Short Version
-Deposit collateral on Aave
-Take out a loan in USDC
-Deposit USDC on Pooltogether
-Hope for a jackpot
The market is down, people are scared, and forecasters are predicting a macro bottom to arrive. Thus, a safe play for DeFi users. In this article I am going to outline a low-risk low reward DeFi play. The primary purpose of this play is to become more familiar with all the financial tools offered in the DeFi sphere.
Risk Categorisation: Negligible
The only risk contained within this strategy is the loan and I advise to keep a loan to value (LTV) ratio below 30%. This leaves significant leeway for market movement and even a steep drop will not see a liquidation event trigger. The real cost of this play is the opportunity cost; whatever assets you deposit on Aave could likely be better utilised elsewhere.
Reward: Low
Estimated APR average of 9.14%. This APR is calculated as a rough approximation, being a decentralised lottery luck plays a huge factor on the actual returns of this protocol. Higher deposit, higher chance to win.
APR calculation: Daily Prizes X 365 / Current Deposits [1]
$100 deposited entitles the participant to a 1 in 280.37 chance of winning.[2] This figure is constantly fluctuating dependent on number of participants and total value of deposits. There are 1024 prizes daily with a total value of $7180. The breakdown is as follows:
1 person $1000
3 people $100
12 people $50
48 people $10
960 people $5
Decentralised Loans
Loans are essential to the modern world and the modern way of life. The concepts of credit and collateralisation have pushed the world forward into a new age of economic prosperity. People can now borrow capital for any purpose they see fit. However, the banks attach a long string of requirements and checks to any individual who seeks a loan. These barriers are abolished in DeFi and anyone with collateral can take a loan instantly.
Aave has more than $12 billion of locked liquidity and runs on three chains: Ethereum, Avalanche, and Polygon. Connect a non-custodial wallet, deposit asset as collateral, borrow USDC.
Aave
A decentralised lending platform that brings together two separate parties: lenders who want to earn interest on idle funds and borrowers who want to access capital for self-defined purposes. Aave is available to anyone with a non-custodial wallet and can be accessed globally. It provides the opportunity to people who may not be able to access capital through traditional finance to do so via decentralised finance. There exists no need to negotiate loans terms on the protocol and thus leads to a more efficient money market.
Why Collateralise Crypto for a Loan?
A collateralised loan means lower risk for the borrower, and therefore capital is lent instantly on Aave with no bureaucratic process. The lender benefits from investment leverage. Normally a participant takes a loan on their asset instead of selling it because it is believed the value of the asset will appreciate in the future and therefore selling the asset is a poor economic decision. Selling an asset may also trigger a taxable event which a participant may want to avoid. Thus, the borrower can guarantee a secured loan instantly and the lender can have needed cash without having to sell their assets. Investment leverage allows the participants to retain full ownership of their assets, underpinned by the belief the assets will appreciate, whilst accessing required capital.
Pooltogether
Decentralised no loss lottery with over $40 million in locked liquidity. It is multi-chain operable with the largest three chains mirroring the chains available on Aave namely Ethereum, Avalanche, and Polygon. It is called a no loss lottery because it is exactly that. Instead of the prize money being collected through ticket purchases, the participants capital is aggregated and lent out to other decentralised protocols where it accrues interest, and then a lucky winner receives this collected capital interest payment. All participants retain funds deposited and can withdraw at any time.
Welcome the oppurtunity that DeFi brings to the world. And, good luck.
[1] https://docs.pooltogether.com/faq/prizes-and-winning
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