Happy 2020 everyone!

Just a reminder that this is performance art and that nothing contained here should be construed as investment advice, nor an inducement to trade, lend, borrow any cryptocurrency or finance product. Transacting with these assets is risky and you are likely to get rekt. Do your own research and consult a financial advisor before transacting any financial product.

Just before the clock marked the passing of one decade to the next, I released details of my plans to start trading a small “fund” focused solely on trading “DeFi” products with an initial investment of 1 Ether.

With the Ethereum network undergoing a hard fork on 1 January to relieve itself of a premature glaciation, all was quiet on the old ETH blockchain. This gave me an opportunity to get myself started by moving some ETH around:

As a place to start, I benchmarked the account at noon UTC on 1 January 2020, and pulled prices from CoinMarketCap. I’ll use this as the base value for the entire experiment:

2020–01–01 1200 UTC

1 ETH

130.87 USD

0.01818155 BTC

Still moving a bit slow on the afternoon of the 1st, I decided to setup just one trade, buy some single collateral SAI.

Why SAI?

Good question, I’ve been following the MakerDAO project for awhile and think that it’s an interesting experiment, though I have some questions about how robust the economic model is. Last November I wrote a post about my experience swapping a Maker CDP from the old single collateral (SCD) model, to the new multi collateral (MCD) model. One thing that got me thinking, and sparked a lot of conversations with people in the industry is how the close down of SCD may lead to a squeeze on SAI as CDP owners required SAI to close out their positions and transition to MCD. Should this process play out there could be demand for SAI from CDP owners willing to pay more than $1 per SAI.

I looked around to places where I could obtain SAI from decentralised exchange and decided to go with Kyber Network.

Get me some old school SAI

I hadn’t used Kyber before, and it looked fairly familiar so I didn’t bother to do too much reading up on the details (notice the T&Cs that I definitely didn’t read).

Being concerned with transaction fees, I opted for the lowest gas fee allow (1 gwei)

Things were pretty quiet on the network so my transaction broadcast out to the Kyber relayers and confirmed quickly. I wasn’t really sure how the relayer system worked, but the transaction in Etherscan looked liked my tokens pinged around 3 relayers, which sounded like it could become expensive if gas fees rise.

I, however, didn’t care at this point and was now the proud owner of 25.001 SAI. Hopefully these little buggers will moon here soon.

I had to resume family related duties and drive home so I decided to leave my SAI to chill a bit and would resume the next day.

Now the 2 January, and while the Ethereum Muir Glacier hard fork seemed to have gone well, the Ethereum blockchain was still a ghost town, which was good for me.

Unfortunately my SAI hadn’t made me rich overnight yet, so I resumed my work and decided to try one of these fancy lending platforms. I found a site that allowed me to compare various “DeFi” lending rates, of the 11 platforms listed with rates for lending and borrowing, only 5 met my sniff test for decentralisation. From those I found that Fulcrum offered a fairly hefty 4.8%+ lending rate on my SAI, as well as some decent rates on DAI, and WBTC.

I hadn’t used Fulcrum before, and was a bit worried that they may decide to force convert my SAI to DAI one of these days, but took some comfort in the fact that they offered rates for both assets. Their blog post mentions the ability for users to do it themselves through the platform. One to keep an eye on.

Fulcrum was another pretty clean platform to use, just had to permission my MetaMask wallet on their site, and click the lend button next to SAI.

I gave Fulcrum all my SAI, and refused to leave a decent tip for ETH miners, whom I think will be getting a substantial cut of my precious fund.

Despite my short changing ETH miners the barren wasteland that was transactions on 2 January meant that my transaction was picked up almost instantaneously.

I learned after setting up the trade that when you lend out assets on Fulcrum they pass you another token that represents this lending position. Like any good ERC20 token it can between transacted and traded around on other platforms. Also, because it is tied to this lending activity, value should accrue to the token. Again, having not bothered to read up on the financial positions I was getting myself into, I have yet to understand how the rate I lent out at works in practice, and if it evolves over time, and if everyone lending on Fulcrum gets the same rate. Pretty important things, but I just got back from holidays, so I’ll read up on them later, for now I want my sweet sweet 4.8272% yield.

And we’re off to the races..

Now with a basic trade setup with SAI, I want to try something more complex, borrowing a stablecoin with a lower interest rate, and lending it at a higher interest rate. In an efficient market these opportunities shouldn’t exist as speculators arbitrage away such opportunities. Seeing such opportunities could mean that these markets are indeed inefficient, i.e. people willing to pay more for an asset in one place than another. It could also mean that there is a structural reason for a disparity between venues.

I’ve stared at cryptocurrency markets for long enough to know that different prices across platforms, at least through 2017, was often the result of structural reasons. It was sometimes hard to move fiat in or out of some venues which could distort prices. In theory, DeFi shouldn’t be beholden to the same issue.

Not expecting much, I went back to my lending rate comparison site and looked for some cheap borrowing rates. I came across DAI (the multi collateral stuff) on dYDX which cited a 2.91% borrowing rate. Significantly lower than any other stablecoin.

I remembered that Fulcrum was offering 4.5%+ rates to lend out DAI, which reminded me of the adage:

“In Every Trade There Is An Idiot And If You Don’t Know Who It Is, It Is You”

This of course being crypto, where everyone is pseudonymous, and no one knows who anyone is, I figured that those rules didn’t apply. So with my plan to make oodles on lending arbitrage I decided to try borrowing on dYdX and lending out at Fulcrum.

Like any good DeFi platform, dYdX requires collateralisation of lending positions. That way if I borrow DAI and take off they can sell my ETH to make the other side whole. The platform required a minimum of $1 in ETH for every $1 in DAI borrowed, and I didn’t want to have to constantly watch my position, so I left a bit more. Still being graced by the mining Gods, my el cheapo transaction confirmed quickly.

And then it was time to head back over to Fulcrum and smash that lend button on DAI for my share of that 4.57% lending rate!

Genius!

In theory this trade should allow me to earn 1.7% on ~$25 annually, while maintaining price exposure to 0.3 ETH (about $40). Assuming ETH doesn’t move around, that’s about 1% APR on lending ETH, vs. the 0.0312% that I can get for lending ETH directly on Fulcrum.

For my third trade, I also had noticed that Fulcrum offered a beefy lending rate on WBTC of 6.6978%. Given that WBTC is basically Bitcoin custodied by a third-party and then traded as an Ethereum ERC20 token, it has questionable levels of decentralisation, however being a Bitcoin maximalist I managed to look past this slight inconvenience and thought about that nearly 7% lending rate.

Back over to the Kyber Network to swap 0.2 ETH for a very small number of WBTC, which confirmed much quicker than a corresponding Bitcoin transaction. Maybe this will catch-on…

Anyway, back over to the Fulcrum decentralised money generating machine with my WBTC, and boom!

Stacking WSats!

By now I was getting worried about the length of the first blog post, and wanted to leave something for the second one, so had a look at parking my remaining ~0.3 ETH in a lending platform. Fulcrum’s rates sucked, so I ventured over to NUO that was offering 0.7%.

Despite being considerably lower than the rates on stablecoins it is one of the higher lending rates for ETH at the moment, but checking out the transaction fees at the lowest side, the $0.07 that it would cost to put this thing on works out to be 1.7% which needed to be paid upfront, so I gave up on that idea.

By this point I had a few other things that I needed to do, but had committed to the internet to putting together a fund. So I decided to go one degree further on the complexity scale and my DAI lending arbitrage, and to give myself more exposure to the future upside potential of SAI.

Being a dYdX, Kyber and Fulcrum pro by this point, I decide to go borrow a bit more DAI, swap it to SAI and go lend the SAI.

Kyber and Uniswap both allowed me to do a SAI/DAI swap, which isn’t 1:1, and Kyber looked a bit cheaper, so I sent my 25 borrowed DAI through that:

As my ETH funds were starting to run low, and I had forgotten to go through advanced settings the Kyber app kept blocking me as it calculated that I wouldn’t have enough ETH to get the transaction through. Undeterred I moved a bit of ETH out of my dYdX collateral pool and got Kyber to let me through so I could adjust the gas fees in MetaMask.

In doing this, I realised that I was also earning interest on the ETH held in collateral at DYDX, which isn’t much but better than nothing. A fortuitous discovery. Their balance graph seemed off though…

And with that swapped over to SAI, I was back to add more to my now very busy Fulcrum account:

Whew, so with that done, I now have my first four trades on.

Long SAI, lent @ 4.82% Borrowed DAI @ 2.91%, lent @ 4.57%, collateralised by long ETH Long WBTC, lent @ 6.6978% Short (borrowed) DAI @ 2.91%, Long (lent) SAI @ 4.82%, collateralised by long ETH

In summary:

Holdings

ETH 0.606

WBTC 0.004

DAI -25.128

SAI 49.830

Which gives me a balance of:

2020–01–02 1232 UTC

0.997 ETH (Since beginning: -0.32%)

129.642 USD (-0.94%)

0.0180847 BTC (-0.53%)

Total transaction fees: 0.003423 ETH ($0.444886)

In conclusion…

I thought that the platforms themselves were all pretty slick, and worked without requiring too much background reading. It was also cool to be able to borrow on one platform and lend on another, something that is generally not available in centralised crypto platforms. Despite the ease of the platforms, I definitely did not do the requisite background research on the ins-and-outs of the platform to figure out if what I was doing was a legitimately good trade or something that will have gremlins later.

While the blockchain was pretty empty today and I was easily able to get my transactions through, the overall price of putting these transactions on was quite steep when compared with centralised venues. The four trades I made, some of which were multi-part, required 14 transactions on the Ethereum blockchain, costing a total of 0.003423 ETH ($0.444886). Though not enormous, this represents a decent portion of my potential lending income. The bid-ask spread was also reasonably large on these platforms, likely due to lower liquidity and higher transaction costs. The total of these two categories of costs, ate nearly 1.7% of my balance.

For my next post, I hope to be able to spend some time researching exactly how these lending platforms work, and will provide an update on how things go.