceed the returns from staking assets. For example, native ETH staking offers 3-5% annually, whereas liquidity pools on platforms like Uniswap or Curve can provide 15-20% annually. Hedging and a well-structured strategy can even boost returns to 30-60%.

Comparison with Traditional Market Strategies

Our DeFi liquidity provision strategy offers a more effective way to use capital compared to traditional markets. In the traditional space, your returns are usually limited to fixed interest from bonds, stock dividends, or asset growth – which often turns negative. Providing liquidity on decentralized exchanges (DEXs), however, lets you earn fees on every trade that flows through the pool, no matter which way the market moves.

Traditional strategies expose investors to risks like stock volatility or fluctuating interest rates, which are tough to hedge without complicated derivatives. In our DeFi strategy, we actively utilize innovative hedging mechanisms. This dramatically reduces the chance of losses, even in a highly volatile crypto market, making it safer than many traditional approaches.

We’ve seen consistent returns over three years, even during bear markets. For example, in 2022, despite the overall crypto downturn, our strategy still delivered a 62.37% annual return – far outpacing what you’d get from traditional markets with similar risk, like bonds. Plus, liquidity provision isn’t even an option for private investors in traditional markets—centralized exchanges don’t let you provide liquidity.

In short, our DeFi liquidity strategy allows for smarter use of capital while protecting it through active hedging. This approach lets you take advantage of market volatility while staying secure and earning returns that you simply can’t achieve with traditional investment tools.

Conclusion

As discussed in this article, decentralized finance opens up new income-generating opportunities that are unavailable in traditional finance. However, the “Wild West” days of the crypto industry are over – this is now a multi-million-dollar market with high competition, where easy money is no longer an option. To earn in DeFi, you need a deep understanding of market specifics, risk management, and smart liquidity management.

With years of experience and proven results, Banana Capital is the ideal partner to guide you through this new financial landscape. Our DeFi strategy helps minimize risks and maximize returns. Whether you’re looking to diversify your investment portfolio or just starting to explore the possibilities of DeFi, this strategy could be the solution you’re seeking.

We invite you to explore investment opportunities and current offers tailored to your risk profile, capital size, and investment horizon: https://t.me/bananacap_bot