In March I launched a proprietary fund to trade on cryptocurrency believing that the opportunities I found as a professional gambler could translate to crypto. In this series, I will talk about different opportunities that the fund is currently making money off. Walking the line between not giving away enough information to damage my edge while still being useful to the reader.
Please do not copy these strategies. I have simplified and most people attempting to make money in crypto will lose money.
In this post, we will go over an opportunity that is currently there right now. It appeared on the 15th June when the token COMP was released. It has gradually diminished ever since but still has lots of potential, especially if you think outside the box and come up with your own approach.
There is currently an opportunity where you will get paid a crypto token called COMP for borrowing or lending money on the compound platform. COMP only recently launched and is currently worth quite a lot of money. Meaning you get paid a higher value of COMP than you pay interest.
For every $1 interest you pay you can receive more than $1 in COMP. You are being paid to borrow money.
Compound and COMP Explained In More Detail
This is all possible because of a platform called Compound that enables loans between users in different cryptocurrencies. It is decentralized which means that there is no middle man holding and dishing out the funds. It is all managed through smart contracts on the Ethereum network.
How do they match borrowers to lenders?
Money is lent into a pool. And anyone can borrow from that pool. The interest paid is split among all the pool members (with a bit taken out as reserves).
How are loans secured?
Compound requires that collateral is given upfront. If the value of your collateral drops below the “collateral factor” you are liquidated. Imagine it like getting a mortgage, but where if your loans gets to 75% of the current market price of the house, it gets seized.
That collateral can also be lent out to earn interest.
What is COMP?
COMP is a governance token that is issued to users of Compound so that they can vote on changes to the system. Remember that Compound is meant to be decentralized so no one person or organization should be in control of it. The COMP token gives power to the users. The idea being that the more you use the platform the more votes you get on any changes.
But it can also be bought and sold, the most liquid place being on Binance exchange. Roughly 2,890 COMP tokens are given out each day and are split 50/50 among borrowers and lenders. COMP is currently worth about $200 meaning that each day $549,100 worth is given out. Much more than is currently paid and received in daily interest.
An Example Of How I Am Making Money From This
DAI and USDC are stable coins pinned to the US dollar. They are competing currencies that are used to trade USD over the Ethereum network. Both are worth $1. (Google stable coins for more info on how).
Here is one strategy to make money from it:
With a relatively small amount of initial deposit you can spin around quite a few times by re-lending out the money you just borrowed.
And here are screenshots from from my accounts in real life. Initial DAI deposit was $8,540.
At the time of writing COMP is selling for $200 on Binance.
You can get an idea of the current COMP yields from this page:
Warning: I find that page to be off by a few percent. You can work out the exact maths yourself by querying the blockchain or comparing to another calculator like this one. But it doesn’t matter a huge amount because the rates and value of COMP change all the time.
Let’s calculate how much I will make:
Now of course it is not quite as simple as that. There are transaction costs for getting in and out of these positions. The rates change all the time and the value of COMP is currently falling, down from $245 a week ago.
But that’s all OK. Interest and COMP is paid out roughly every 15 seconds so provided I regularly lock in my profits I will be alright.
And anyway. That is not the whole story.
Opportunities On Opportunities
The above is not the only way to make the most of this situation. This COMP opportunity has rippled out and led to a whole bunch of other opportunities. There is one that we are currently heavily invested in that I won’t talk about. But here are some others:
Lend Out And Borrow The Same Token
The above uses two tokens which are largely equivalent (both meant to be worth $1) because the Compound App web interface doesn’t allow you to borrow the same token you’re using as collateral. But the app is only a web interface to the actual smart contracts themselves, which have no such limitations.
By interacting directly with them you can lend the same token you use as collateral meaning we can just swap DAI back and forth without having to change it to USDC.
Other Governance Tokens
Since the success of the COMP token a few other decentralized finance (DeFi) have followed suit and released their own governance tokens. One example being Balancer.
Think of Balancer as an ETF for crypto assets. You create a pool of assets with your desired split. For instance 50% Ethereum and 50% DAI. As the price changes between the assets, arbitrageurs trade with the pool. Paying a fee as they do and keeping the ratio between assets the same.
A pool can be made of any number of ERC-20 tokens.
Now Balancer have also released their own governance token, BAL. Which means that you get paid for providing liquidity to Balancer pools.
Remember how I said you can make a pool of any ERC-20 token? Well that includes the cTokens you get when lending money to Compound. When you lend USDC you will get an interest bearing token called cUSDT. Which can be lent to a pool.
Here is a pool that holds cUSDT, cUSDC and COMP.
So by putting money in this pool you will be earning from:
- The interest on your lent assets
- The COMP distribution
- The BAL distribution
- Any fees paid to people arbitraging the pool
Here is a caculator that works out the value of your BAL distribution vs the assets invested. If I deposited $1,000 in the return is 44.9% just from the BAL.
CAVEATS: You will earn less COMP overall by using a pool vs holding the cTokens yourself because of the way it is distributed. And you will probably lose money to arbitrageurs keeping the pool balanced. And BAL is only distributed once a week on Tuesdays so you have more exposure to price volatility.
Maybe you distrust the above and think people will get burnt from all this mania. Well because of all the people COMP farming, there has been some strange market discrepancies in other parts of the decentralized finance (DeFi) world as people are willing to borrow at high rates to get COMP farming.
For instance, you can currently borrow DAO at 0% from MakerDao and lend it out on Aave for 6.93%.
Or you can borrow it on Compound for 3.03% and lend out on Aave. Making 3.93% profit plus some COMP distribution on top.
Shorting The Governance Tokens
Transaction fees can get quite expensive and although you get COMP every 15 seconds you may decide to reduce your transaction fees by holding it for longer and then trading out all at once.
If you do this then you risk the price of COMP plunging and your COMP will be worth less than what you are paying in interest.
You can hedge against this by shorting COMP. (EDIT: the below screenshot is from FTX which has since gone bankrupt. Please don’t use!)
If COMP drops in price your short will rise in value meaning provided you have your maths right you will still be in profit.
And obviously there are some other opportunities I know about but haven’t told you. As well as loads I don’t know about.
As I said at the beginning please be very careful if you want to take advantage. I have simplified a lot. Make sure you know the risks beforehand and do the maths. And just because the opportunity existed when I wrote this article doesn’t mean it will when you read it. At some point COMP yield will drop below the interest rates you pay and the circle I described above will become unprofitable.
I hope you found this post interesting. Happy hunting out there. And subscribe if you would like to see the next episode.