Hotdog & Kimchi Coins Flash Million-Percent Yields
Also, asset-backed loans on Aave, yEarn's permissionless insurance
Hello Defiers! Here’s what’s going on in DeFi.
The new crop of DeFi meme coins are offering seven-digit yields. If it sounds too good to be true, it’s because it is
Aave’s market for RealT tokens allows DeFi users to borrow against real estate
yEarn Launches Permissionless Insurance
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The Mirage of Emojis Delivering Million-Percent Yields
There’s a new DeFi project called Hotdog. There’s also Kimchi, Noodle, and Harvest, and they all sprung up in the past day or two.
But what’s more impressive is this: Some claim to offer annual yields in the seven figures. That’s 1,000,000% APYs. Yes: Million. Percent. Yield.
Image source: @RougeVert4
This is the latest trend in decentralized finance, which has been heating up with traders pouring hundreds of millions of dollars into platforms incentivizing liquidity by offering their native tokens as rewards. Returns have been juicy amid rising token prices. But what started out with consolidated DeFi platforms using this mechanism to draw more activity to actually useful applications, started to devolve.
YAM Opened the Floodgates
Yearn’s YFI sparked the trend of 100% community-owned tokens, a welcome change where no early investors, advisors or even team members got allocations; only the protocols’ users did. YAM followed by combining community-owned tokens with a ridiculous food meme, and a platform made from code that was copied from other protocols, which had only one simple purpose: Farm YAM tokens.
That opened the floodgates and now there’s an avalanche of copycats promising thousands and million percent returns.
Degens Rush In
Here’s what’s actually going on.
Developers simply copy the code of those who came before it, creating websites that look identical. They mint tokens and attach a catchy name and emoji to it.
They create a market for the token on Uniswap —anyone can list any token on this permissionless DEX, by providing the token and ETH. By controlling the supply of ETH relative to the token, they’re also able to set an inflated price for a highly illiquid token.
Image source: Uniswap.info
These platforms work like this: Traders deposit tokens representing deposits in Uniswap’s liquidity pools. In exchange for those deposits, they gain (or farm) whatever the project’s meme coin is.
What happens next depends on the DeFi traders flocking to any new project, also known as degenerate farmers or degens. They’ll want to be the first ones in, driving token prices higher. The price of the token will momentarily jump. When returns from that 2x, or 3x gain is annualized, you get thousand-percent, and million-percent yields.
The flashy numbers will draw in more buyers. That’s how the early farmers, and very likely the creators of the project themselves, will be able to cash out and make a juicy profit.
“It's a bit like musical chairs,” DeFi investor Arthur Cheong told The Defiant. “The early farmers make the money while there is still liquidity to exit. The latecomers that were providing liquidity for that specific token will lose money when the early farmers start cashing out.”
Bug and Hacks
The risk isn’t only being the last one holding the bag.
It’s also that these projects are launched with no audits or tests, so the code may very well have bugs that put users’ funds in danger. There’s also the more intentional bugs: anonymous developers can create back doors that allow them to run with the funds.
Still, let’s not forget there’s innovation at the heart of this craze. Worthless projects and tokens will come and go, but the space will gain a valuable new way of raising funds and rallying communities.
This is a free market — possibly the most free, open, permissionless market out there, and these experiments are bound to happen. Just know what you’re getting into; the story goes that the world’s original sin also started with a food item. Sometimes it’s better to resist temptation.
Aave Brings Asset-Backed Lending to DeFi
DeFi users will now be able to borrow against tokenized real estate.
The new market will allow users to deposit their RealT ERC-20 tokens, which represent ownership over real estate, and borrow stablecoins against them.
The move is the latest in a relentless path by Aave to bridge DeFi to traditional finance. After announcing version two of its protocol, the money markets protocol was granted a full electronic money authorization for its UK subsidiary, which allows them to provide financial services such as issuing accounts to consumers and businesses. It listed LEND on the SwissBorg wealth app, making their token available in 17 fiat currencies.
Image source: Aave
Permissioned Money Market
RealT tokenizes real estate in a fully compliant way. When an investor acquires RealT tokens, they buy rights into LLCs that manage the underlying properties. Buyers have to go through a KYC process before gaining real estate exposure through their platform and it will be no different in Aave. Users of the protocol who want to use the new market will have to go through a KYC process with RealT to whitelist their Ethereum addresses, making it the first permissioned money market in DeFi.
In the future, RealT is planning to allow borrowers who finance their homes with mortgages from banks, to tokenize their properties and borrow against those tokens. This would allow them to change their financing model from the centralized system to the decentralized system, or to free up part of their capital and finance other needs.
Real estate is a very different asset from what we’re used to seeing in DeFi. And its market in Aave will also have some special characteristics. Investors of RealT properties regularly receive payments in the form of stablecoins for their holdings. This will allow users to take out loans from assets that generate income, which can be used to repay those loans in real-time.
Real estate is also less volatile than most DeFi tokens so, even though Chainlink will be used to get price feeds for this market, the valuation will only be updated a few times per year and borrowers will be notified about price changes in advance in order to decrease the liquidation ratio. Also, when liquidations occur, liquidators will also need to be whitelisted by RealT to pay back the debt on behalf of borrowers. RealT will be the buyer of last resort for defaulted positions.
As the industry continues to grow, we will continue to see more projects and initiatives that bridge DeFi to traditional finance. These kinds of innovations show signs that DeFi is willing to cross the chasm into the early majority.
yEarn Launches Permissionless Insurance
yEarn has deployed a KYC-less yInsure product with coverage for Aave, Balancer, Compound, Curve, Synthetix and yEarn.
These covers protect users in the event of smart contract exploits similar to the bZx flash loan hack in February. Users pay an upfront premium in ETH or Dai and select a duration and coverage amount for the right to submit a claim in the event of a black swan. Covers are underwritten by DeFi insurance provider Nexus Mutual.
No KYC Required
yInsure comes as a big win for DeFi traders as Nexus Mutual requires KYC to purchase a cover, whereas yEarn allows anyone to protect against smart contract risk. To do this, yEarn community members underwrite a cover on Nexus, tokenize it as an NFT, and then ‘resell’ that same cover to other users via the token.
LPs will soon be able to provide capital to Insurer Vaults in exchange for a claim on 0.1% initiation fees and a 0.01% ongoing weekly premium. Insurer LPs are able to vote with their liquidity as new claims submitted. More on this here.
This comes as the first step in a fungible insurance ecosystem. Users will soon be able to purchase insured tokens with 1:1 value protection —for example, a Dai token that has insurance baked in.
Over $1M in Cover
This creative feedback loop is pushing composability to its limit by allowing anyone to provide or purchase insurance without having to join the mutual. Over $1M in cover has been taken out by more than 10 unique addresses in 48 hours, a sign that there is clear demand for those looking for protection without wishing to undergo KYC.
Alongside the newly deployed yETH and Delegated DAO Funding Vaults, yEarn is continually showing why it’s a market leader for innovative farming strategies and yield aggregation strategies.
According to The Block Research, Ethereum miners generated all-time high fee revenue of $17 million on September 1. The figure is 3.7 times higher than the previous highest amount recorded during December 2017 and January 2018 when crypto prices went through the roof.
Decentralized exchange Loopring announced today the integration of Band Protocol cross-chain oracles to provide price data for all crypto assets supported on the Loopring exchange, Decrypt reported. The move comes on the heels of Chainlink’s recent smart contract conference and the announcement that DeFi protocol Synthetix will use Chainlink oracles for its synthetic asset exchange.
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About the founder: I’m Camila Russo, author of The Infinite Machine, the first book on the history of Ethereum. I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.