How to “beat the market” using Defi Rate Swaps — Pendle
The dislocations in Defi are sometimes just too big to ignore. Case in point - Warren Buffet produced an average return since 1965 of about 20%/yr. I can show you how to obtain yield like this without taking directional exposure in the markets (functionally only assuming smart contract risk). Heads up, I’m going to use rough math here as the numbers vary slightly daily. If you just want to see which buttons to push to be Buffet, scroll down to the bottom section.
Pendle works by taking your interest bearing token, in our case aUSDC or cDAI (from AAVE or Compound deposits), and separating out the yield and principle. YT is the yield and OT is the principle token, together YT+OT = redeemable aUSDC/cDAI. So what happens when you sell your YT tokens and keep the OT ones? You’re essentially selling all the yield + future yield and keeping ownership of the principle. The caveat is that you must wait for the OT tokens to appreciate back to par at expiration. As time moves forward there will be less yield available so the YT tokens will go down in value, while the OT tokens will appreciate closer to par in a balanced manner. Our trade will focus on the USDC/DAI 2022 products.
Just show me how to make guaranteed 20% a year on my money…
Currently Pendle rates for simply depositing cash in AAVE or COMP is ~15%/APY. With your payment for selling YT you would go purchase more OT tokens. This leaves you at about 120% exposed to the OT token until Dec 2022, close to about a 20%/yr return on your money. Additionally you get the stAAVE and/or COMP tokens from staking on those platforms. These accumulate over your maturity period, and now your return is roughly 22% APY. You’re beating Warren Buffet already. The next leg of this is optional, but it’s how you get to 30+% yields. Importantly it does not jeopardize your fixed 22%, but supplements it.
With your OT tokens available, head to the staking tab on Pendle, stake your OT tokens with USDC, then park your LP tokens. I have posted these rates as of time of writing. The important part here is that this leg of yield is paid out in sushi and/or Pendle token, so it is heavily subject to fluctuation.
Ok, so now we have our first OT leg doing a mostly fixed 22%, and then we are doing another call it 20% in Pendle/sushi on OT leg x2 (OT/USDC), netting us a bit over 30% APR. Now this kind of return is just about unheard of in traditional markets, even in Hedge Fund Land. There is enough liquidity for several million bucks to pass through this trade. For pleb instructions visit their educational page on how to use Pendle: https://medium.com/pendle/tagged/educational
