Create a Revenue Generating Defi Portfolio Using AAVE – Beginner’s Guide

This guide was created to be an educational resource on how to generate yield on your long term core positions of ETH/BTC using AAVE. None of this is financial advice.

It is aimed to newer entrants into Defi to show how you can transform your entire portfolio from one where you only make money when prices go up to a revenue generating portfolio that earns you yield regardless of price.

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What is a “Revenue Generating Portfolio”?

The name is self explanatory: a portfolio that is able to generate cash flow.

The key distinction is to create a portfolio that can make money even if the price of your assets don’t appreciate.

Who Cares?

I come from an investor/business background so any asset that can generate cash flow while being exposed to asymmetrical price appreciation it makes my eyes light up.

I no longer have to try and be a “trader” to make money in crypto. I can now treat my portfolio as a digital asset and instead of optimizing for total portfolio size, I can now optimize for cash flow.

Game changer.

When you have a singular thing you are optimizing for everything becomes a lot more clear and every action you take aligns with that singular goal.

Does this only work in a bull market?

The simple idea of generating cash flow via your portfolio works in all markets. The main difference between a bull and bear market is the yield rates you can get. So I think the model will always work but the effectiveness will diminish in a bear market.

The main point of this guide is to get you thinking differently about your portfolio and get away from being 100% reliant on prices going up to make money.

The one clear benefit of treating your portfolio has a revenue generating machine has a bear market is due to the way the portfolio is constructed you are always have the majority of your portfolio in BTC/ETH/stables. That is going to allow you to weather the storm a lot better than someone chasing the next scam coin.

Clarifying Vocab

I like to refer to the money my portfolio as “revenue” because that is how I think about it. But it is interchangeable with terms such as “yield” and “cash flow”.

My Goal for this Guide

This is aimed to be a high level strategy and framework that can be applied regardless of which protocols or tactics you use. Or what the market conditions are. Defi changes so rapidly that any tactic is out of date in days.

I will be mentioning specific protocols throughout the article but your focus should be on the thought process behind what the overall strategy is. Not the individual tactics. Please keep this in mind as you read through this.

It’s also worth mentioning that I simplified a lot of things in this and did not cover everything in fine detail. I by no means consider myself a finance expert but I do have first hand defi experience doing this exact strategy. If I made any errors please let me know. The core principles of this guide are solid though.

How to Build a Revenue Generating Portfolio Using AAVE

I’m going to walk through the steps to setting up a (basic) revenue generating portfolio using AAVE. There are many ways to go about achieving this but I will cover what I consider to be the core of a revenue generating portfolio.

For this guide I will be using all numbers and screenshots are from the Polygon network. You can implement this same strategy on any network though as long as you can collateralize your core holdings.

The basic idea is to use AAVE to collateralize your long term holdings (BTC/ETH), borrow stablecoins and then generate yield via your stablecoins. This allows you to maintain exposure to your assets AND generate revenue for your portfolio.

The complete step-by-step guide to doing this outlined below. After the tutorial I will walk through a scenario with an example portfolio.

Note: I will be building the portfolio out on Polygon, which is a sidechain of Ethereum, due to the low fees. This is critical for smaller portfolios to be able to use things such as AAVE. There are tradeoffs to using Polygin instead of ETH but I will not go into that now. DYOR.

Step 1. Determine Your Core Holdings

This should more than likely be some combination of Bitcoin and Ethereum. These are the investments that you are going to hold long term and don’t have any plans to sell.

Your core holdings should be able to be used as collateral on AAVE. The more of your portfolio you can use as collateral = more stablecoins you can borrow = more yield you can generate.

A hidden benefit of using long term core positions as collateral is that it incentives you to keep a high % of your portfolio in coins like Bitcoin and Ethereum. I think this factor alone will help the majority of new people survive these markets and make good money.

Below is the market currently available on AAVE (Polygon):

Markets Available on AAVE (Polygon)

Step 2. Deposit Core Holdings to AAVE

AAVE is where the magic starts to happen.

AAVE moving to Polygon was a gamechanger for me as it allowed me to experiment without worrying about transaction fees. If you have never used AAVE before I would highly suggest testing with a very small amount of money and read through their docs.

It’s a lot easier to use than you might think 🙂

The basic deposit process is:

  1. Go to the “Deposit” tab in the menu
  2. Select the asset you want to deposit
  3. Select the amount of the asset you want to deposit
  4. Follow the on screen prompts and send the transaction
  5. Boom. Your asset is now deposited onto AAVE earning yield. You can verify by going to “My Dashboard)

Congrats, you officially have a revenue generating portfolio thanks to the deposit APY + rewards on AAVE.

Step 3. Borrowing Stablecoins

The next step is to borrow stablecoins against your collateral you just deposited.

If you have never done this before PLEASE fully understand the implications of borrowing. Practice with a very small amount.

The basic process is as follows:

  1. Navigate to the “Borrow” tab
  2. Select the stablecoin you want to borrow (USDC, DAI or USDT)
  3. Input the amount you wish to borrow (keep note of the health factor. Try to keep above 3 to be safe)
  4. Select interest rate type (stable or variable)
  5. Confirm and borrow

When you borrow stablecoins you pay interest on the loan. The different interest rates are shown below for the various stablecoins. The top number is the interest rate you will pay per year on your loan. The bottom number (the one with the MATIC symbol next to it) is actually the reward APY you get for borrowing. Right now your MATIC reward APY is higher than your interest APY.

Yes, you get paid to borrow money. How cool?

Some important things to keep in mind when borrowing:

  • Always borrow stablecoins
  • Try to keep health factor above 3 to be safe. Once it reaches 1 you will be liquidated.
  • You are paying interest to borrow. The interest is variable so keep tabs on it
  • The amount you can borrow depends on your collateral. If your collateral rises in value you can borrow more. Vice versa when it goes down.
  • Try to always have at least equal to or more stablecoins on hand than the amount you have borrowed. This insures that you can fully repay your loan whenever you want without having to sell any core positions.

Stablecoins are amazing and the key component to a RGP. Now that we have some stablecoins to work with we can go to the next step.

Step 4. Put Stablecoins to Work & Generate Revenue

With a fresh stack of stables ready to deploy you are ready to start generating some revenue! There are almost endless ways you can go about doing this, but for this guide I’m going to cover two options that I think are the safest (AAVE and Curve) and one option that is a high R/R play (IRON) . I would highly suggest starting with AAVE and Curve as a beginner.

Option 1: Deposit Into AAVE

Risk: Very Low

Reward: Low

This is by far the lowest risk option for your stables. The returns from AAVE aren’t the best BUT it is still infinitely better than no yield. The screenshot below gives you an idea of the sort of yields you can expect depositing stables into AAVE.

Stablecoin Yields on AAVE (Polygon):

CoinDeposit APYRewards APYTotal APY
USDC1.79%2.09% MATIC3.08%
DAI2.74%3.22% MATIC5.96%
USDT9.8%6.63% MATIC16.43%
As of June 6th, 2021
  • USDC: 1.79% + 2.09% MATIC Rewards = 3.08% APY
  • DAI: 2.74% + 3.22% MATIC Rewards = 5.96% APY
  • USDT: 9.8% + 6.63% MATIC Rewards = 16.43% APY

Note: The total APY is not 100% accurate as the MATIC rewards % is in APR terms. So the total yield will actually be slightly higher than the above (assuming you compound).

So in the lowest risk option of AAVE you could be earning anywhere between 3-16% APY. Not bad! Plus factor in the yield you get for borrowing the stablecoins outlined in step 3.

Using this option also opens up the possibly for recursive farming. This is where you can deposit-borrow multiple times over due to each new deposit allowing you to borrow more again. This is somewhat of an advanced topic for another day.

Option 2: Deposit to Curve

Risk: Low

Reward: Medium

Next option I’m going to cover is using Curve to earn a yield on your stables.

What is Curve? In their own words:

“Its main goal is to let users and other decentralised protocols exchange stablecoins (DAI to USDC for example) through it with low fees and low slippage.”

Curve Docs

Curve is a Defi staple with some of the smartest devs. They have also been around a long time (at least in crypto terms) and have proven to be an extremely safe place to put funds. Oh yeah, they also have over $9b in funds currently in their protocol. Compared to everything else in defi, this is a very safe place to deploy funds.

Let’s take a look at the rewards we can expect for depositing our stables into Curve. This is for Curve on Polygon FYI.

Let’s decipher what this means.

So you will get a Base APY of 4.12% which is paid out in AAVE Curve Pool tokens (basically dollar stablecoins). Then on top of that you get 18.17% in WMATIC rewards.

Total yield of 22.29%.

This is a decent amount higher than the first option of only using AAVE.

Option 3:

Risk: High

Reward: High

This is a high risk to reward option that you should only conisder if you know what you are doing. There is a very good chance you could lose all of the money you invested.

With all of that being said, these are the places where you can potentially yield amazing revenue while still holding stables.

The example I am going to be using is IRON Finance. They allow you to mint your stablecoins to their stablecoin ($IRON) and then you can provide liquidity on Quickswap/Sushiswap. This option allows you to remain in stables, but you are exposed to added risk of the IRON platform and the IRON stablecoin losing peg.

I’m not going to into any detail on how to do this, but I just want to show you what is possible. Below is a screenshot of the current yields:

Right now you could be earning 360% APR on stablecoin LP position. Wow.

So yes, a ton more reward but also comes with a ton more risk. Please please keep that in mind.

Other Options

As I mentioned earlier, there are endless places to deploy your stablecoins. All with varying risk/reward profiles. Some options include:

  • Stable LP positions (USDC-DAI Uni LP)
  • Degen farms (Super high APY farms)
  • Recursive farming
  • and many more

I will cover all of these options in-depth in future articles but if you are just starting out I would highly suggest sticking to AAVE or Curve.

Stable FarmRiskReward
AAVE LendingLowLow
CurveLowMedium
IRON FinanceMed-HighHigh
Degen FamrsExtremely HighExtremely High

Ongoing Management of AAVE Positions

When borrowing on AAVE, it is not set and forget. You need to constantly monitor your positions and make sure you are never in a position where you could get liquidated. The simplest way to insure this is to follow these simple tips:

  1. Always borrow stablecoins
  2. Try to keep your health score above 3. If it dips below 2 you should move stables back to AAVE and repay some of your loan off. Is this super conservative? Yes. But this is just my suggestion.
  3. Always have more stablecoins than your loan amount
  4. Know your liquidation price.

If you follow these 4 things you should be able to handle almost anything the market could throw at you without getting liquidated.

Let’s Run Through an Example

Let’s take a look at how this strategy looks with an example portfolio of $100k in core holdings (50k in BTC and $50k in ETH).

Step 1: Deposit into AAVE

Based on the current APYs on AAVE, you would generate a yearly revenue stream of $3,965 from your $50k BTC and $50k ETH. This is 3.97% yield per year. That is a solid start so far!

Yield % is not 100% accurate due to adding APY + APR together. Real yield would be higher assuming some form of compounding

Step 2: Borrow Stablecoins

With $100k as collateral, we can now determine how much we can safely borrow. Remember, a safe health score to shoot for is 3. You can play around a bit with the borrow amount to see what amount you can borrow.

You can see below the calculation to determine the amount we can safely borrow:

We can borrow around $26,250 safely. Yes, you could borrow way more if you wanted to take on more risk. Heck, you could borrow $75k if you wanted but this is a recipe for disaster. Now that we know the amount we are going to borrow, it’s time to actually borrow!

I like borrowing USDC, but you can also consider DAI and USDT. Based on the current market rates we will have to pay 2.99% per year in interest for this loan. The good news? We get paid 3.07% APR in MATIC rewards on the same loan. The rewards more than offset the interest. Nice.

The full calculation is shown below:

To borrow $26,250 USDC we pay $785 per year in interest. We also make $798 a year in MATIC rewards. This ends up being net positive $13. We are getting paid to take a loan! Crazy.

Let’s see where we stand so far:

  • $50k BTC deposited earning $2,505/year
  • $50k ETH deposited earning $1,460/year
  • $26,250 USDC borrowed earning $13/year
  • Total revenue per year (so far) = $3,978

Now it’s time to juice the yields by putting those stablecoins to work!

Step 3: Deposit USDC into Curve.fi

For this example we are going to be using Curve.fi as our yield farm of choice. I think it is one of the best risk adjusted places to get yields.

Below is what Curve is currently offering for people who deposit USDC, DAI or USDT into the pool:

Assuming we deposit the entire amount we borrowed of $26,250 into Curve we would get the following:

An additional $5,851 per year in revenue added to our portfolio.

ROI from Example

Putting this all together gets us the following ROI calculations

ActionAPYYearly Revenue
$50k BTC Deposit into AAVE5.01%$2,505
$50k ETH Deposit into AAVE2.92%$1,460
$26,250 USDC Loan.05% (net)$13
$26,250 Deposit into Curve22.29%$5,851
Total9.83%$9,829

All in all we have turned our $100k BTC/ETH holdings into a portfolio now generating $9,892 per year in revenue. This is all while maintaining the same amount of exposure to our core holdings and all future upside(and downside) they might have.

Use our yield calculator tool to calculate this yourself!

Example Scenario Summary

That completes the entire process. The thing we would need to do now is manage our AAVE loans as the price of BTC/ETH fluctuate. As prices increase we have the option to borrow more stablecoins if we wish. As prices decline we have to watch our health factor and if it drops below our threshold we need to withdraw stables from Curve and repay some of our loan to get back to 3 health score.

This requires constant monitoring but working with a health score of 3 you have a wide margin of safety to handle pretty much any short term price movements without being liquidated.

Wrapping This Up

There is so many things to cover on this topic but I don’t want to drag this article on too long. I will have a lot more content coming out covering all of these various topics surrounding the core idea of creating and operating a revenue generating portfolio.

Please consider following me on twitter. That is where I spend most of my time and where I will post any new content I create.

This Post Has 13 Comments

  1. FeelingGood

    🔥 guide! Thanks so much, I didn’t put all of this together myself but with your guide I now get it.

  2. deecrypto

    Great guide! Well structured and explained – thanks for putting it together.

  3. Chris C

    Wow, this article really helped me to understand the core concepts, along w/ the “blue-chip” DeFi players AAVE & CRV.

    The breakdown w/ real numbers really drove it home.

    I’ll start with a small amount this week now that I have a blueprint to follow.

    Excellent analysis, thank you so much. Subscribing to your social media now. 🙂

    1. defidividends

      Thanks Chris, glad you found it useful!

      Let me know if you have any questions about anything as you go through it. Feel free to message me on twitter

  4. OCO

    Super article. Vivement les prochains.

  5. joaquin

    Great article sir, i had no clue this strategy was possible so i appreciate this. I see this heavily relies on the interests that AAVE pays and charges. I have 2 questions:
    1) How common is for this interests to change over time and with how much volatility? i mean can the borrowing rate of USDC go from 3% to 15% or something like that?
    2) And also, I believe the interests you are receiving for taking a loan might be to promote the use of AAVE in matic, how long do you think this will last?

    thanks for the article again, hope you can answer my doubts

    1. defidividends

      Good questions!

      1. For AAVE polygon the interest rate is variable so it will fluctuate. AAVE on ETH has the option for a fixed rate. Most times tho if there is a spike in interest rate they usually come down fairly quickly but def something to keep your eye on and monitor.
      2. You are correct. The added MATIC rewards are for liquidity mining which help promote usage. They are planning to be stopped soon but the overall strategy will remain the same and will still work, just not as high APYs

  6. James Bitakis

    Thanks much. Iron no good obviously now.

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