[HN Gopher] Two Ethereum DeFi traders just made $120M using a st...
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Two Ethereum DeFi traders just made $120M using a strategy called
'looping'
Author : wslh
Score : 12 points
Date : 2024-02-15 19:50 UTC (3 hours ago)
(HTM) web link (www.dlnews.com)
(TXT) w3m dump (www.dlnews.com)
| DarmokJalad1701 wrote:
| This "strategy" smells very much like the one that
| /u/ControlTheNarrative infamously used on Robinhood back in 2019
| (and blew up his account).
| soared wrote:
| Is it accurate that on these platforms one can deposit funds,
| borrow funds (using the deposit as collateral), deposit those
| borrowed funds, borrow more funds (using the deposited borrowed
| funds as collateral), etc. and this can 3-5x their money, and the
| only risk is a bankrun?
|
| This seems.. insane. What's the interest rate and payment terms
| on these borrowed funds? I have $100k cash and need to buy a
| house.. maybe I just crypto loop to get 500k.
| pcthrowaway wrote:
| That's exactly what looping refers to. See my other comment for
| an idea of what these numbers probably look like.
|
| The interest rate usually varies based on available liquidity
| in the pool, so if they were borrowing 292M of stables, their
| interest rate could vary anywhere from 0.5-150% APY, depending
| on the protocol parameters and the available liquidity.
|
| Usually (negative) APY when borrowing stablecoins (edit: _on
| ethereum_ ) would be closer to 1%, but as you can imagine, when
| lots of people withdraw liquidity to engage in the same kinds
| of tactics, the overall liquidity available for borrowers
| decreases, and then the interest rate adjusts to incentivize
| depositers (who can sometimes have stablecoin (positive)
| interest rates of >100%.
|
| For reference, I deposited 200 USD of a stablecoin into a pool
| with low liquidity on a more niche lending protocol on a
| blockchain that is known for attracting people more inclined to
| leveraging, about 18 months ago, and I can withdraw 550 USD now
| based on the interest rate fluctuations (likely due to lots of
| people going long _against_ the stables in that same period)
|
| Right now on Compound, one of the most popular (and safest)
| lending protocols, one can get 9% APR for supplying USDC (which
| I believe to be one of the safest stablecoins)
|
| As things turn around into more bearish territory, people will
| leverage the other direction and that interest rate will go
| down significantly (back to more like 1%) as people effectively
| short ETH and other tokens using the same mechanics (deposit a
| bunch of USDC, borrow a volatile crypto-asset, sell it for
| USDC, deposit more USDC, etc. Then if the price of that crypto-
| asset goes down significantly, you can repay your borrow
| balance at a fraction of the cost in USD terms)
| pcthrowaway wrote:
| > This seems.. insane. What's the interest rate and payment
| terms on these borrowed funds? I have $100k cash and need to
| buy a house.. maybe I just crypto loop to get 500k.
|
| Just to address this directly, you're probably _much_ more
| likely to get liquidated than to be able to bring your balance
| up to 500K when leveraging. In fact, if you 're leveraged very
| close to the liquidation rate, with a lot of money at stake,
| people may even make plays to move the market to get you over
| the liquidation line and then liquidate you.
|
| I mentioned turning 200 USD into 550 USD based on a stablecoin
| deposit, but that was both incredible luck on my part (I
| deposit as things were starting to flip from bearish to
| bullish) as well as being a lower-liquidity protocol where
| interest rates could fluctuate much more wildly.
|
| To be clear, my earnings would have been a much smaller
| percentage had I deposited 100K USD, because the increased
| liquidity in that protocol would have resulted in much lower
| supply rates due to much higher liquidity, so I may have seen
| something more like 5-20% APR in that meantime (which is still
| not bad to be fair).
|
| Had I leveraged even a little bit (going short against a
| volatile crypto-asset basically), I would have certainly been
| liquidated as prices for those have mostly all mooned in that
| time.
|
| Looping doesn't just let you walk away with the money, as you
| necessarily have to redeposit it into the protocol to borrow
| more against your deposit.
|
| If you're considering leveraging because you need to buy a
| house, you almost definitely shouldn't leverage unless the 100K
| is worthless to you without another 400K on top of it, and
| therefore you don't mind the much more likely scenario where it
| gets evaporated by market fluctuations
| jmalicki wrote:
| You can't crypto loop to $500k in outside funds. Let's say you
| can borrow fraction (1-r) of deposits (for some small r, could
| be 0 - in fractional reserve banking monetary expansion, r is
| the "fractional reserve").
|
| At time t0, you deposit 100 ETH, and borrow 99 ethereum worth
| of USDT.
|
| You loop that back into 99 ETH, and redeposit it. You have 199
| ETH of assets, (99 EHT at time t0 of USDT) of debt (that you
| basically owe to yourself) - 100 ETH net, what you started
| with.
|
| You can now borrow an additional 98.1 ETH worth of USDT that
| you could spend on a house - less than the 100ETH you started
| with.
|
| Or you could redeposit that, to have 297.1 ETH total. But now,
| you can only borrow an additional 97.2 ETH.
|
| The total leverage on your ETH/USDT trade goes up, but the
| amount you can take out of the system (to, say, buy a house)
| can only stay the same or go down at each step through the
| loop.
| pcthrowaway wrote:
| So to clarify for those who don't care to know about defi, 2
| people made on-chain leveraged bets with up to 2X leverage (which
| isn't a ton compared to what some people do).
|
| If they are up 120M when ETH has gone up ~26% since it's low
| point of the last 30 days, they must have deposited ~150M to
| start with.
|
| Looping 3 times, and borrowing ~80% of their deposit value each
| time (pretty close to the max for most defi protocols), they
| would have borrowed (likely in a stablecoin) 120M, then 96M, and
| finally 76M, giving them a total deposit of 442M worth of ETH
| against a borrow of 292M of the stablecoin.
|
| After ETH went up by 26%, their initial 442M deposit is now worth
| 557M. Had the value of ETH gone down 21% at any point from the
| beginning of their levered position, their initial stake of 150M
| in ETH would have been liquidated by the protocol, so this is an
| incredibly risky play as you can imagine
|
| The fact that such a large position likely moves the market does
| at least make it a _little_ bit safer for them, but by that same
| token, unwinding their position will move the market in the other
| direction just as easily (so they might only see a 110M in profit
| if they tried to unwind entirely, at this article was written)
| neonate wrote:
| http://web.archive.org/web/20240215054349/https://www.dlnews...
|
| https://archive.ph/EFGPO
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(page generated 2024-02-15 23:01 UTC)