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Who wants to be a DeFi yield farmer?

Updated: Jun 24, 2020

The hottest Decentralized Finance (DeFi) project in the blockchain world now got to be Compound Finance. It is a P2P financing platform with a twist. The platform uses smart contract on the Ethereum blockchain to provide P2P finance of a handful of ERC20 tokens and stable coins. The smart contract is based on the Compound Protocol which is governed through voting by the Compound token (ticker COMP) holders. COMP is distributed to both the lender and borrower using a formula that takes into account of the interest rate and the supply of the tokens financed. The first COMP is distributed on 18/6/2020 and the distribution will last 4 years. The total supply of COMP is fixed at 10,000,000 COMP. This is the background. Let's go through an example for more clarity.

From the above, Basic Attention Token (BAT) has the highest yield at 26.95% APY. This means that a lender of this token can expect to collect 26.95% in interest income per year. The interest is credited every 15 second (based on Ethereum block time) approximately. Note that there is no lock up period. Lender can withdraw fund at any point of time. In addition to the interest, the lender is also rewarded COMP tokens for providing liquidity to the platform. At current price of the COMP token (approx. USD300 per COMP), the yield from this is more than 100% APY. This is when things get a bit crazy. As the borrower will also be rewarded with COMP, the effective borrowing rate for say, BAT, is about negative 66%. This means borrowers are PAID to borrow.

Let's go crazier. You can leverage on the tokens that you lend out as collateral to borrow. The borrowed tokens can be lent out and leverage again as long as the loan to collateral ratio is not breached. You can do the math. I have read that some users raked up astronomical yield with that!

There are of course many risks associated with these high yields farming. For a start, this is in no way a sustainable model. Given the high price volatility of the tokens involved, you may lose more capital than you gain on the interest. And if you leverage, the smart contract will automatically liquidate your entire portfolio once the loan to collateral ratio is breached. There will be no broker to remind you of the margin call. The worse cast scenario? Well, the entire Compound smart contract could be hacked and all funds (USD900m and counting) stolen. You have been warned.

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