What’s Behind High Ethereum DeFi Yields? A Top Investor Explains

Bitcoinist June 22, 2020
Updated 2020/06/22 at 12:39 PM
3 Min Read

Ethereum-based decentralized finance has seen quite the frenzy over the past few weeks. After taking a large hit due to March’s liquidation event, this segment of the cryptocurrency market has been back on the rise.

The growth culminated this week in the public launch of the COMP token, the governance token of Ethereum-based protocol Compound. Compound is a money-market protocol that allows users to borrow and lend cryptocurrencies such as Ethereum and Tether’s USDT.

The launch of COMP, which exponentially increased the amount of money one could make by using the protocol, sent DeFi skyrocketing. But the profits are being supported by “poor retail traders,” according to a prominent crypto investor.

Ethereum’s High Yields Are Supported By Retail Traders

If you’ve perused Crypto Twitter at all over the past few days, you’ve likely heard of the high investment yields one can earn through using DeFi.

One Twitter thread published by a venture capitalist/fund manager in the space said that one can earn over 100% per year on stablecoin deposits via DeFi. This beats out traditional bank accounts by thousands of percent.

To put 100% in gains per annum into even more context, one doubling $1,000 every year for ten years will give one an end balance of $512,000.

Many have sprung for these opportunities, seeing them as ways to make a vast amount of money while Bitcoin and Ethereum stagnate.

But according to Qiao Wang, the ex-Director of Distributed Systems and Data Science at Messari and a stock/crypto trader, the high yields are being supported and subsidized “by the poor retail traders who consistently lose money on centralized exchanges.”

Wang explained further:

“One of the biggest problems these professional traders face is capital efficiency. If they want to leverage long, they need to borrow USDT. If they want to short, they borrow native cryptoassets. Most of the borrowing and lending happens on centralized platforms like OTC desks, of course. But centralized rates are ultimately passed on to decentralized platforms. Or else there’s arbitrage.”

Notably, the high rates available via Ethereum DeFi may also be a byproduct of COMP, which is distributed to users of Compound, increasing the demand to lend and borrow cryptocurrency.

There Are Risks

There are also multiple risks in trying to capture this 100% yield.

As reported by Bitcoinist previously, Tony Sheng, a crypto analyst and investor of MultiCoin Capital, identified five such risks. They are as follows:

  • Smart contract vulnerabilities in the lending protocol, whether that’s Compound or otherwise.
  • Smart contract vulnerabilities in the assets one is using with DeFi.
  • A liquidation event in the value of cryptocurrencies caused by market volatility.
  • Failure in the economic design of a protocol.
  • User error.



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