As far as I understand on average DAI is backed by 150% of other cryptocurrencies. What would happen with DAI if all other crypto-currencies would lose 90% of it's value?
fyi you can get around half these returns on aave on ethereum mainnet without having to mess with matic at all.
while i don't think the matic team is untrustworthy, it's worth pointing out their entire network is currently secured by an upgradeable multisig wallet.
there is also a ~1 week period to move back from matic to ethereum mainnet which can be irksome if you e.g. want to sell quickly back to fiat via some centralized exchange.
The problem with doing it on the Ethereum network is gas fees. Even with super low gas fees (~$3), this strategy would cost over$100 to implement.
I agree that doing this on Polygon / Matic is not ideal, as it is a sidechain / quasi L2 solution that sacrifices decentralization for speed and cost, but for illustration purposes, it works.
It takes ~40 mins to bridge Ethereum from the Matic network to the Ethereum mainnet,
ah yes, the proof of stake bridge is faster.
i guess it depends if you're running this strategy with size. e.g. for over $100,000, 10% returns means you'd earn back gas fees in ~3 days.
A Decentralized Finance (DeFi) Exercise
Link to original post.
Over the last couple of months, I have been playing around Decentralized Finance (DeFi), a relatively novel application within the cryptocurrency ecosystem. In this post I want to illustrate how to use several DeFi applications to maximize yield on US Dollar pegged coins (stablecoins) without having exposure to cryptocurrencies volatility.
This post is advanced in its nature: To understand it, you will require an intermediate level of knowledge in DeFi and investment finance. If you’re keen to learn here’s how you can start:
Read this primer on Decentralized Finance
Deposit USD or CAD and buy cryptocurrency (For this exercise, I suggest buying ETH). I like Netcoins but something like Coinbase works just fine
Setup a wallet. I am very happy with Metamask
Learn how to use Polygon / Matic, a quasi Level 2 Ethereum solution
Learn how to use AAVE, a lending platform on Ethereum and Polygon
The first step is to get the amount you want earning yield in your Metamask wallet.
From there, open the Matic Network wallet and transfer the ETH to the Polygon / Matic network
The next step is to connect your Matic Metamask wallet to QuickSwap, and exchange your ETH to DAI. DAI is a cryptocurrency that is pegged to the US dollar, meaning 1 DAI = $1 USD
Finally, deposit your DAI in AAVE. This is where the fun begins.
Now that your assets are deposited on AAVE, the goal is to borrow USDC, another coin pegged to the US dollar. The idea is to do the following:
Borrow USDC on AAVE
Exchange USDC to DAI on QuickSwap
Deposit DAI on AAVE
After repeating steps 1-3 eight times, this was the result:
What does this mean?
I have deposited on AAVE $3,382 DAI, earning 2.82% p.a on my deposit
I have borrowed $2,400 USDC, costing me 2.94% p.a.
I am earning 3.71% MATIC Rewards for my DAI deposit on AAVE
I am earning 3.46% MATIC Rewards for my USDC loan on AAVE
What are MATIC rewards?
MATIC is the native token of the Polygon / MATIC network. At the moment, I am being rewarded as an user of the protocol. The rewards accrue instantly, so for the purposes of keeping my cryptocurrency price volatility at a minimum, on an almost daily basis I will be converting my rewards to DAI and depositing them in AAVE.
What is my expected annual rate of return on this strategy?
For my deposit, I expect to make: $3,382 * 2.82% = $95.37
For my loan, I expect to pay: $2,400 * 2.94% = $70.56
My MATIC rewards for my deposit are: $3,382 * 3.71% = $125.47
My MATIC Rewards for my loan are: $2,400 * 3.46% = $83.04
$95.37 - $70.56 + $125.47 + $83.04 = $233.32
I deposited $990 DAI on AAVE, so my expected annual rate of return is roughly: 233.32 / 990 = $23.56%
What are the principal risks of this strategy?
Although it looks complicated, once you get a hang of Metamask, Polygon, QuickSwap, and AAVE, getting this strategy in place is not that complicated. Once its up and running, you are welcome to either keep accumulating MATIC rewards (and add the price volatility of MATIC to your strategy), or periodically exchange MATIC to DAI. As long as the APYs stay close and the MATIC rewards continue, this strategy works and I believe it is great on a risk adjusted basis.
I expect MATIC rewards to be reduced slowly over time, so it is probable that my 23.56% expected annual return will be lower. However it sure beats the 0.30% expected annual return I am currently getting in my savings account.
For informational purposes only. This is not investment advice.