Interest rates on the US$ (and most other major countries) have been low for as long as some people can remember; viz. There is a ‘desperate hunt’ for yield across the globe as professional investors look for ways to make ‘money on money’ from investing and the normal low risk investments are returning less than 1%. At the same time, governments are printing more and more money ultimately meaning the stuff you have in your account is worth less. So what to do? How about a nice safe Deposit Account? Well, I for one are not ‘feeling the love’ even from the highest yielding deposit accounts. If you don’t have the stomach for the 20%+ daily swings of ‘real’ crypto — what about ‘stable coins’ — can we make any money from them without using anything too difficult or complicated? Even just a little better than 1%? Lets see..
While there is a lot of worrying over an inevitable resurgence of inflation, rates have stayed stubbornly low and even ‘negative’ meaning that simply ‘holding’ the currency loses money in real terms. Updated, sortable, list of current interest rates here. This means that as an example, lending 1,000 Swiss Francs to your bank for a year ( by simply leaving it in a deposit account) you would have 992.50 in your account at the end of the year (ouch!). This is ignoring any price inflation during that year which would further reduce this amount.
What if I could buy “stable” cryptocurrency and put it on ‘deposit’ instead earning 18%+ per annum?
Well, that sounds a lot more interesting!
Last post we looked at providing liquidity versus ‘HODL-ing’ and considered ‘stable’ coins which are almost exclusively pegged to the US$ as part of a balanced LP portfolio to ‘protect’ against large runs on a paired crypto asset. What if we looked at pairing two of these ‘stable’ tokens in an LP pair? That would be ‘super-boring’, right? NOTHING would ever happen and the tokens would both stay at US$1 — so what’s the point of that?
It turns out that, by virtue of just ‘providing liquidity’ — i.e. locking your money on the decentralized exchange you earn a share of the ‘fees’ every time someone uses your ‘pool’ to switch between these currencies. So does anyone actually need to switch between these ‘stable’ tokens ? How much interest could you make?
We looked at Uniswap, although Curve is a specialist in Stablecoin trading and is now at the time writing larger than UniSwap in terms of locked LP since the Curve products and their mechanism is a little more complex and includes ‘Rewards’ and products like “BUSD yDAI+yUSDC+yUSDT+yBUSD” which could perhaps have too many moving parts for most people looking for ‘deposit account’ like behaviour and qualities.
Let’s take a look at the ‘annual’ interest or yield available on these stable token pairs. We should first list the following caveats;
- What are my GAS fees? — as we covered in the last post ,’GAS’ can be really significant. Imagine a deposit account that could charge you a $20 to $100+ fee every time you wanted to make a deposit or a withdrawal? Outrageous! Well unfortunately this is exactly the situation every time you want to remove or add liquidity in Uniswap. So please do factor this into your calculations and roll-on ETH2.0! If you are using large enough amounts, this becomes insignificant over time.
- How deep is the liquidity pool? — In the last post we looked at being left ‘holding the bag’ as an LP provider and the concern over the ‘depth’ of the pools. In this case, with 2 stable coins there is not much of a chance of a ‘run’ on one of the tokens, but risk still exists and USDT (Tether) is a good example where there are no shortage of sceptics. We have also looked at the pool ‘depth’ to gauge the likely activity and popularity of the pairs (see below)
- Do I earn Interest? — We need to state clearly that NO INTEREST IS PAID ON THESE POOLS! There is just arguably ‘equivalence’ between earning interest on a deposit account and the 0.3% fees paid to the pool token holders every time trades are made using the pool. So what if no transactions take place? That’s right — no fees. We have looked at the pools fees since inception and annualised that as a proxy for ‘interest’ but this is no guaranteed prediction of the future.
- Am I protected by the EU or UK laws on Deposit Account Guarantees? — Well, since providing liquidity on a pair of crypto-assets is not a deposit account by any country’s definition, no. So if something happens to one or more of your crypto-assets, the Uniswap exchange or the Ethereum network it runs on, you are on your own. There is a reason that the rates payable are higher! Again THIS IS NOT A BANK DEPOSIT ACCOUNT.
- What if I lose my password, private key or something happens with the wallet I am using? Can I call Uniswap or Metamask and ask for my password or get ownership of my assets? No! So who ya gonna call? That’s right — GHOST-BUSTERS! (did we mention there are risks?)
- What’s a wallet? So you will need to open a ‘wallet’ for storing your tokens and connecting with the exchange. In the case of Uniswap that is currently limited to 5 wallets.
- How do I even buy ‘Crypto-currency’? — The answer to this question varies according to which country you are living in. Please research how to do this safely in your country.
- Are these ‘stable’ coins really stable? — As covered in the previous post, they DO fluctuate but have been more or less stable for the last couple of years. Not all ‘stable’ projects are created equally and many are sceptical including entire Twitter accounts dedicated to proving they are not(!). There are also regulatory risks to consider although the larger the coins get, the more the ‘collateral damage’ would be, especially with the OCC authorising crypto asset custody as a standard banking activity in the USA.
So if you are still with me, can stomach the risks and can use enough money to make the gas fees unimportant then let’s take a look at the returns;
Wow! That looks a lot better than my terrible deposit account’s pitiful interest rate! So these rates are fantastic for simply putting money on deposit and a lot better than ‘negative’ or ‘nominal’ rates. These rates have been ‘annualised’ based on the number of days the pools has been active — in most cases this is LESS than a year. So this means on $1000 you would have earned the equivalent of US$189 on a deposit of US$1000 if you had been providing liquidity on the pair USDC/USDT. With this pair we have measured the fees per $1 over 287 days, so this is reasonably representative of ‘a year’. Again there is no guarantee that this level of fees will continue or indeed that 0.3% will continue to be paid out by Uniswap.
How deep are the ‘pools’ ?
So the UNISWAP fees are distributed by the UNISWAP protocol and the larger the amount you ‘provide’, the larger the share of fees you get. This is kind of self-regulating since if the pool is not large enough to provide liquidity for a transaction then it will fail (in the case of a timing issue) or be prohibited. If you think about it, if you are providing US$1000 then it takes quite a lot of ‘0.3%’ fee shares to add up, unless your $1000 is a big share of the pool. The ‘Stable-stable’ liquidity pools are a lot smaller than the biggest pools on Uniswap, but still bigger than many of the pools on Uniswap and probably large enough to make most people feel comfortable that they are not disappearing any time soon. Here is the total liquidity in these pools as at March 3rd 2021.
So there you have it. In just one month, you can make more in ‘Fees’ than you would earn in any deposit account in any major currency. You do have to use an amount large enough to make the ‘gas fees’ an insignificant amount in the calculation as well as to factor in the purchasing of these assets and the costs associated with that in your country. You also need to consider the risks which are detailed above. Come over to Novum and find out more about digital assets or check the returns for yourself with our free ‘defi-calculator’.
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The information provided in this article by Novum Insights is for informational purposes only, we make no warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the article or the information, products, services, or related graphics contained on the website for any purpose. Any reliance you place on such information is therefore strictly at your own risk. None of the information provided is intended nor should be relied upon for the purposes of investment’”
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Credit: Written by David Henderson for Novum Insights.
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