7th October 2021 > > BENQi, a DeFi protocol.

tl;dr

A dive into the world of Decentralised Finance (DeFi).

Market Snap

Market Wrap

As shown by the increase in the Binance BTC perpetual swap rate, the leverage sheep are all now going long after BTC has risen from $44k on 1st October, a 24% increase in a week. Someone needs to explain to these people that it is usually better to buy BEFORE the price rises, not afterwards.

Almost all perp rates across almost all exchanges for almost all coins are now a sea of red. The risk of a long squeeze has increased dramatically overnight.

Curious Cryptos’ Commentary – Decentralised Finance (DeFi) – I suspect I lose most of you today

The CCC has not delved too deeply into this area yet, apart from reporting the hacks and rug pulls that are a frequent feature of this landscape.

I am also deeply sceptical that the potential rewards on offer adequately cover your market risk and your risk of impermanence loss, which as Larry has previously and rightly pointed out, is usually permanent.

The high fees for Ethereum based DeFi also means that it is expensive to explore and try out various ideas and strategies.

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DeFi is relatively complex compared to simply adding fiat to your Coinbase account and exchanging for BTC. For most protocols you will need a Ledger Nano, or Metamask or something similar, and you will have to swap coins across different blockchains. Blah blah blah.

Despite these sizeable barriers to entry, hundreds of billions of dollars’ worth of cryptos have been locked up across the various protocols. For an industry that is only 18 months old, that is an impressive performance.

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I have found one DeFi strategy that incurs almost no market risk, and almost no liquidation risk, which seems remarkable to me.

BENQi is a DeFi protocol launched on the Avalanche (native token AVAX) network on 17th August 2021. In less than a week, it had attracted $1bn of business. Total supply is now $1.9bn and total borrow $650mm.

They must be doing something right.

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As of today, you can deposit USDT.e (the C-Chain version of USDT) into BENQi and earn 12.38%.

You can borrow back 60% of your notional earning (not paying) 0.12% giving a total return of 12.5%.

However, if you return the 60% back to your fiat bank account you have only 40% of the original notional tied up in the trade, giving an effective return of 31.25%.

Alternatively, you could deposit the newly borrowed USDT.e back into the pool and borrow more.

Rinse and repeat (there is a small wrinkle in doing this – if you are interested let me know, but it isn’t really relevant to the overall discussion).

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Now, I know this doesn’t compare to some of the headline numbers in DeFi, especially those that Larry is interested in. But please - never forget that Larry’s risk tolerance is on an entirely different planet to anyone else’s.

But with this (relatively) simple strategy you have no crypto market risk and no liquidation risk as both lend and borrow are in USDT.e.

You do have FX risk if your base currency is not USD.

Costs are minimal (buying USDT on Coinbase is free of fees) and transfer costs are approximately 0.5% of notional out of Coinbase and 0.05% for each transaction on the Avalanche network.

Someone sitting on spare cash earning zero percent interest from their bank might be interested in receiving 31.25% per annum instead.

The only real risk you have is if BENQi gets hacked or rug pulled, or perhaps you forget your Metamask password and private keys. Easily done.

These are real risks by the way – only the foolish would put their entire life savings into just one basket.

And it is important to note that the returns are partially quoted in USDT.e and partially in the native token Qi, so the end result will be different (could be higher, could be lower) to my simplistic headline analysis.

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As part of my research for today’s CCC I have set up my very own first yield farm (*).

Hurrah!

Or possibly Boo!

I have tried so hard to not get dragged into this world before now, but you can blame Dr. Chloe for this one. I can see it is going to use up a lot of my time.

However, here goes a real-life example that is currently merrily harvesting away for my benefit.

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I have deposited AVAX into BENQi earning 10% per annum.

I have taken out a loan in USDT.e earning 0.12% per annum.

I have used that USDT.e to buy more AVAX.

I have deposited that AVAX back into BENQI earning another 10%.

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I know I said in an earlier CCC that you should NEVER use DeFi to lend crypto to yourself.

Despite my obvious hypocrisy in this situation - making me very qualified to be a politician of any party or better still, a single-issue protester without a job stopping others from going to work or the hospital - I still stand by that statement.

I am only doing this so that I can report back on my experience for the benefit of us all.

Cos I am kind like that.

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(*) This isn’t strictly true. I set one up on Bancor when Bancor was first released. I just didn’t know it was called yield farming – I didn’t know it was a thing. That farm is still ticking along nicely. Anyway, this is my first conscious attempt to create a yield farm.

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** None of this is investment advice, it is just an interesting story. To me at least. **