23rd December 2021 > > Earning passive income with stablecoins (Part II).

tl;dr

It's in the title.

Market Snap

Market Wrap

That 1,200-point Omicron wobble is now down to 300. The resilience of stock markets continues to surprise to the upside, though cryptos are not following suit for now.

Curious Cryptos’ Commentary – IOTA, staking, $ASMB and $SMR

You will recall that the CCC on 19th December 2021 described the new staking process for IOTA and the launch of $AMBR/$SMR coins.

If you are an IOTA holder you should now download the updated Firefly 1.3.0 wallet and pre-stake.

Actual staking then happens automatically from 28th December 2021 for 90 days. You have nothing to lose if you are already invested in IOTA with potentially large upside by staking.

Potentially.

Curious Cryptos’ Commentary – Earning passive income with stablecoins (Part II)

Many of my concerns about lending stablecoins to an exchange to earn passive income (see yesterday’s CCC) are based around counterparty risk and exchange hack risk.

The obvious way to avoid those problems is to engage with Decentralised Finance (DeFi) which you can do in several different ways.

Engaging with DeFi is a whole lot more complicated than simply depositing stablecoins on an exchange, is more prone to user error, and runs the risks of a protocol hack or a rug pull.

But it does throw up some interesting opportunities.

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To interact with DeFi you need to use either a hardware wallet (Ledger Nano X is my preferred option) or a web-based wallet (MetaMask is my go-to solution), or the ideal scenario, MetaMask in conjunction with Ledger Nano (see our training course Module 1.12: MetaMask and Ledger Nano for details).

Increasingly I find myself using MetaMask rather than a Ledger Nano X for ease of use, but also because the range of DeFi protocols is that much greater. There are of course security risks around web-based wallets, and you must employ strict mitigation strategies. These are mostly obvious, usually tedious, and often overlooked. Please do not make that mistake.

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Let’s look at a real-life example, that involves a crypto and a stablecoin.

AVAX is the coin native to the Avalanche network, a Layer 1 network with block times of 1-2 seconds, low fees, and is EVM (Ethereum Virtual Machine) compatible, meaning that it can host all Ethereum assets and tools.

I have a long-term investment in AVAX. Rather than simply storing on my Ledger Nano X, I have used MetaMask to supply my holding to a DeFi protocol called BENQi:

https://app.benqi.fi/markets#supply

Currently, the passive income for supplying AVAX on BENQi is 7.65% which isn’t particularly exciting. It does vary, and at times has been much higher than that.

There is a perfectly valid strategy of continually searching out the best rates and moving assets around between DeFi protocols to take advantage of the highest rates. There is a small cost of doing so in terms of AVAX but a huge cost in terms of the time it takes each day. I don’t have enough hours to do that and write the CCC.

I am also confident in the robustness and longevity of BENQi. I cannot say the same about many other DeFi protocols. The highest returns are usually from new entrants, which are the riskiest ones in terms of hacks or rug pulls.

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I have added more spice by borrowing USDT.e (the Avalanche network version of USDT) against my AVAX supply.

This adds a new layer of risk, in the case that the AVAX price sells off from that at the time of borrowing USDT.e. If that happens then I run the risk of being liquidated and being forced to sell AVAX at a lowly price.

The key mitigation against that risk is to restrict the level of borrowing. BENQi has a very handy function showing the utilisation of the borrow limit and a health score. Regular monitoring of that number is advised.

Your question right now is – why would I borrow USDT.e against my AVAX?

Well, here comes one of the wonders of DeFi.

Right now the cost of the USDT.e loan is 5.82%.

However, I have deposited those USDT.e back into the protocol and currently I am being paid 8.78% to do so.

Net I am being paid 3.04% to borrow USDT.e, a concept which takes some getting used to.

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You may notice that it is possible to simply deposit UDT.e, to earn 8.78%, borrow USDT.e against that costing 5.82%, and deposit that borrowed USDT.e to earn another 8.78%.

But there is a wrinkle I have not yet mentioned.

Any passive income received by depositing AVAX and USDT.e is in the form of AVAX coins and Qi coins, the coin native to BENQi.

The cost of borrowing USDT.e is currently made up of a charge of 9.89% in USDT.e and distribution of 4.07% in AVAX and BENQi.

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In effect, this means that the headline rate of passive income is affected by the change in price of both AVAX and Qi, as well as the constant changes in rates.

Claiming that income means that both can then be deposited into the protocol, thus compounding the interest paid, which can have a miraculously beneficial impact.

In short, the actual return cannot be predicted with any accuracy, though as an investor in AVAX and a believer in BENQi, these are additional risks that I am happy to take.

Reserve Treasury Protocols (before they all go to zero