Gonna preface this with saying I am not sure precisely on what exchange this should go. The question is more about DeFi than it is about Bitcoin, so the Bitcoin exchange is not the right place. The Cryptography exchange also doesn't seem to be right considering it seems to be mostly about development and fundamentals, rather than a specific application. Ultimately I decided to ask the question here as it relates to finance:
I have been reading recently about the DeFi space. I have noticed (admittedly, pretty late) quite a bit of buzz regarding WBTC and its applications in Ethereum. I have read about the Compound dapp and how it allows users to put assets like WBTC into a liquidity pool and earn extremely high interest rates (>5%!). Is this legit? I currently have $X in a US money market account, but given the federal interest rate, this MM account is yielding <1%. As a result, it seems to make financial sense for me to move $X to buy Y amount of BTC, transfer that Y amount of BTC to Y amount of WBTC (via something like CoinList), and then put this Y WBTC into the liquidity pool on Compound and earn >5% annual interest. While complex (at least in comparison to what I as a 'classic' investor might normally do), it seems relatively easy to do. But it just seems... I don't know, too good to be true? I just convert my FIAT->BTC->WBTC and earn >5x what I am earning in the highest yield MM I can find? Am I misunderstanding some part of the process? Is there some hidden tax or fee structure that makes the return dramatically lower? I guess there is risk of depreciation of the WBTC while it is sitting in the liquidity pool, and that would lower my absolute return. Is that the only negative? 5% just seems fantastical as a guaranteed rate.
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3There's an Ethereum Stack Exchange site: ethereum.stackexchange.com– FluxCommented Nov 5, 2020 at 3:50
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3With these decentralized applications (dapps), isn't there a large risk of losing your money to hackers who manage to exploit bugs in the app?– FluxCommented Nov 5, 2020 at 4:20
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1 Answer
Compound is a very speculative product and I would argue that the interest rates are not reflective of the risk they incur. The various interest rates are floating rates and they have not run for a year yet to really extrapolate what an earning rate actually would be.
Regarding the proper venue to ask the question, yes, it can be difficult, personal finance forums are typically very risk averse leaning towards total ignorance, the purpose being to educate on broadly applicable financial stability topics for people that are completely segregated from the financial system and would be better off if they weren't. So, self-directed speculation typically isn't one of the topics these places are optimized for.
