I'm not sure if we're in DeFi 1.0 anymore. There is so much happening in DeFi, it feels like we've fully moved into DeFi 2.0. We now have DeFi ecosystems on multiple blockchains and several cross-chain DeFi protocols are emerging. We have supply mining, liquidity mining, yield farming, borrowing, lending, and leveraged trading. The iterations of these financial instruments have incubated across many swaps, liquidity pools, and yield farms. But in some cases, things are getting outright ridiculous. We've got experiments in "layered farming" bringing wild speculation to the DeFi market. The rates on some yield farms are so high they are clearly unsustainable, but it's hard not to at least put a couple of dollars in there to see what happens. However, those things in and of themselves do not, in my view, constitute "DeFi 2.0". The existence of those speculative and experimental projects indicates to me that the DeFi 1.0 market is reaching maturity. The market is reaching for more widespread adoption and the more sustainable, trusted, and useful DeFi services will be well positioned to capture mass adoption market share in the coming 3-5 years.
If you don't yet have a TronLink browser extension wallet set up, check out my last post, DeFi Beginners Guide: Getting Started on Tron Network. I started writing that mostly to help accelerate onboarding some of my friends to the world of decentralized finance. It's a helpful tutorial to get you ready to use JustLend & Sun.io on the Tron Network. A few days ago, I wrote about Tron Network's Budding DeFi Ecosystem. It was exciting to see how much traffic that post got. I'm not sure if it was because you guys are really interested in DeFi on Tron, or if I just got lucky with the post timing or keywords. But that post has now been viewed 2,399 times... far more than any of my other few posts. So thanks to all of you for reading all of that and for your feedback in the comments.
I want to explore an enduring opportunity in DeFi that isn't based on crazy speculation. It's the concept of arbitraging barrow and lend rates to leverage your own assets for increased yield. It's not an unsustainable model that pays great for a week and then collapses. It's actually the tool that the fractional reserve banking system has enabled central banks to use to make huge profits with all of our bank deposits. So if there's no central bank or fractional reserve banking system in crypto... well don't be naive, there is... they are called Coinbase, Binance, & BlockFi. Okay, so if you're not using a centralized exchange to hold your crypto... can you become your own fractional reserve bank by arbitraging supply and lend rates with DeFi? It seems so.
I think this is what DeFi 2.0 truly looks like... individuals recognizing and harnessing the power of leveraging their own assets with relatively low risk and low technical and financial barrier to entry. DeFi 2.0 should put the whole puzzle together. It is the cumulative integration of many decentralized financial instruments (supply mining, liquidity mining, yield farming, borrowing, lending, and leveraged trading) in simple user interfaces which integrate all of these financial instruments together for a wider audience to access and use.
If you're new to DeFi, please don't let the jargon intimidate you. It's just words. We'll talk about what they mean. A good rule is just not to invest in anything that you don't understand. So really try to understand the market so that you can make informed choices and take calculated risks. I'm keeping it very simple for myself and that will keep it simple for you. Basically all I'm doing is putting up the tokens in my Tron wallet (which are already staked and earning interest in Supply Mining on Sun.io) as collateral for a loan of about 30% of the present value of my tokens in USDJ. Then I'm staking that borrowed USDJ in the Supply Mining on Sun.io. So I'm effectively arbitraging the the difference in the Supply APY and Barrow APY on JustLend with about 30% of my portfolio. So, in my case with USDJ, my borrow APY is 1.17% and my supply APY 16.86%. So my net earning is the spread of 15.69%. These numbers fluctuate dynamically, so rates have already changed a bit since I snipped this image. Nonetheless, as long as the supply rates exceed the borrow rates, we are able to earn additional income by arbitraging supply & borrow rates.
I chose to borrow USDJ because I'm new to this strategy and I wanted to control as many variables as I could while still getting a decent return. So I thought that trying this with a stable coin is a good way to start out. If I wanted to increase reward and potentially reduce risk further, I could potentially do so by taking several different loans in 1:1 backed currencies. So instead of 1 big loan in USDJ taken against the whole mixed pot of my staked tokens, I could take the maximum allowable loan (I think about 60%-70%) in the currency I'm staking. So if I have 100 SUN and the maximum loan is 70%, then I could stake my 100 SUN for 38.4%, take a loan of 70 SUN against it at 20.9%, then Supply Mine that 70 SUN I borrowed from myself for 38.4%, for an additional net profit of 17.5% on 70% of my 100 SUN, in addition to the 38.4% I'm earning on my 100 SUN. I have to repay the 70 SUN I borrowed, but for now I can use it to earn more yield. Since the loans are taken against the currencies which back the loan, there is no risk of the loan value to staked portfolio value ratio changing. I'm not sure if this specific method is possible in JustLend, but it seems so. In the meantime, I'm experimenting with this other USDJ stablecoin method to experience the mechanics of JustLend's decentralized borrowing and lending application.
If you're not familiar with the concept of "impermanent loss", you need to avoid Liquidity Mining until you fully understand the risks involved. I talk a little bit about "impermanent loss" in this post on my experience with Goose Finance. Liquidity Mining refers to supplying two currencies in a trading pair in 50-50 USD value ratio and this subjects you to considerable risk with volatile tokens due to the automated market maker (AMM) code that powers Liquidity Pools. I generally always prefer single currency staking or "Supply Mining" because I have felt the pain of impermanent loss. The cool thing about Tron Network is that when you see that 100.69% Total APY on the SUN-TRX LP you can put in $10 of SUN & $10 of TRX to explore what the real returns are like and the network fees are low enough to facilitate that sort of small dollar exploration.
Also, did you notice that the your APY reward is paid to you in a basket of TRX & TRC-20 tokens? I personally really like this because it's an awesome way to bank some small cap Tron Network project tokens passively over time without having to go and buy them. At the moment Sun.io is paying rewards in TRX, SUN, JST, BTT, WIN, & BTCST. It's important to realize that Sun.io and JustLend are a linked pair. You can deposit on JustLend and Sun.io, but you can not withdraw on Sun.io. You can only withdraw on JustLend. There is a lot of overlap between the two but they each have some features that the other does not. JustLend has the borrowing functionality and Sun.io has Liquidity Mining.
These rates fluctuate daily and these images from yesterday or the day before are no longer current. I just wanted to take a snap shot for you guys for illustrative purposes. When you recognize the opportunity here, it's pretty exciting... not as exciting as a golden goose with 25,000% APR, but it's a real world realistic kind of exciting. You can earn an additional 7%-20% APY on around half of the tokens you are already staking for APY.
It sounds so scary to leverage your assets, but if implemented correctly, it can be a relatively low-risk way to greatly increase passive income generation. Leveraging assets is how wealth is generated. It's what the fractional reserve banking system relies upon. It's what the institution of centralized banking has been doing with our money to generate massive wealth. But now with fast micro-fee networks like Tron building DeFi ecosystems, it's something that we can do with our own money. Granted, I'm not investing very much on Tron right now, but I'm becoming a believer. I'm testing some strategies and finding the most trusted Dapps on Tron Network and trying them out.
I'm really excited to continue running this experiment with JustLend. I've already earned $1.24 in Supply Mining rewards in just a day or two with this small balance. This may be a good spot to try borrow-supply arbitrage with a bigger investment once I have worked out the optimal strategy. Venture capitalists looking for crypto market research associates please contact me. I'm finding deep value on the fringes of the crypto economy.
Centralized Services (Block To The Future Referral Links)
Coinbase (necessary evil for buying crypto with USD)
Kucoin (best of the centralized exchanges, also has USD buy option)
Bittrex (meh, okay... also has USD buy option)
Binance (used to love it, now, not so much)
BlockFi (so far so good, decent interest rates, not really an exchange though)
Robinhood (get the free stock for signing up and dump Robinhood when we have a good synthetics market on the blockchain)