Investing in liquidity pools is tricky. There are many variables to consider. On the other hand, the fact that they provide a significant profit even when the prices are flat makes them attractive.
I make my DEFI investments on Hive, Binance Smart Chain, Cosmos, and Polygon networks. Since I met DEFI on Binance Smart Chain (BSC), this network has a special place for me. Moreover, since BNB is one of the coins I like to invest in, one of the coins of the liquidity pool pairs I invest in is definitely BNB.
Binance and BNB
Founded in 2017, Binance is still the largest centralized exchange by far. In addition, Pancakeswap, the second most used decentralized application in the blockchain world, operates on the Binance Smart Network. (The most used application, Splinterlands, operates on Hive.)
Although BNB is fourth in the market cap, it is not considered a "cool" coin like Ethereum, Solana, or Polkadot in the crypto community. I attribute this to the fact that Binance is essentially a centralized exchange coin. The fact that Binance stepped into DEFI via Binance Smart Chain (BSC) does not change this situation. Because at its core, BSC uses infrastructures created by the Ethereum community.
Photo by Josh Appel on Unsplash
Binance has not made a radical innovation to date, on the other hand it can consistently create value for its investors, business partners, and customers because it is successful in disruptive innovation and especially incremental innovation. In more concrete terms, it allows its clients to access a large number of coins with a commission rate as low as one-thousandth. In addition, with the contribution of Binance's systematic coin burning program, BNB investors have made significant profits to date.
It is necessary to evaluate the return provided by a financial asset together with the possibility of a decrease in the value of that asset. Sharpe ratio is used for this purpose. A number greater than 1 indicates that the financial asset is performing well. Sharpe ratio of BNB for the last three years has been 1.57. Whereas, the Sharpe ratio of XRP, ETH, and BTC was realized as 0.70, 1.37, and 1.24, respectively.
BNB Staking
If you are convinced of the return potential of BNB, we can start looking at BNB investment alternatives. Staking and liquidity pool investments are the most commonly used methods to earn returns on coins.
The easiest way to invest in BNB is to stake BNB on Binance. In the Binance Earn menu, 60-day locked staking still provides an annual return of 6.53%. That's a pretty good return for a financial asset with zero inflation. If you use this option, you have to re-stake your BNB after 60 days, otherwise, your BNB may be deprived of any potential additional staking returns.
Liquidity Pools on PancakeSwap
If you are confident in your financial literacy and want to earn higher returns, you can invest in liquidity pools with BNB on Pancakeswap. As I have a cautious personality, my recommendation would be the BNB-BUSD liquidity pool. I recommend this liquidity pool because it has relatively high returns and is resistant to possible declines.
Let's say you invest $1000 in the BNB-BUSD liquidity pool on Pancakeswap. (500 USD-->BNB + 500USD-->BUSD) Since BUSD is a stable coin, its price will remain constant. If the BNB price halves after a year, your principal will drop to $707. Since the return of the pool is 21%, you will earn $210. You will have 910 dollars in total.
The impermanent loss effect is included in the calculation. I neglected the compound return effect. As you can see, even though the value of the coin we invested was halved, we only lost 9%.
In our second scenario, we assume that the BNB price has doubled a year later. In this case, our $1000 principal would have increased to $1414 at the end of the year. When we include the $210 pool return in the calculation, we have a total of $1624. Thus, we will have a return of 62.4% in one year with our principal.
Again, I included the impermanent loss effect in the calculation. Similarly, I neglected the compound return effect. As you can see, even though the value of the coin we invested in this scenario doubled, we achieved a return of 62.4%. Similar to our loss, our profit was also relatively low. According to game theory, for various situations, we can multiply the payoff by the probability of winning to get the expected payoff. Assuming both probabilities are equal (more likely to double due to historical data), our expected annual earnings would be 26.7%.
Liquidity Pools on Cubdefi
Even if the rates I mentioned above did not appeal to you, I do not doubt that you will like the options that I will talk about shortly. If you invest the BNB-BUSD liquidity pool tokens you created on Pancakeswap using the Kingdoms option of the Cubdefi application, your base return will be 46% instead of 21%. Thus, even if the BNB price is halved, you will have made a profit from your investment at the end of one year.
Since I am a cautious person, I invest in the Pools menu with CertiK audit completed, instead of Kingdoms. Currently, the Cub-BNB liquidity pool provides a return of 111.5%. Although there is a possibility that the Cub price will decline, this pool is my favorite recently. The fact that Cub owners will benefit from the Polycub airdrop may also have a part in this :)
Thank you for reading.