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Today MakerDAO approved Coinbase’s proposal to custody up to $1.6 billion USDC.
If you’re wondering why MakerDAO seems to be doubling down on a risky centralized strategy, this post will explain.
We also have an update on a new type of scam you might come across if you’re farming and two solid tips to protect yourself.
TradFi Rates Up, Crypto Rates Down
One Year Ago
During the bull market there was large demand to borrow dollars to invest in crypto assets which investors expected to appreciate: Bitcoin, Ethereum, altcoins, and NFTs.
High demand combined with low stablecoin supply caused the interest rates on cryptodollars to exceed 10% for most of 2021, despite the official Federal Funds rate being nearly zero.
Investors who could not find an attractive TradFi yields could invest their dollars to earn high returns from lending or farming stablecoins, without taking on price risk.
Trading companies and sophisticated investors were sending USD to a centralized exchange, converting to Bitcoin or Ethereum, and then hedging in the perpetual futures contracts to farm a good yield. Yields on the majors rose as high as 30% in 2021 and the all time average is still above 10% despite funding being negative through most of 2022.
Investors who did not want to take on the risk of trading derivatives could simply lend their coins on the FTX margin system. The all time average interest rate for Tether, USDC, and physical dollars has been around 8%. This includes the recent three quarters where rates have fallen to around 2%.
There were also various high yielding DeFi farming strategies for stablecoins.
Today
Fed funds rate is up ~4% and a further rise is priced in. Demand for borrowed money in crypto dried up when leveraged participants went bust during the summer.
TradFi’s risk free rate is now higher than crypto USD yields.
Mercenary capital is better off investing in US treasuries to earn ~4% rather than taking on smart contract risk in DeFi for < 2%. This causes an outflow of legitimate funds.
Money drained from hacked protocols will likely stay parked in DAI, which has no blacklist.
Today, anyone can borrow USD on FTX against crypto collateral at 1.1% *below* the Federal Funds Rate. FTX customers in aggregate are lending ~$2.95 billion dollars at rates ~2% below the treasury bill rate. Is lending to degens on FTX lower risk than lending to the US government? Of course not
Rates are similar in DeFi. Here are the stablecoin rates on Aave.
Once again, taking on smart contract risk lending to DeFi degens on-chain is riskier than lending to the US government.
These funds are held by participants who either want to invest in Ethereum and altcoins again soon, or they don’t want to (or can’t) KYC and withdraw to fiat for better yield.
MakerDAO - Endgame “Pigeon Stance”
MakerDAO’s founder Rune Christensen knows the score.
In a recent governance proposal setting out his vision for Maker’s endgame, he described a scenario where the DAO would invest the USDC reserves it holds (from the peg stability model) in Real World Assets (including TradFi / government bonds) to make as much money as possible over the next 3 years.
This makes sense for Maker, which was struggling to meet its high overheads and earning little revenue. Under this plan the DAO will earn ~$22m annualized if the maximum $1.6b is invested.
DAI is ~30% backed by USDC so the protocol is already semi-centralized. Rune convinced the community that it is better to get some yield for that risk. The trade off is accepting such a low yield in exchange for the benefits of Coinbase providing relatively easy onboarding.
Better yields could be achieved in money market funds or by investing in treasury bills directly, but that would require significant management resources from MakerDAO’s core units and could not be achieved as quickly.
We’d argue the rate Coinbase is offering isn’t nearly sufficient to justify the risk of being an unsecured creditor of a firm with a BB rating. A more realistic rate would be 6%, allowing Maker to earn ~$96m/year instead of $22m.
S&P dropped Coinbase’s bond rating from BB+ to BB in August following disappointing earnings. The note issued by the ratings agency declared a negative outlook for Coinbase due to concerns about its ability to prudently manage operating expenses, disappointing revenues, and the likelihood of further share price falls.
Revenue from the Coinbase deal is to be converted to ETH and retained to fund a future vision: withdrawing from centralized assets in response to regulatory threats, and potentially allowing the exchange rate for DAI to depeg from the US dollar.
All in all, MakerDAO is taking a risk-on approach to generate additional income. The protocol, already being intertwined with USDC, is now also locking arms with Coinbase.
The Maker team is thorough, but locking $1.6 billion of their funds with a BB rated centralized company seems overly risky for a low single digit yield.
Security Highlight: The Stabledoin Scam
Summary of events:
Yields are low so degens are flocking to high risk farms on new chains
Degens don’t check transactions in detail
MetaMask doesn’t show nicely formatted transaction details on non-ETH chains
Attackers are smart enough to know that they earn more if they delay rugging andonly rug the larger withdrawals so that most users don’t notice
A Dogechain project called Stabledoin set its frontend to steal funds from anyone withdrawing more than $4k from the liquidity pool
Thanks to Marco, a security auditor at Paladin for this detailed tweetstorm:
Actions
Check the details of every transaction before you sign. We keep harping on this because it’s important. You should be able to see your wallet address in a transaction which withdraws funds from an LP. If it is another address, don’t sign!
Address mid-way through the transaction (red box) should be YOUR wallet
You shouldn’t interact with the frontend on a dapp which rugged. But you need to withdraw your liquidity. Instead, try RugDoc’s “LP Breaker” tool here. Always check the transaction details before signing, even on the good guy’s frontend.
Fake Aptos Airdrops
Aptos impersonators are running fake social media accounts including @Aptos_lab (note the underscore) and @AptosLabs_L1 (note the suffix) on Twitter. There are fake websites claimaptos dot com and aptosfoundation dot fi. Do *not* approve an address 0x9..d106, it’s a scam.
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Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are opinions from an anonymous group of cartoon animals with Wall Street and Software backgrounds.
Security: Our official views on how to store Crypto correctly (Click Here)
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