Deposit interest rate higher than loan rate? What is carry trade?
How to maximize usage of DeFi services (feat. dYdX)
Let’s assume there are two different Banks A & B. Bank A offers a short term (1 year) loan at 3%/yr while Bank B offers a 5%/yr deposit product. Assuming there are no additional expenses, it is possible to loan out 1 million dollars from bank A and deposit to Bank B for a profit of $20,000 (2%) within one year. This risk-free method of profiting from differences in interest rate is known as carry trade.
In reality, this risk-free carry rarely happens. If it were to happen, chances are, Bank B would have a limit as to how much you can deposit, or you may be asked to purchase additional investment items.
Nevertheless, because the cryptocurrency market is yet immature, possibilities for a carry can happen from time to time. Take DAI on dYdX platform for example. The interest rate for depositing DAI is 12.04%, which is significantly higher than that of banks in the United States with interest rate of 1.75–2.00%. Generally, interest rates from loan services are higher than bank interest rates but the aforementioned difference is still significant.
A carry trade between traditional banks and cryptocurrency market may seem attractive.However, as it requires a dollar account, it is often not a viable option in reality. Meanwhile, carry trades made within cryptocurrency market are fairly easy and faster to execute for most people to participate.
An example of Carry trade within the Cryptocurrency market
Let me exemplify with Trinito and dYdX. Below are loan interest rates of Trinito and deposit interests rate of dYdX, at their respective utilization rates.
As of 25 Sep, dYdX’s utilization rate for DAI is 81%, and it provides a 12.04% interest rate on DAI deposits. Trinito, on the other hand, has a utilization rate of 11%, providing 3% interest rate on DAI loans. If you were to borrow DAI from Trinito, and deposit it into dYdX, you would be expected to make over 9% profit per year (excluding transaction costs etc) .
The only opportunity cost to be considered comes from collateralization of your asset (a cryptocurrency other than DAI) at a bigger value to borrow DAI. Nevertheless, If you have an asset that you seek to hold long-term, providing it as a collateral shouldn’t be a big issue.
The carry trade process for DAI between Trinito and dYdX is as follows.
1. Depositing collateral funds into Trinito
2. Borrow DAI into a personal Ethereum wallet
3. Connect your personal Ethereum wallet to dYdX
4. Deposit DAI into dYdX
5. Check Real-time rewards
There are still various opportunities within the DeFi market!
We used Trinito and dYdX as an example for Carry trade today, but this is not uncommon within the cryptocurrency market. With various DeFi loan services popping up every day, and the difference between their interest rates, carry trade allows users to gain small profits at no risk. This is just one strategy among many others to maximize usage of DeFi services.
[Official Trinito Channels]
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