Borrow, lend, borrow, lend — lather, rinse, repeat.
Illustration: Carolina Moscoso
Michael P. Regan
In this edition of the Bloomberg Crypto newsletter, Michael P. Regan discovers a place in DeFi where eye-popping yields continue to proliferate:
There’s a line in a recent newsletter from The Defiant that is nothing less than jaw-dropping: “Featured Yields: Up to 60% APR on Stablecoins, 61% APR on ETH
Excuse me? Did someone just say 60%?
Perhaps news of the death of juicy decentralized-finance yields has been greatly exaggerated. But what manner of crypto sorcery is conjuring up such seemingly magical yields? Well, it’s complicated, but the most important ingredient is something called “
The strategy starts with a concept similar to what is known in traditional finance as a carry trade. The idea is to borrow in one currency somewhere at a low interest rate, then lend that same money out elsewhere at a higher rate and pocket the spread between what you’re paying to borrow and being paid to lend. And because DeFi loans are often over-collateralized – meaning you need to put up more collateral than the amount you’re borrowing – it’s conceivable you can even get to borrow when factoring in rewards meant to incentivize locking up coins in proof-of-stake networks.
So if you can dip your borrowed money into a crypto box and earn a nice yield, the thinking among loopers goes, why not double dip? Or triple dip? Or quadruple dip? First, put some crypto in the box. Then use the money in that box as collateral for a loan from the same box. Put that newly borrowed money right back in the box! Lather, rinse, repeat.
It’s not a brand-new concept, but it’s a buzzy topic these days as DeFi investors hunt for yield and new protocols emerge with the promise to automate the whole process. (Looping can require swapping back and forth among synthetic, staked and/or “wrapped” tokens. We’ll leave it to the reader to use the Google machine to read up on all the various options available because even though “do your own research” is a warning repeated so often it’s become a cliche, it’s an especially pertinent cliche in this instance.)
Of course, this begs the question: Is it risky? You can bet your bottom Dogecoin it is. First, there are all the standard hazards of DeFi, like smart-contract programming bugs, hackers, rug pulls, etc. But also, you may have to lock up your crypto for a long time to get those juicy yields, and prices can be so volatile that there’s a chance your collateral ratio could be breached and your entire position liquidated. Game over, thanks for playing.
“It’s as about as safe as covering yourself in peanut butter and running at a horde of malicious chimpanzees,” as Nathan Thompson wrote recently for Cointelegraph. That begs another questions: Do malicious chimpanzees have some sort of out-of-control peanut butter craving? Who knows. But we’re in no mood to stress-test his analogy. We get the point.
Charting it out
Hearing them out
“We know that there's a lot of individuals out there who either don't want to comply with the law, choose to evade the law, or don't know about the law. And, you know, sometimes they will do things that are surprising, including writing things down."
What we’re reading (and writing)
- Crypto Murder Case From Seoul’s Beverly Hills Spurs Tighter Digital-Asset Regulation
- The Rise of FTX, and Sam Bankman-Fried, Was a Great Story. Its Implosion Is Even Better (New York Times)
- Singapore’s Whampoa Group Plans Crypto-Friendly Bank in Bahrain
- In Zimbabwe, Digital Gold Beats Bitcoin (MarketWatch)
- Citadel Securities Alleges Ex-Employees Stole Trade Secrets
- Matt Levine’s Money Stuff: Tether Bought Some Bitcoin (Bloomberg Opinion)
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