The structure of our submission is the following:
- We mention our goal and analyze the corresponding risks.
- We explain our Lego pieces exposure strategy.
Goal
- Our target currency is Euro and we would like to invest in and focus on selected (riskier) crypto projects we believe in, while having a balanced risk spread across our entire investment portfolio (incl. traditional financial market).
General risks
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Each DeFi protocol and lending DApp carries with it some risk. The protocol carries risk of devaluation and the DApp carries risk of losing (temporary) access to the capital.
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Each DeFi protocol & platform used makes it harder for us to grasp every important detail/risk associated with our investment.
One example is losing track of under collateralization in one DeFi lending protocol and getting liquidated.
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Working with current global DeFi lending platforms opens us up to exchange rate risk.
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Risk of USD devaluing against Euro
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Risk of stable coins losing peg against USD (e.g. like DAI collateralization )
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Risk of extracting Euro (e.g. strict regulation for the crypto market in general)
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Taxes lowering the earnings when keeping single coins less than the required minimum time interval to be tax free (60 days, which is beneath the 1 year interval in Germany)
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Correlation of assets within the whole crypto market
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Not considered: Risks outside the system like running dry of the whole crypto market, solar flares that destroy the internet or invasion of “black swan” marsians
This leads to our approach that we keep our model from being overly complex and not include too many risk factors.
Our strategy
Let’s assume we have 30k USD to invest and have an appetite for an extremely risky bet.
We can also “look into the future” with sufficient confidence to make a 60-day trade, since this is the minimum lock period for DAI on Tinlake to gain RAD profits.
Scenario:
We are in general bullish on BTC, ETH, DeFi platform coins and also on RAD, as well as the Tinlake investment pool that we have chosen.
The Tinlake pool we are looking at has assets that will be repaid in the next 60 days which - funny coincident! - happens to be exactly the market timeframe which we are bullish for.
Therefore we want to:
- Have BTC exposure
- Have ETH exposure
- Gain COMP/AAVE where possible
- Earn RAD
1) Buy main assets we want to hold
Buy wBTC (50%) = 15k USD =~ 0,43 wBTC
Buy ETH (50%) = 15k USD =~ 11,17 ETH
We check for the best rates for our trade on loanscan or on defirate
2) Lend & borrow against wBTC on platform with best rate for DAI (=Compound example at point of writing)
We lend 0,43 BTC on Compound, gaining 0.23%, making a tiny profit with lending over 60 days.
Against this collateral we could take out a loan of ~11.250 DAI (=75% ratio). However, to be conservative with our collateralization ratio we only borrow 10.000 DAI. This loan will cost us ~10,14% in interest or ~ 1.014 DAI over 60 days. (The calculation is not 100% correct due to APY).
⇒ To optimize this for fees, we will actually do the trade through instadapp since there the lend & borrow can be done in a single transaction.
3) Lend & borrow against ETH on platform with best rate for DAI (= AAVE example at point of writing)
We lend 11,17 ETH on Aave, gaining 0.12%, making a profit of with lending over 60 days.
Against this collateral we could take out a loan of ~12.000 DAI (=80% ratio for ETH). However, since at 82,5% our loan would get liquidated we will also only lend 10.000 DAI. This loan will cost us ~8,35% in interest or ~835 DAI over 60 days.
⇒ To optimize this for fees, we will actually do the trade through instadapp since there the lend & borrow can be done in a single transaction.
4) Buy mix of DROP and TIN tokens in 2 pools on Tinlake
We now have 20.000 DAI to put into Tinlake pools.
As the minimum investment amount is 10.000 DAI per pool, we can enter two different pools (and diversify our risk some more with that).
In our scenario both pools give us a 5% return on DROP and 20% return on TIN.
Since we know our assets very well (and we are very risk prone) we are sure that the assets in the pools will not default. Therefore we aim to cover our loan cost of almost 2k DAI primarily with earnings from TIN.
In both pools we enter:
⇒ 2.500 DAI into TIN, returning to us up to 3.000 DAI per pool = 6.000 DAI
⇒ 7.500 DAI into DROP, returning to us up to 7.875 DAI per pool = 15.750 DAI
5) Earn RAD
For putting 20.000 DAI into the pools for 60 days we unlock the right to claim 5040 RAD (at current rate).
6) Take profits
After the 60 day period we take our Tinlake profits by returning DROP and TIN back to Tinlake to receive 21.750 DAI. We use the DAI to pay back the DeFi lending loans, which is about break-even. We have net profit in the value of ETH price increase, (w)BTC price increase and having earned RAD (price unknown).
Also we have earned a tiny amount of AAVE and COMP through using their platforms.
From those profits we now have to deduct taxes… 
Booo!
7) Disclaimer
This strategy is an example and extremely risky. Even if you guess the market right, the borrowing fees will likely eat up any profits that you make. In our scenarios we only “earned” something by using TIN, which is the high risk asset on Tinlake - it takes any default losses first!
In addition to the obvious costs, there are significant hidden risks in this strategy (see General risks). In order to achieve medium to long term gains, a market participant first of all has to survive. This is called ergodicity and this strategy is not sustainable.
However, this would become a good strategy if we could
- Acquire good hedges. That could mean an inverse correlation between the DROP/TIN asset and our base asset. Any PUT options for 60 days are hard to get or too expensive
- Buy crypto insurances against some of the other outlined risks
- Get much cheaper DAI borrow rates. MakerDAO is likely the best place for that
8) Used platforms in example scenario
Buy ETH on Binance
Buy wBTC on Uniswap
Borrow DAI from wBTC on COMPOUND
Borrow DAI from ETH on AAVE
An InstaDApp usage example
