The Ergo blockchain uses a Proof of Work (PoW) consensus mechanism, known as Autolykos. Although Proof of Stake (PoS) has become very popular lately, deploying the Ergo network as a PoW blockchain was an intentional decision. As with any design choice, this involved tradeoffs: PoS prioritizes minimizing energy consumption, while Ergo’s PoW prioritizes security and decentralization.
Within community forums, many newcomers who are familiar with PoS projects, like Cardano or Ethereum, often ask if they can stake their ERG to earn yield. While the Proof of Work model does not rely on staking to secure the network, the purpose of Decentralized Finance is to offer individual’s the ability to access financial tools that may help them earn yield, diversify their investments, or manage risk. Ergo’s goal is to provide organic and sustainable financial tools that do not introduce unnecessary fragility and risk into the economy, which is far too common in today’s crypto ecosystem. The following is a collection of current and future applications that allow users in the Ergo ecosystem to earn ERG:
The most conservative investment in all of crypto is mining. You can choose to sell the coins you earn, and your GPU’s will maintain their value over time. For example, an investment in mining equipment during 2021 would likely be worth more today than an investment in actual crypto because the price of GPU’s has not fallen by the same 75%+. Although mining has become unprofitable for many in this bear market, it may still be beneficial depending on the cost of electricity and GPU’s in your area. Learn more about mining on Ergo here.
The most common way to earn yield is by providing liquidity. This is done by supplying pairs of assets to an exchange for users to trade between, which results in the supplier earning trading fees. Liquidity provision (LP) is possible on centralized exchanges such as Coinex or Kucoin, and decentralized exchanges (DEX) such as Spectrum or Swop.fi. Centralized exchanges offer ERG trading pairs with BTC, USDC, and USDT, and currently provide an APY in the range of 4-7%. Spectrum DEX offers users the ability to create their own trading pairs, which has led to nearly every major native asset on Ergo being represented on the DEX. The APY on the DEX changes dramatically with trading volume, but the current rate for the most popular assets (Ergopad & Paideia) is between 4-8%. If engaging in LP positions, it is recommended that you research the process as much as possible. In particular, it is important to be aware of the risk of impermanent loss.
A grid bot is an advanced trading tool that trades assets for you. The advantage of this method is that you can select price ranges that you wish to trade between, or even an overall long or short position that allows you to take advantage of volatility to earn money no matter the price. This is available on Kucoin, but Ergo will soon offer a decentralized version of this tool that can be run through Nautilus wallet.
Off-Chain Dex Bots
For the more technically inclined, it is possible to operate an off-chain bot that processes transactions on Spectrum.fi and earn fees. These bots are responsible for handling and verifying the transactions people make on the DEX.
“Wait, I thought there was no staking in PoW!?”
Herein lies the genius of Ergo’s eUTXO model and smart contracts. ErgoPad has led the way in the Ergo ecosystem by providing staking opportunities for those interested in investing in new projects in the ecosystem. AnetaBTC has also recently launched their staking portal, and holders will soon earn fees produced by AnetaBTC’s BTC wrapping protocol and community owned liquidity fund. In the near future, Ergo’s NightOwl Casino will allow users to provide liquidity as well as the opportunity to be part of the “house” of the casino.
With the abundance of options for buying and selling ERG, there will inevitably emerge some differences in price between the various platforms and pools. Any time there is a difference, there is an opportunity for users to take advantage of that difference and turn a profit. Advanced users may build bots to execute these trades, while others might simply remain vigilant. An example of this is on the Bisq network, where the average price of ERG has been 5-10% higher than other markets. True to form, there are developers looking to build a Bisq-like p2p fiat onramp on Ergo in the coming year.
A second opportunity for arbitrage will come with the release of DexyGold. Dexy is a stable coin framework that relies on users to take advantage of trading opportunities to maintain the coin’s peg (whitepaper). In this case, the token will be pegged to the price of gold. More to come on this product in the next year!
Lending & Borrowing
Lending and borrowing protocols like Aave and Curve are staples of the broader DeFi ecosystem, and they are knocking on Ergo’s door. DuckPools is a lending and borrowing protocol, similar to Aave, that has recently released a beta version of their lending and borrowing protocol. Although this version is limited to transactions of 1 ERG, the dApp has shown that proper DeFi is ready to blossom on Ergo, and the full version will be available soon. EXLE is a radically new DeFi tool providing uncollateralized loans to businesses in Kenya. Similar to Kiva, borrowers define the terms and submit requests for a loan, and lenders choose which loans for which they wish to provide funding. The first loans through EXLE have already been successfully repaid, and the protocol looks to expand for public use in 2023.
Coming to a dApp near you, Ergo Profit Sharing and ErgoWell enable developers to tokenize and fractionalize their dApp, making it possible for users to own “shares” of the project while earning a portion of its fees. An exciting application of this will be the ErgoMixer, which will incentivize users to leave their ERG in the mixer, thereby increasing ErgoMixer’s ability to obfuscate transactions.
Bonds and options have been used in traditional finance for many years, offering individuals the opportunity to diversify their investment portfolio, manage risk, and potentially earn returns through the buying and selling of these financial instruments. Sigma Finance brings these features to the blockchain, which will allow a complex market to emerge for users and miners wishing to access liquidity or hedge against volatility in new ways.
These financial tools provide users the ability to earn yield and take advantage of trading opportunities, while also supporting the stability and decentralization of Ergo’s ecosystem. Given the unfortunately high number of scams, hacks, and collapses in the past year, Ergo’s focus on first principles will offer users a haven of sanity through the bear market and beyond. With over 400 days of negative price action, users also need to consider the possibility that market sentiment can change in 2023, and recognize the opportunities that lie ahead for Ergo. Not only has development increased throughout 2022, but average daily transactions and the number of wallets have also increased, while the supply of ERG distributed from the emission contract has been reduced from 67.5 ERG per block in January 2022 to 42 ERG per block in January of 2023. In the coming year, be on the lookout for new products and services which will provide additional opportunities for users to earn ERG. As always, reach out to members of the Ergonaut community if you have questions or need help with any of the above information.