Advanced DeFi Guide #3 - Crypto Money Markets
Why Retirement Math Always Fails - and Crypto Mortgages
This is a guide for people that are familiar with everything discussed in the Beginners guide to Crypto, and for people familiar with the basic function of a DEx I outlined in section 2 of the Beginners Guide to DeFi.
You also should be familiar with Signing Transactions as well.
Consider this post to be a direct follow-up to Advanced DeFi Guide #2, as we will be discussing stablecoin income and borrowing in more detail here. You need to be familiar with the basics of stablecoins outlined in that post as we will be expanding on that and discussing the roles Stablecoins play in DeFi.
A Definition list for the abbreviations, words, and terms that I use.
As usual, this post is too long for email, be sure to check out the substack site or download the substack app if you have an apple product or iPhone.
As a note, I have scheduled this post to go out on my big day. That’s right, I get to face off against the bank in a state court to hopefully get my money back. You very well may be reading this while I am attending trial. Wish me luck.
Table of Contents
Retirement Math Always Fails
Crypto Money Market Rates
All Lending Rates are Market Facing
Stablecoin Lending Cycles
Stablecoin Lending Protocols
Self-Repaying Mortgage
Conclusion
1. Retirement Math Always Fails
Incredibly obvious to all of you reading this probably, crypto-currency is in its infancy and an incredible growth phase. This means that almost every single protocol, while having the potential to appreciate to eye-watering levels of wealth for early investors, is also incredibly ethereal. Anything that is here today can easily be gone tomorrow. Markets in general are extremely efficient at arbitraging risk so that the returns offered (in terms of income) roughly comes to reflect how much risk is present. Consider the video below.
Most all of you probably read my post-mortem for $LUNA’s failure last month, and so know how the above endeavor would have ended. That’s right, essentially would have set $700k on fire trying to do retirement math. There is (almost) nothing in this space that is going to offer significant income over a long period of time to cover a mortgage payment that won’t be carrying significant amounts of risk. If you are in this space, you need to be in it for the right reasons, or significantly dispassionate enough that the money you have in here isn’t earmarked for anything in particular. There are too many people who are looking for an off-ramp from life. They’re trying to do retirement math. This is what retirement math looks like.
“If I can just get xxx coins staked at 11% APY and it stays above $19.77 a coin, I’ll have $3,000/month and I can quit my job.”
Yeah, don’t do that. That’s the wrong reason to be here. If you are tired of life, this isn’t the space to alleviate that general exhaustion. This is a space for either passion, or for dispassionate risk-on investments. What I mean by that is you are either in this space and constantly curating your investments and tracking their performance and shifting in and out of protocols as they suit your needs so that you are growing and moving within the crypto space to maximize your income with no real goal of sitting on a beach somewhere. Or you are just parking some money in BTC, ETH, and some crypto infrastructure plays while doing other things for money. This isn’t a place to come so you can quit. And in defense of the kid above, his actual income comes from making Tik-Tok’s and Reels selling lifestyle advice to the kind of person that is constantly attempting to do retirement math. So he’s staying in his lane, even if the advice being shared is counter-productive.
The only place retirement math works is when annual yields are close to the 5-10 year Government T-bill rate. As we covered in the May treasury auction post, the 10 year is returning about 3% right now. Returns any higher than that, and you’re taking on risk and need to be involved somewhat.
You should be entirely skeptical of a fixed rate of return in any crypto protocol. Skeptical in the sense that you are not taking it for granted.
In a bull market, rates for stablecoins typically rise. In a bear market, those rates typically fall. We’ll go over why in Section 2. A lot of centralized exchanges, offer fixed interest rates, if they are healthy, you can expect them to change alongside market conditions. When a decentralized exchange offers a fixed interest rate, you should be incredibly suspicious. One thing you may note in the future when watching my tone, is that I will likely be much harsher on fixed interest rates being offered on decentralized platforms than I was on Anchor in my Stablecoin guide.
on Anchor Protocol for instance, it is paying out 19% APY on UST deposits. The claim is that Anchor pays for this interest by using deposited ETH and LUNA to earn staking rewards, while also charging 10% interest on borrowers. Whether this is sustainable or not is beyond me to speculate on, but you should be aware of that if you wish to use the platform to earn APY.
I was pulling some punches, which is something I can be biased into doing in the crypto space. I am typically hesitant to shit on things that are performing well even if it is raising alarm bells in my head, and even if I would never invest. My instinct to let sleeping dogs lie is something I’m going to work on in the future to make sure I’m not pulling any punches or tossing up soft-balls when I really shouldn’t be.
You should always be asking the question, “where is the income coming from to pay me these yields.” If you’re here, it’s probably because you already ask that question, and you’re here to get answers. Well, you’ll get them, but before that, I have one last reminder for you all on the topic of retirement math. The biggest problem is that people are trying to do too much, too quickly, and you can end up like this person below when markets shift.
Imagine, you’ve managed to accumulate $2M in assets. Sounds like a pretty big success right? You’ve made it. Tossing that into a basket of dividend paying stocks could return you $60k-$80k a year. Not a bad little nest egg of worthless stock, IMO. From there, you hopefully have additional sources of income and can use that nest egg to provide you with more security and stability as you continue to expand your wealth.
What did this person do instead? They tried to do to much, and were probably doing some retirement math on getting to $5M as fast as possible. They spent the cash, and leveraged against their risk assets, and were exposed to a very basic function of leveraged trading markets, a margin call, and they have no idea how to pay it. Not to be crass, but in general, these markets are not for everyone. The person in this example invested in real estate 20 years ago and seems to have done fairly well for themselves. They are probably mid-40’s or early 50’s. When considering the financial risks you should be taking, a major consideration is your age. This is the biggest mistake most people make in their 20’s and 30’s, and on the other side, the opposite mistake is typically most common after a mid-life crisis.
When you have plenty of time and future income to recover from mistakes and financial misfires is when you should be taking out-sized risks in the markets. Your risk profile should be decreasing with age, because you have less time to wait on highly risky investments to turn around. Most people waste their 20’s and 30’s without taking any significant risks (huge mistake), and then in their late 40’s and early 50’s they feel the urge to want to catch up and increase their risk profile when they have no ability to do so, which is also a huge mistake. I’m in my early 30’s right now. However well I am able to do by ~45 is about where I’m going to make it financially. Beyond that age, I’m simply not going to be taking any outsize risk due to my personal time horizon. No matter how bad my mid-life crisis is, I will be accepting my lot in life at that point. Youth is for the young, it’s a mistake to throw away your older years trying to do all of the things you didn’t do in your youth. Live that life now (if you’re young), and age with grace, when you’re old. Don’t sell your only home and jump into an investment you don’t understand.
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