Cryptocurrency Operates on Blockchain Technology: Focus on “Operating on Blockchain”

Cryptocurrency, a virtual currency that runs on blockchain technology, is often introduced to beginners through cryptocurrency exchanges. However, exchanges may only account for about 5% of the entire crypto ecosystem. The majority of cryptocurrencies are not listed on exchanges, and many financial products and innovative mechanisms are found exclusively on-chain. By using exchanges alone, one may miss out on most of the opportunities in the crypto world.

Better earning opportunities are often found on-chain. For example, the following chart illustrates the yield from liquidity mining on Raydium, the first DEX on the Solana blockchain. At the time of writing, the annualized return for stablecoin pools, which carry no risk of token price fluctuation, exceeds 50%.

On the well-known Layer 2 BASE chain, the AAVE lending protocol offers double-digit deposit rates for USDC, whereas Binance, a leading centralized exchange, provides only a 5.23% flexible savings rate.

On-chain activities can indeed be more challenging and carry higher risks. Many newcomers to cryptocurrency start with exchanges, but exchanges represent only a small part of the crypto world. As you become more familiar with the field, you’ll find that more rewards and early opportunities exist on-chain.

Participation in on-chain activities can be divided into two main parts:

1. Buying Tokens
   The goal is to purchase tokens with higher potential at a lower cost. On-chain platforms offer more choices, allowing you to buy tokens at earlier stages. For more details, you can refer to the following articles:

   • Why Can They Buy Tokens You Can’t? Only Using Exchanges Gives You Access to Just 5% of the Crypto World. How to Buy Tokens On-Chain?
   • Overview and Guide to Investing in Cryptocurrency Primary (Early) and Secondary Markets
2. Wealth Management \
   Use your existing tokens to earn more yields. On-chain platforms often provide more types of financial products and higher returns than exchanges. This article introduces several mainstream on-chain financial mechanisms and provides a simple comparison table for easy understanding. Lastly, it highlights several useful on-chain tools for financial management. Use the directory on the right to jump to the sections you want to read.

What Is On-Chain Financial Management?

To define it simply: on-chain financial management refers to using your existing tokens to earn additional yields.

• Trading: Buying low and selling high to profit from price differences.
• Financial Management: Focusing on earning more tokens using your existing ones.

On-chain financial management specifically involves financial activities conducted on blockchains. Since participating requires stepping away from exchanges, you’ll need a decentralized cryptocurrency wallet.

Preparation for On-Chain Financial Management: Creating and Learning About Cryptocurrency Wallets

You must first have a cryptocurrency wallet and transfer some tokens into it before you can start on-chain financial management. Here are the essential preparatory steps:

1. Create a cryptocurrency wallet.
2. Transfer tokens into your wallet.

The Three Most Active On-Chain Ecosystems

Currently, the three most active ecosystems are EVM, Solana, and Bitcoin. Each ecosystem has its own mainstream wallets:

• EVM Ecosystem: Metamask Wallet Tutorial – Installation, Transfers, Adding Chains and Tokens
• Solana Ecosystem: Solana Wallet Guide – Phantom Wallet Tutorial: Creation and Transfers
• Bitcoin Ecosystem: Bitcoin Wallet Guide! Introduction to Unisat for Ordinals and Bitcoin NFT Ecosystem

Other ecosystems, such as Cosmos, Polkadot, TON, and Near, each use their own wallets. For details on how cryptocurrency wallets work:

• What Are Cryptocurrency Wallets? Principles and Usage Guide

To start on-chain financial management, first install the wallet specific to the blockchain ecosystem you wish to use, then transfer some tokens into it. Once this preliminary step is completed, you’re ready to begin.

What Types of On-Chain Financial Management Are Available?

Difficulty/risk/return are all relative, and are compared with other on-chain financial products.

DeFiLlama, a decentralized finance data platform, lists the top five DeFi categories by Total Value Locked (TVL), which provides insight into the level of capital participation in various on-chain financial products. Categories 3 and 4 fall under liquidity mining, while the majority of on-chain financial activities revolve around these three areas:

1. Staking (including staking, liquid staking, and restaking)
2. Lending
3. Liquidity Mining

Below is an introduction to these categories, ranked by ease of operation.

Staking

Staking is a mechanism for participating in blockchain operations. Under the Proof-of-Stake (PoS) consensus mechanism, the quantity of tokens staked on a blockchain determines the selection of the next block-producing node. The selected node will receive block rewards as compensation after producing a block.

Locking a blockchain’s platform token > Being selected as a block-producing node > Receiving block rewards—this is the basic logic of staking. Sometimes, you don’t need to become a node yourself; you can delegate your locked cryptocurrency to a node and still receive a share of the block rewards.

To fully understand the staking mechanism, you first need to know what blockchain consensus is:

• What Is Blockchain Consensus? Exploring Berachain’s “Proof of Liquidity (POL)” Innovations

While the underlying principle can be complex, the process itself is very simple, making staking one of the easiest forms of on-chain financial management. That’s why it’s the first mechanism introduced here.

The staking process may vary slightly across blockchains. Many blockchains now allow staking directly within wallets.

For example, with Solana’s Phantom wallet, if you want to stake $SOL, you can simply select the staking option in the wallet interface:

Choose the validator to delegate to:

Input the amount, press stake, and then complete the wallet signature transaction.

With Polkadot (DOT), staking can also be done directly in the Polkadot wallet. The process is similar: find the staking function, select a validator or pool, enter the amount, and submit the transaction signature.

Usually, staking is only available on blockchains using the PoS consensus mechanism. Staking the native token of the chain earns block rewards, with reward rates depending on the chain’s block reward allocation, which varies across chains: Ethereum is about 3-4%, Solana 6-7%, Cardano 2-3%, Polkadot 15-18%. Reward rates are not necessarily higher = better. Rewards are calculated in tokens, so the price performance of the token must also be considered.

Advantages and disadvantages of Staking:

Advantages - Simple operation, participation in blockchain consensus, stable earning of income, and the ability to further amplify income through liquid staking.

Disadvantages - Unstaking usually has an unlocking period (7-14 days), poor liquidity, which can be solved through liquid staking.

Essentially, staking is a more in-depth participation and a longer-term on-chain financial management operation. Only projects that you want to participate in for the long term should be considered for staking. Short-term and medium-term financial management is not very suitable.

Usually, only POS mechanism blockchains have staking. Bitcoin uses the POW mechanism, which is traditional mining. However, recently some projects have successfully launched Bitcoin staking services, and Bitcoin can also be directly staked on the Bitcoin chain, but this is no longer general staking and is a more advanced operation.

Originally, only blockchains and public chain tokens could be staked. However, it has later been extended to certain protocol applications. Although some protocol applications do not have a chain themselves, after staking the application’s token, they can participate in governance or distribute protocol revenue. Staking has been extended to become a general term for locking tokens on-chain. The operation is still extremely simple, and the underlying principles and revenue mechanisms are more complex, but essentially it is still a longer-term operation. Only projects that you want to participate in for the long term should be considered for staking.

Lending/Borrowing

The lending logic is very simple: deposit money and borrow money. The borrower pays interest to the depositor. This concept is very similar to bank deposits. The main difference is that it operates on-chain, and the interest rate is determined by market supply and demand.

For depositors, the operation is simple: just deposit and receive interest.

Advantages and disadvantages of lending/borrowing:

Advantages - Simple principle, simple operation, no unlocking period, can be withdrawn almost at any time, good liquidity

Disadvantages - The rate of return is usually not very high

Risk and return are usually linked. The higher the risk, the higher the return. The lower the risk, the lower the return.

Once lending begins, operations are no longer handled directly in the wallet. Instead, users need to access the lending protocol’s application website. For example, the leading lending protocol AAVE can be accessed at https://app.aave.com/. After selecting the cryptocurrency you wish to deposit, navigate to the deposit page, enter the amount, click Supply, and then sign the transaction to complete the process.

There are many lending protocols, with different leading protocols on various blockchains. However, the operation process is generally the same. In addition to interest rates determined by market supply and demand, some newly launched protocols may offer additional rewards for deposits or loans, presenting opportunities to earn excess returns. Of course, newly launched protocols also come with higher risks.

How to find on-chain protocols and find potential opportunities?

Start by learning how to use DeFilLama. This is the most important DeFi information platform: Must-have website for the crypto circle｜Introduction and tutorial for DeFi on-chain data platform DeFiLama

Yield Farming

Excluding advanced cases, yield farming is the most difficult to understand in terms of operating principles among these basic on-chain financial products.

It was initially an invention after the birth of the AMM (Automated Market Maker) innovative mechanism. In decentralized exchanges (DEXs), instead of relying on traditional market makers, many participants lend liquidity and gather it in a trading pool. When the liquidity is deep enough, it can provide a good trading experience, fast and with low slippage. The DEX will return part of the transaction fees to the liquidity providers, and sometimes there will be additional liquidity incentives. This practice of providing liquidity to earn returns is called yield farming.

More detailed mechanism explanation: What is yield farming? How much return can you earn? What is impermanent loss?

What is a market maker: Without them, market fluctuations would be more severe｜Cryptocurrency market makers: The invisible hand behind the market

Taking Raydium, the first DEX on Solana, as an example, liquidity in AMM DEXs is usually in units of pools, and each pool is usually composed of two coins, such as SOL-USDC / SOL-USDT in the figure. The income is composed of the transaction fees of the pool and additional liquidity incentives (not necessarily available). The figure shows that the SOL-USDC pool provides a 279.84% return, divided into two parts: 276.18% for transaction fees and 3.66% for additional RAY rewards.

Liquidity incentives are not always available. They are usually available on newly launched DEXs or when there are ongoing promotions, but transaction fees are definitely available. The basic logic is that the more active the trading, the more transaction fees there are, and the better the return of liquidity mining. Therefore, DEXs with more active trading are more likely to attract people to participate in liquidity mining. The more people participate, the deeper the liquidity, which in turn can provide a better trading experience and attract more people to trade, which is a positive cycle.

Advantages and disadvantages of Yield Farming:

Advantages - Highest rate of return, multiple operating strategies

Disadvantages - Difficult to understand, risk of impermanent loss

For pools that you want to provide liquidity to, click Deposit or Add Liquidity. The operation is a bit more difficult, mainly consisting of three parts:

• Liquidity pools are usually composed of two coins. When providing liquidity, you need to provide both coins at the same time.

• There are now more liquidity provision strategies. With the release of Uniswap V3, liquidity provision strategies are becoming increasingly complex. However, you can also simply choose the standard option without delving into the complexities.

• To stake LP tokens and maximize returns, liquidity providers receive LP tokens (shares) after contributing liquidity. Holding these LP tokens allows you to earn a share of the trading fees. However, to qualify for additional liquidity rewards, you usually need to take one more step: staking the LP tokens to receive the reward distribution.

On More Complex Liquidity Provision Strategies:

• What are Uniswap and its V3 version? Why are so many protocols built on top of it?
  • Gamma Protocol
• Introduction to Trader Joe, a star exchange in the AVAX ecosystem
  • Features like liquidity order books and zero slippage trading.

The evolution of liquidity provision strategies takes two directions: towards more complex and advanced operations, and towards simpler routes. For example, DODO and Hydration allow single-asset liquidity provisioning:

• DODO Exchange Overview: What is DODO? Features, investment potential, and simple operation tutorials
• Hydration Omnipool: Liquidity hub in the Polkadot ecosystem – introduction and tutorial

Understanding Impermanent Loss:

Impermanent loss occurs because token prices fluctuate, which may result in the quantity of tokens being different when withdrawing liquidity compared to when they were initially provided. When you add liquidity, you receive LP tokens (shares). Participating in liquidity mining does not diminish your shares, but the value of these shares in terms of tokens is variable. This may lead to the total value of your assets being lower than if you had not participated, which is known as impermanent loss. It is not a direct loss but rather an opportunity cost.

Liquidity mining often offers some of the highest returns in on-chain finance. Although the mechanisms can be complex, practicing it a few times helps build understanding. Liquidity mining is a critical component of more advanced financial operations and is essential for understanding on-chain finance.

Further Reading:

• What is liquidity mining? How much profit can it generate? What is impermanent loss?

Summary: Staking, lending, and liquidity mining can be considered the three foundational pillars of on-chain finance. Most other financial strategies are variations or combinations of these three. Understanding these fundamental principles will help you comprehend more advanced financial operations.

Liquid Staking

Essentially, liquid staking = staking. If you compare the staking reward rates, liquid staking may appear lower than traditional staking because liquid staking protocols take a portion of the staking rewards as a service fee.

• Direct staking by yourself: 5% staking reward rate
• Through liquid staking: 4.5% (because the liquid staking protocol deducts 10%)

The above figures are for illustrative purposes only. Sometimes the reward rate can be higher because liquid staking protocols may implement better staking strategies (e.g., selecting more efficient nodes), which result in higher staking rewards. However, the difference is generally not significant. Liquid staking remains fundamentally equivalent to staking, with the main differences lying in other aspects.

When you stake one Ether (ETH) through Lido, you receive one stETH in return. As mentioned earlier, staking = locking tokens on-chain. Usually, unstaking requires waiting through an unlock period, during which the staked tokens are locked and cannot be used for any other purpose. Even if you want to sell them, you must wait for the unlock period to end.

Liquid staking addresses this limitation by providing a staking certificate corresponding to the staked tokens. Since each staking certificate is backed by an equivalent amount of staked tokens as collateral, the certificate itself holds value. While the original tokens are locked on-chain, you can use the staking certificate tokens (commonly referred to as LSTs, or Liquid Staking Tokens) for other operations.

Originally - Stake ETH to earn a 3% staking reward, that’s it.
Now - Stake ETH through Lido to earn a 2.7% staking reward (with a 10% cut), and then use stETH for lending or liquidity mining to earn additional income.

Pros and Cons of Liquid Staking:
Pros - Maintain liquidity while staking, earn multiple layers of income, and have various operational strategies.
Cons - Adds an additional layer of smart contract risk.

The first part of the process is essentially the same as staking, except you use a liquid staking protocol and stake in a liquid staking app. If you don’t perform any additional operations, the yield from liquid staking is not much different from regular staking. The advantage is that liquidity is maintained, and you don’t need to wait for an unlocking period to sell, but the exchange rate fluctuates with the market, which may cause minor losses.

To earn additional income, you need to use liquid staking tokens (e.g., stETH) to participate in other on-chain financial activities, such as lending or liquidity mining.

Practical Combination Example - Leverage Staking

Polkadot ($DOT) ecosystem token, the most mainstream liquid staking token in the ecosystem is $vDOT, operating on the same principle: stake $DOT to receive $vDOT certificate tokens.

Currently, $DOT staking yields are approximately 15-18%. In the Polkadot ecosystem, a certain lending protocol has a $DOT borrowing rate of 6.43%. This lending protocol supports liquid staking tokens $vDOT as collateral deposit assets.

Operation:

1. Stake $DOT to receive $vDOT.
2. Deposit $vDOT into the lending protocol as collateral.
3. Borrow more $DOT, paying 6.43% interest.
4. Stake the borrowed $DOT to earn 15-18% staking rewards.
5. Stake to receive $vDOT, deposit more $vDOT, borrow more $DOT, and continue the cycle.

This is equivalent to leveraging multiple times to arbitrage a 9-12% return, with two risks:

• DOT/vDOT price decoupling, leading to liquidation risks.
• $DOT borrowing rates soaring: If rates exceed staking rewards, losses may occur.

The above example is for explanation purposes only. The key point is that liquid staking can release staking liquidity, but participating in other on-chain financial operations is necessary to earn additional income.

Unlike staking directly, liquid staking through a protocol introduces an additional layer of smart contract risk. It is recommended to select mainstream and trusted protocols to participate. Different blockchains have different liquid staking protocols:

• Ethereum liquid staking protocol - Lido Finance Introduction | Staking Tutorial
• DeFi ecosystem boom! A deep dive into Solana’s largest DeFi protocol - Jito | Project Introduction
• Multi-chain protocol - Solv Protocol | BTCfi Ecosystem Introduction and Yield Opportunities

Restaking

Restaking is essentially still staking, but the difference lies in staking liquid staking tokens a second time, effectively staking twice to earn two layers of staking rewards.

Plain Explanation of the Popular Narrative: What Is Restaking? What Is AVS?

Restaking involves staking to receive liquid staking tokens, then staking those tokens again. Why is this possible? Because the second staking doesn’t occur on the original chain but serves as a security asset for other chains.

In simple terms, restaking addresses the security issues faced by newly launched blockchains. The PoS mechanism requires staked assets to ensure blockchain security. When a new blockchain starts with a low market cap, there aren’t enough staked assets to provide security guarantees. Restaking protocols fill this gap by offering security asset leasing services through restaking.

1. The initial staking, such as staking ETH, earns Ethereum’s staking rewards.
2. Using liquid staking tokens for restaking earns block rewards from the new blockchain.
3. Additionally, restaking provides restaking certificate tokens (e.g., LRT), which can be used in other DeFi opportunities for more income.

Pros and Cons of Restaking:

Pros:

• Multiple staking opportunities lead to multiple layers of staking rewards.

Cons:

• Each additional layer adds another layer of smart contract risk.
• Strategies become increasingly complex.

Restaking is currently an emerging field in development. While it offers significant opportunities for excess returns, it also carries higher risks. It is recommended to participate in moderation.

• EigenLayer Moves to the Next Growth Stage: Understanding the Impending AVS Wave
• BTC Ecosystem Pell Network: Testnet Launch, TVL Exceeds $400M to Become the 5th Largest Restaking Protocol
• Restaking X BTCfi: Bedrock’s Path to Breakthrough Success | Potential Airdrop Tutorial

Advanced - Yield Tokens / Governance Bribery

More advanced strategies involve more complex combinations, generally taking the following directions:

1. Incorporating Governance Bribery Mechanisms Boost your on-chain financial returns by leveraging governance bribery systems.

2. Advanced Financial Mechanisms Separate principal and yield into distinct tokens for customized strategies.

3. Integrating Points and Airdrops Focus on potential future airdrops, where the current yield is uncertain but the strategy targets long-term rewards.

This area is more complex, and each direction could be expanded into several articles. For more details, you can refer to the following resources:

• Optimism Ecosystem Leader Velodrome: What Is VELO Token? Understanding DeFi Bribery Yield Opportunities
• Base Chain’s Leading Protocol and Liquidity Hub: Introduction to Aerodrome Finance and Its Built-In Bribery Mechanism
• What Is Blockchain Consensus? Exploring Berachain’s “Proof of Liquidity” (POL) Innovations
• Riding the LSD Liquid Staking Wave: Why Pendle Finance Gained 10x Popularity in the Bear Market
• Bitcoin Liquidity Financial Layer Lorenzo: Introduction and Airdrop Tutorial for stBTC Liquid Staking Tokens

Comparison Table: On-Chain Yield Types

Difficulty, risk, and yield are relative values compared to other on-chain financial products.

Essential Tools for On-Chain Financial Management

There are many related tools; here are a few key recommendations:

DeFi information data platform DeFilLama

DeFiLlama: DeFi Data and Analytics Platform

DeFiLlama is essential for tracking the most comprehensive on-chain information, including categories, protocols, data, and official project links. A must-have for on-chain financial activities!

• Importance: ★★★★★
• Guide: DeFiLlama Introduction and Beginner’s Guide

High-yield opportunities are scattered across multiple chains, making manual searching cumbersome. vfat.tools consolidates and displays high-yield opportunities across dozens of major blockchains, offering unmatched convenience.

DeBank on-chain asset dashboard

DeBank makes it simple to track whale movements, including their token holdings and protocol participation. Its user-friendly, visualized interface integrates SocialFi mechanisms, making it intuitive and beginner-friendly.

Guide: How to Use DeBank to Track Whale Movements and Increase Profits

Explore other tools to improve your DeFi investment and trading experience:Introducing DeFi tools! DeFi player trading essentials to improve DeFi investment and trading experience

Summary: DeFi Forever!

On-chain financial management is essentially DeFi—the act of earning yields through various DeFi products and mechanisms. The core of this activity lies in the #DeFi sector, which, despite years of stagnation, remains one of the most promising long-term fields.

Why DeFi Has Long-Term Potential

1. Fundamental Demand: DeFi addresses the basic human desire for unrestricted and independent pursuit of financial returns.
2. Favorable Trends: The macro environment is increasingly DeFi-friendly with:
   • Interest rate cuts.
   • Clearer regulatory frameworks.
   • Improved user experiences in cryptocurrency operations.

DeFi Revival Insights

Arthur, founder of the investment firm DeFiance, highlights five key reasons DeFi has over 6x growth potential in the future.

• Why DeFi Is Poised for Growth

Sustainability in the DeFi Market

The key to building sustainable moats in DeFi lies in effectively capturing and retaining end users.

Recent Activity in DeFi Blue-Chip Protocols

Several established DeFi protocols are starting to show renewed vitality in the sector:

• Uniswap: Unveiled the “Unichain Effect,” with a focus on 12 DeFi tokens tied to strong fundamentals and high value.
• AAVE: Analyzed through on-chain data, showcasing the current status and potential development of this leading DeFi lending protocol.

Resources:

• Exploring Uniswap’s Unichain Effect
• AAVE Analysis: The Current State of the DeFi Lending Pioneer

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