Although decentralized finance (DeFi) has been used largely for rampant speculation in the market, there are other use cases that allow individuals to make a profit without staying awake working late into the night. For example, stablecoin loans, which offer a much higher return than traditional products of comparable risk. Or arbitrage bots that allow tech-savvy traders to profit from minute price discrepancies.
An intrepid DeFi user has revealed a smart strategy that allowed him to buy a Tesla Model Y ($ 51,490) with the performance of cryptocurrencies. How did you get it? Is it a tactic we can do ourselves?
Connecting DeFi to the real world
If you’ve spent any time on DeFi, the principles used by AaronNg they will be familiar to you. If you haven’t, this story may have you disappearing into the Google hole and exploring ways to make your own wealth work for you.
Recently Ng, Former Facebook employee and long-time cryptocurrency user, dHe decided that he would like to buy a Tesla using cryptocurrencies. However, a friend dissuaded him from doing so, pointing out that You could keep your precious digital assets while you purchase the vehicle using only the return on your savings.
DeFi protocols, for the uninitiated, allow investors to earn a generous annual percentage return on their digital assets by lending them at a pre-agreed rate (APY / AnnualPercentageYield). In a banked world where interest rates are low to negative, DeFi provides a means to generate passive income without risking the lot in the notoriously volatile crypto markets.
While DeFi protocols are not without risk, many astute investors are making the most of their untrustworthy nature. Anyway, going back to our Tesla driver AaronNg …
Ng recently used a collateralized ETH loan to cover the $ 10,000 down payment on the Model Y. Simply put, this means that pledged 10 ETH (worth approximately USD 20,000 at the time) as collateral to open a loan of 10,000 LUSD, which in turn was used to cover the down payment.
Now, isn’t it normal to pledge a part of the collateral to get a loan? Well, not really: in traditional banking it is a difficult process, with a lot of paperwork and unfavorable interest rates. Using the Liquidity Protocol, Ng accepted a one-time fee of 0.5% to acquire an interest-free LUSD loan: just $ 500.
Of course, a down payment is just that: a down payment. AND Ng was still hooked on the $ 10,000 loan. The smartest thing is what he did next.
To cover the monthly lease payment of USD 700, Ng blocked a separate cryptoasset called Curve (CRV) in a participation protocol that offered an APR above 70%. “By betting USD 20,000, I will be generating around USD 1,200 per month”, he explained, “700 of which go to pay the lease and another 500 to pay the loan.”
“Since the liquidity loan has no repayment date or interest, I can adjust that second amount as needed. At $ 500 a month, it will pay off in approximately two years.”
All that glitters …
And this is how you buy a Tesla without spending money. If all goes well, Ng will end up unlocking his ETH collateral (which may have appreciated at the time) and will drive off towards sunset in his Model Y, possibly laughing in recognition of his own ingenuity.
Now, it goes without saying that this little scheme is not without its risks. To be fair, the value of a token could plummet; or the favorable staking protocol interest rates could disappear. The loan could also be paid off if the value of your ETH collateral falls below the collateral-to-loan ratio.
Oh, and let’s not forget that Ng (unlike many aspiring DeFi heroes) was in a position to guarantee $ 20,000 worth of ETH while betting another $ 20,000 to get a return. This is not exactly a handicap story.
Perhaps the lesson here is that DeFi represents a gateway to up-and-coming financial primitives that, if you are properly informed and aware of the risks, you can use to your advantage. I’ll be right back, I’m going to rent a Lambo …
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