4 ms·

Maybe this isn't the place to ask, but since the source of this wealth is "defi lending" and finding ways to max out APY, I have to ask why anyone would take ou

Maybe this isn't the place to ask, but since the source of this wealth is "defi lending" and finding ways to max out APY, I have to ask why anyone would take out a line of credit at extraordinary interest rates in order to make all these staking schemes profitable?

tylersmith 5y ago
The high yield isn't coming from high interest rates, generally they're being subsidized by the protocol to attract deposits. In fact, some these these subsidies pay you to borrow.
ludamad 5y ago
I was curious to this myself (I'm speaking more generally than any project). One reason I found is just to provide margin investing. So some company buys some $FOO and it goes up 10x. It may prefer to borrow stablecoins with it as collateral, even at a high rate. This way, investment can continue without selling (they may want to defer selling for liquidity or tax reasons, simply want to leverage and buy more etc)
akyu 5y ago
If you can borrow token A at X% interest, but there is an opportunity to use that borrowed token and earn Y% interest, if Y is greater than X, you can make profit. This is a super simplified explanation but that's the gist of it. Basically defi is a gigantic game of rehypothecation.
- cuteboy19 5y ago
  crypto must certainly be the worlds biggest wealth generating machine if people are borrowing at 30%. that or its a pyramid scheme
  - cslarson 5y ago
    just curious where you get the 30% figure. usdc borrowing on aave is 2.83% right now, which is practically reduced a further 0.97% by the AAVE incentives. most other stablecoins are in the same region.
    - jazzyjackson 5y ago
      Like a sibling said it might be more of a promotional rate thing since there are max lock-ups, but here's a Binance document [0] that advertises 20% for AVAX, NEAR, MATIC, and 70% for CAKE (never heard of it). Looking at CAKE, they have a max lockup of 10 coins for 90 days. So that's... $60 worth of crypto at 70% APR for 90/365 days ~= $10 profit max. Just like banks that offer a stunning 3% interest rate when you open a savings account (up to $3,000 for first 3 months etc etc) [0] https://www.binance.com/en/support/announcement/2dd9fba94afd4ef2a214ea4072c35ae1 https://www.binance.com/en/support/announcement/2dd9fba94afd...
  - koolba 5y ago
    It’s both. Pyramid schemes generate wealth for a subset of the pyramid.
  - ayngg 5y ago
    The rates aren't that high, and for people that trade volatility, yes it can be insanely profitable.
  - tootie 5y ago
    It also seems to be an economic niche that is 100% rents and 0% utility.
  - vmception 5y ago
    I love this assumption because this is why BlockFi, Nexo, Gemini and Coinbase Staking can offer people like 4% fixed, simply because its more believable. Behind the scenes they use the capital deposited with them to get 30% and more, in these Defi protocols of the day, and just pocket the difference. Similar to banks, just with much wider yields. "Why bother explaining just offer them something ‘super edgy’ like 3 percent higher than their bank gives!" The pyramid scheme parts of crypto offer much larger percentages, by multiple orders of magnitude. Although each protocol has to be evaluated independently. Typically these protocols earn from volume and size of transactions moving through other parts of the economy, as they take a cut while providing a service that makes it easier for volume to occur. They then just extrapolate the earnings over a prior time period, compared to the current amount of capital deposited with the protocol, and display a percentage return. These are not fixed returns as many factors can affect the actual return on capital. One primary factor is that if there was more capital deposited then the % would be much lower. People don't deposit capital to that extent because there are so many other places to get higher than 30% yields. Its just a boomtown, the pie is really that big. In traditional markets something similar occurs but people move capital chasing yields down to 2% or less. Using the same logic on the next opportunity "Oh I won't except 0.75%, I can get 2% on this other bond!"
    - randomhodler84 5y ago
      That, and a lot of the pools will absolutely burn you with impermanent loss — plus more of a depreciating vanity token that the site included in the yield percentage. It’s a good racket — while some new shittoken is popular, get people to add your exit liquidity by pledging stablecoins and gas tokens to liquidity pools, borrow those pool claim tokens from the suckers (pay them “yield”), raid their liquidity, dump your shittokens, print more shittokens, “pay” the suckers with second set of shittokens, give them back their claim tokens (which are now mostly a claim on the first lot of shittokens), sucker goes to claim their winnings (their original capital) and is left with a big bag of worthless shittokens. And you have their ether, bnb, matic, stablecoins. 100% APY tho
      - vmception 5y ago
- rchaud 5y ago
  > A at X% interest, but there is an opportunity to use that borrowed token and earn Y% interest, if Y is greater than X, you can make profit. This is how arbitrage works. But wouldn't the arbitrage opportunities disappear if enough people know that this token yields more elsewhere? Surely the market prices would adjust accordingly.
  - 22c 5y ago
    One thing that I've noticed is that Y% is often a constantly moving target whereas X% is a bit more static. The arbitrage opportunities can and do dry up. Typically the larger the arb, the faster it dries up, at which point you're back to earning X% but with more overheads. At most you can probably be sitting on Y% for a few months before you need to find a new strategy.
- tomc1985 5y ago
  There's gotta be someone at the end of this chain getting the shrift
- cyanydeez 5y ago
  Like the dotcom bubble where advertisers were selling advertisement to advertisets
TrapLord_Rhodo 5y ago
There's a ton of reasons. Arbitrage - Borrowing, swapping and paying back in the same function call. Liquid Staking - Say i have a POS coin. When i stake i secure the network with collatoral and get paid a certain APR. But now that token is stuck staking. But if you create a smart contract the aggregates the coins together, stakes them and loan them out to represent their underlying value, you get slight divergence between the total value in the smart contract and your underlying ownership in it. So now i have this Liquid X coin, that is rising in value at a set rate to normal X Coin. So now, i can then go and utilize the underlying value of the Liquid coin by utilize it as collatoral to mint more X_Coin. Rinse and repeat until you are at a respectable collateralization ratio.
SilasX 5y ago
Not precisely what you’re asking for, and about Compound/Uniswap rather than this bundle, but I made a comment a while ago explaining some of the core dynamics of defi lending. https://news.ycombinator.com/item?id=30348136 https://news.ycombinator.com/item?id=30348136

tylersmith 5y ago

The high yield isn't coming from high interest rates, generally they're being subsidized by the protocol to attract deposits. In fact, some these these subsidies pay you to borrow.

ludamad 5y ago

I was curious to this myself (I'm speaking more generally than any project). One reason I found is just to provide margin investing. So some company buys some $FOO and it goes up 10x. It may prefer to borrow stablecoins with it as collateral, even at a high rate. This way, investment can continue without selling (they may want to defer selling for liquidity or tax reasons, simply want to leverage and buy more etc)

akyu 5y ago

If you can borrow token A at X% interest, but there is an opportunity to use that borrowed token and earn Y% interest, if Y is greater than X, you can make profit. This is a super simplified explanation but that's the gist of it. Basically defi is a gigantic game of rehypothecation.

cuteboy19 5y ago
crypto must certainly be the worlds biggest wealth generating machine if people are borrowing at 30%. that or its a pyramid scheme
- cslarson 5y ago
  just curious where you get the 30% figure. usdc borrowing on aave is 2.83% right now, which is practically reduced a further 0.97% by the AAVE incentives. most other stablecoins are in the same region.
  - jazzyjackson 5y ago
    Like a sibling said it might be more of a promotional rate thing since there are max lock-ups, but here's a Binance document [0] that advertises 20% for AVAX, NEAR, MATIC, and 70% for CAKE (never heard of it). Looking at CAKE, they have a max lockup of 10 coins for 90 days. So that's... $60 worth of crypto at 70% APR for 90/365 days ~= $10 profit max. Just like banks that offer a stunning 3% interest rate when you open a savings account (up to $3,000 for first 3 months etc etc) [0] https://www.binance.com/en/support/announcement/2dd9fba94afd4ef2a214ea4072c35ae1 https://www.binance.com/en/support/announcement/2dd9fba94afd...
- koolba 5y ago
  It’s both. Pyramid schemes generate wealth for a subset of the pyramid.
- ayngg 5y ago
  The rates aren't that high, and for people that trade volatility, yes it can be insanely profitable.
- tootie 5y ago
  It also seems to be an economic niche that is 100% rents and 0% utility.
- vmception 5y ago
  I love this assumption because this is why BlockFi, Nexo, Gemini and Coinbase Staking can offer people like 4% fixed, simply because its more believable. Behind the scenes they use the capital deposited with them to get 30% and more, in these Defi protocols of the day, and just pocket the difference. Similar to banks, just with much wider yields. "Why bother explaining just offer them something ‘super edgy’ like 3 percent higher than their bank gives!" The pyramid scheme parts of crypto offer much larger percentages, by multiple orders of magnitude. Although each protocol has to be evaluated independently. Typically these protocols earn from volume and size of transactions moving through other parts of the economy, as they take a cut while providing a service that makes it easier for volume to occur. They then just extrapolate the earnings over a prior time period, compared to the current amount of capital deposited with the protocol, and display a percentage return. These are not fixed returns as many factors can affect the actual return on capital. One primary factor is that if there was more capital deposited then the % would be much lower. People don't deposit capital to that extent because there are so many other places to get higher than 30% yields. Its just a boomtown, the pie is really that big. In traditional markets something similar occurs but people move capital chasing yields down to 2% or less. Using the same logic on the next opportunity "Oh I won't except 0.75%, I can get 2% on this other bond!"
  - randomhodler84 5y ago
    That, and a lot of the pools will absolutely burn you with impermanent loss — plus more of a depreciating vanity token that the site included in the yield percentage. It’s a good racket — while some new shittoken is popular, get people to add your exit liquidity by pledging stablecoins and gas tokens to liquidity pools, borrow those pool claim tokens from the suckers (pay them “yield”), raid their liquidity, dump your shittokens, print more shittokens, “pay” the suckers with second set of shittokens, give them back their claim tokens (which are now mostly a claim on the first lot of shittokens), sucker goes to claim their winnings (their original capital) and is left with a big bag of worthless shittokens. And you have their ether, bnb, matic, stablecoins. 100% APY tho
    - vmception 5y ago
rchaud 5y ago
> A at X% interest, but there is an opportunity to use that borrowed token and earn Y% interest, if Y is greater than X, you can make profit. This is how arbitrage works. But wouldn't the arbitrage opportunities disappear if enough people know that this token yields more elsewhere? Surely the market prices would adjust accordingly.
- 22c 5y ago
  One thing that I've noticed is that Y% is often a constantly moving target whereas X% is a bit more static. The arbitrage opportunities can and do dry up. Typically the larger the arb, the faster it dries up, at which point you're back to earning X% but with more overheads. At most you can probably be sitting on Y% for a few months before you need to find a new strategy.
tomc1985 5y ago
There's gotta be someone at the end of this chain getting the shrift
cyanydeez 5y ago
Like the dotcom bubble where advertisers were selling advertisement to advertisets

TrapLord_Rhodo 5y ago

There's a ton of reasons. Arbitrage - Borrowing, swapping and paying back in the same function call. Liquid Staking - Say i have a POS coin. When i stake i secure the network with collatoral and get paid a certain APR. But now that token is stuck staking. But if you create a smart contract the aggregates the coins together, stakes them and loan them out to represent their underlying value, you get slight divergence between the total value in the smart contract and your underlying ownership in it. So now i have this Liquid X coin, that is rising in value at a set rate to normal X Coin. So now, i can then go and utilize the underlying value of the Liquid coin by utilize it as collatoral to mint more X_Coin. Rinse and repeat until you are at a respectable collateralization ratio.

SilasX 5y ago

Not precisely what you’re asking for, and about Compound/Uniswap rather than this bundle, but I made a comment a while ago explaining some of the core dynamics of defi lending. https://news.ycombinator.com/item?id=30348136 https://news.ycombinator.com/item?id=30348136