Do you think it's right to pay a bank to store your money?
Back in the day, we used to be incentivized to save - you'd put money in the bank and they would give you a modest return in exchange so they could use your funds with other clients.
This is about to change...
I recently posted this image on social media - as you can see, this bank in Europe is now charging clients with deposits above €100,000 - €70 per month - equivalent to ~0.84% per year.
This is because rates in Europe have now dropped below 0% and banks are being forced to pile on fees to earn a return from depositors otherwise their entire business model implodes.
Now let's consider the inflation rate which, if you go by official government figures, is 1-2% annually.
However, if you simply look at the cost of homes, education and healthcare you would know this is being severely underreported and could be as high as 7% annually.
Let's take a simple average of the official government stat with the hypothesized 7% figure to arrive at a 4% adjusted rate of inflation. Then let's take on the ~1% on deposits above $100,000.
This means if someone were to hold over $100,000 in their bank, they would need to earn 5% just to not lose money and if they didn't, within 15 years this $100,000 would be worth $46,329.
A loss of 54%!
I'm also not taking into account Shrinkflation where the price level of goods per unit of weight goes up as retailers sell smaller units of the same products. It's how you get less Mars bar for the same price.
Cool - so what can we do about it using this new fancy financial system I've been boasting about over the last few weeks - in this post, I'm going to explore earning interest on deposits of stablecoins.
But first, let's do a quick recap
Recap
In previous posts, we first explored Bitcoin as a new unstoppable monetary system, we then got into how do you value such a network before then buying our first crypto and trading it on a decentralized exchange or DEX. Finally, last week I taught you about dollar cost averaging into the market.
Jump into the links below to catch up:
How to earn interest on deposits
You can earn up to 8.6% on stablecoin deposits using either centralized or decentralized platforms at the time of this post. This easily beats out the 5% in fees + inflation mentioned above and why I'm so bullish on web 3.0 as a refuge for savers.
You can checkout Loan Scan at any time to compare rates in real time.
Few things to consider:
Rates Change: Rates are variable on most platforms and can change from day-to-day and week-to-week. I expect this to change as we get more data and the market gets competitive. Expect to see more fixed rates in the future with over one year terms.
Centralized Risks: If you're using a centralized platform like Ledn.io or Blockfi.com where you can earn up to 8.6% on USDC deposits, pay attention to where they custody your crypto and whether or not they provide insurance for lost funds.
Decentralized Risks: If you're using a decentralized platform like Compound or Aave, your rates will be lower but you don't have to go through KYC. In this case, pay attention to the platform risk using a tool like DeFi Score to assess the security of the platform.
Buy Insurance: If you're going decentralized, consider buying insurance on Nexus Mutual - rates are about 1% of funds insured but it should provide protection against smart contract failure. This is a manual process now but expect it to be directly integrated in DeFi lending in the future.
Use Tools: You can sign into your wallet at DeFi Saver or Idle Finance and automate the process of searching for yield. Idle Finance even has two options that search for the best APR while in one case specifically adjusting for DeFi risks as mentioned above.
How is this possible?
Often when something looks too good to be true, it is. In this case, there's a good reason that different parties are willing to pay the rates being offered. Let's look at each one:
Investors: This group believes crypto assets will increase in price significantly over the next few years and are leveraging their funds to buy more. They are betting that returns will outpace the 8.6% being charge and are happy to pay the premium.
Traders: This group does the same thing but takes on leverage at an even higher rate (up to 100-1) to take on short term profit opportunities in a volatile crypto market. They are betting with leverage they can significantly outperform the market.
Miners: This group earns in crypto but needs to pay business expenses in fiat. They don't want to lose the upside in crypto so they borrow against the crypto assets they earn and pay their expenses with the proceeds. Again they are betting on crypto outperforming.
Spenders: Finally you have spenders who have crypto but are worried about the tax implications of spending their funds. They would rather borrow against these assets and avoid capital tax on the gains from liquidating their investment.
All parties above are long crypto assets and while for many this could sound like a risky bet there's a growing sense that it's the best long term play.
How do I play this?
Let's jump back into our calculation above with a starting balance of $100,000.
I mentioned that if these funds were left in your bank account and banks instituted fees broadly to make your savings rate negative - after adding inflation, in 10 years this amount could be only $46,329.
Let's juxtapose this with investing at 8.6% (a net 4.6% return after inflation), your $100,000 would be worth $196,325 - a difference of $149,996 or ~50% ROI.
Of course, these rates won't last forever but given you have an option to earn 8.6% today, it's an attractive way to achieve a high return with low risk while this nascent industry is monetizing itself.
Let's jump into an example using our favourite wallet: Argent
Using Argent to earn interest (2 mins)
There are three options to earn interest on Argent at the time of this writing: Aave, Compound and Dai Savings Rate. You can see rates right now using LoanScan. In this case, we're going to use Compound.
Open Argent Wallet
Click on the "Invest" tab
Click on "Compound"
Select the asset you want to invest
In this case, we're going to go with USDC or USDT. Follow the prompts to purchase either of those assets if you don't have them already.
Click "Save"
Using Idle Finance to find the best rate (2 mins)
Let's try another example but this time we'll use Idle Finance which will automagically allocate your funds to the highest earning interest rate for you.
Go to Idle Finance
Choose the "Best Yield" option
Click "Connect" to connect your wallet
We'll use Metamask in this case to connect our wallet. You'll be prompted to authorize Idle Finance to view your account.
Select your asset
You can choose from USDC, USDT and DAI at the time of this post.
Calculate your returns
Enter the amount you want to deposit and Idle Finance will calculate your potential returns for the month, quarter, half and full year.
Deposit funds
That's it!
Two super simple and easy ways to invest your excess funds into DeFi and earn passive income all in under 5 minutes of effort.
Summary
While 2% or even 8%, doesn't seem like much - the benefits of compounding are felt over time.
There's a story of the British cycling team that had a goal to win the Tour de France within 5 years. Their coach encourage them to only get 1% better everyday.
So the team starting looking at small things like what pillow gives us a 1% better sleep, or what pair of riding shorts makes us 1% faster. These small seemingly insignificant changes led to them getting faster and faster and in only 3 years they were able to take the Tour De France.
In the same way, if you construct a portfolio that is growing your savings after inflation by even 1% per year - you'll come out significantly ahead in 5 years - all with zero effort.
Next week, we're going to checkout how to provide liquidity to decentralized exchanges like UniSwap and earn trading fees - make sure to subscribe below!
Around the Space
Goldman slams Bitcoin in investor presentation
The nice folks at Goldman continue to miss the mark. After teasing a presentation on Bitcoin which got the whole of cryptotwitter excited - they dropped the hammer and called Bitcoin a ponzi scheme in their investor presentation on the economy. It's clear legacy financial institutions will be a lagging indicator for progress and ultimately they will be left to catchup as this space accelerates and replaces their business over the next decade.
Bitfinex rolls out USDT scaling on OmiseGo
USDT has been clogging the Ethereum mainnet spiking fees for Ethereum dApps across the board. It looks like layer 2 scaling is starting to get into full swing with a large portion of USDT moving on the OMG L2 network. Scaling solutions are starting to fly out with Matic Network moving onto mainnet, Deversifi using Starkware to process 9000 tps in their next version and of course Loopring which I profiled in a previous post.
mStable brings diversified stablecoins to mainnet
I mentioned USD++ in a previous post which was a basket of stablecoins wrapped up in one token allowing buyers / investors to diversify their risk across stablecoins. While that token has yet to launch, mStable has come along and stolen their thunder for now. You can jump onto their platform and mint your own stablecoin baskets and earn fees along the way. This is an important step as the stablecoin space searches for ways to diversify and reduce risk for users.
RenVM brings Bitcoin solution to Ethereum
Ren Protocol launched their long awaited mainnet bringing Bitcoin to Ethereum in a completely, trustless way. You are now able to lock your BTC and mint RenBTC which is an ERC-20 representation of Bitcoin on Ethereum. The project differentiates itself from the likes of wBTC in that it uses secure multi-party computation across dark nodes to allow true interoperability between blockchains at scale. I expect to see DeFi protocols allow users to collateralize much more Bitcoin on Ethereum in the coming months and years.
ENS names are being used to simplify DeFi
Two projects that caught my attention this week were Umbra and DeFi777 which both use ENS names to make decentralized finance easier for the masses. Umbra aims to preserve users privacy by enabling stealth addresses and DeFi777 allows users to get back any DeFi primitive token like DAI by simply sending funds to an address. I look forward to the day when there is more privacy on Ethereum and trading becomes as easy as sending money to a named account.
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Disclaimer: Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.