The U.S. banking system and its regulators are panicking about DeFi (decentralized finance), because having gone through decades of scandals and new rule writing, suddenly the new technology of blockchain and crypto have spawned an alternative to legacy finance. It is clear to most that DeFi has the potential to sweep the whole scene away in the same way as the internet flattened the print media industry. The core worry will be stablecoins, a technology where a token tracks a currency, in this case the dollar, but is created and distributed by the private sector. To government, especially one set on a path of depreciation, having a nimble private sector eating into their money monopoly is a very unwelcome development.
The gimp and the dominatrix of established financial services are in a panic because their cozy world of fraud and fine is under threat, and they are working hard together to try and halt the galloping progress of crypto into mainstream finance.
There is of course plenty of need for regulation in crypto but you can’t believe all the crying about customer peril when every day we all get a handful of robbery attempts through our email and social media without the authorities appearing to lift a finger to stop it. Imagine if you were the victim of so many attempted muggings when you walked down the street?
However, apparently BlockFi offering 5%-8% on deposits of a stablecoin is worth trying to block by prosecution rather than go chase the criminal gangs trying to hack you in your own home. It doesn’t take a genius to work out where priorities lie.
That aside, DeFi is a fantastic development and offers all sort of positive financial possibilities.
As a starting point, take a holder of a stablecoin. A favorite of mine is USDCoin (USDC), a well-funded and backed Ethereum token pegged to the U.S. dollar at 1:1. You can lodge that with Aave, BlockFi, Celsius or Compound to name four of the main players, and get anywhere between 4%-8% APY interest.
That’s a really great rate, which is why the “‘may as well be” 0% interest, financial repression brigade of established finance is less than happy.
Compound and Aave have bonus programs handing out their tokens to users, but this isn’t an article about how much interest you can get, it’s about what else these systems can let you do.
All these sites have borrowing features, so you can lodge, for example USDC and borrow ethereum or dai. Aave and Compound, for example, actually give bonus APY in their tokens that can make borrowing very cheap. It is also nearly instant, although there is ETH gas fees to be paid which can be high.
So for example, you want to buy ethereum and you have USDC to do it. You could swap the tokens using a site like Uniswap or Sushiswap, or do it on a Dex like Binance. Better still, you could also leave your USDC on deposit at Aave and at today’s numbers earn 11.8%, borrow Dai at 2.6% then swap dai for ethereum.
Dai and USDC are pegged 1:1 to the dollar and the net positive interest on the borrowing and deposit is 9.2%, you earn a fat rate of interest and can still buy the ethereum. Obviously if ethereum goes down you lose and visa versa, but nonetheless you have got your Ethereum position while still keeping your stablecoins earning interest.
To add a further twist, you could sell that ethereum and you are now short. You could then take the proceeds in USDC and deposit them for more yield.
Obviously, this is a somewhat spicy trade, as shorting is always risky when the asset can rise a lot, but this is the game a shorter plays so why not earn interest while you are about it? When you close the short, you simply pay off the loan and count your profit or loss which will be enhanced or lessened by the APY on the deposits.
So if you like earning interest on your crypto while still having the ability to trade, these sites give a hodler the ability to use your interest-earning capital as collateral to trade.
Then there is staking with borrowed tokens, which is a whole other area of potential profit which I will cover in my next article.