5 ms·

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 prof

by 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

by akyu 5y ago

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