Bitcoin’s Borrowing Rate Spikes on Ethereum’s Compound


Compound abstract, Sep 2019

Interest in borrowing tokenized bitcoin suddenly spiked to as high as 17% per year with lenders offered almost 10%.

The situation now seems to have returned more down to earth, but you can still earn about 1% of actual bitcoin a year or borrow the actual asset at the current interest rate of 6.67%.

This 1% is very high by normal standards. If you lend eth, for example, you get just 0.03%.

This numbers might seem small, but it’s not 1% of the amount borrowed, it’s 1% of all the amount that has been put up for borrowing.

So if you put down 1 wrapped bitcoin (WBTC), you get 0.01 bitcoin in interest a year regardless of whether anyone actually borrows your bitcoin or borrows just ₿0.1.

Obviously, however, just how much you get in interest on all of the assets that you put up for lending depends on demand which at that brief 9% suggests it’s very high in part because there isn’t much supply.

There’s only 112 tokenized bitcoin in play currently, worth about $1 million, with Compound seemingly being the only one offering WBTC according to Loanscan.

For other prominent crypto assets there has been significant growth in providers, but Compound remains the biggest one of its kind.

Compound stats, Sep 2019
Compound stats, Sep 2019

Some $40 million is currently held by borrowers of all assets on offer at Compound.

These borrowers do not have just a claim to the asset, they have actual possession of the borrowed crypto itself or token and can do with it whatever they want.

What exactly they’re doing with WBTC is not clear as that is a fairly new entrant to ethereum, but they can use the token in the entire DeFi space, including potentially in margins or they can sell it on decentralize exchanges if they think price is going down further, at which point they can buy it again and pay off the loan.

This is all trustless as there is little doubt the loan will be paid back unless there’s some unfound contract bug. That’s due to collateralization requirements of the higher the better but at least 1.5x with it currently at nearly 4x for all assets at Compound.

The interesting thing here is that the borrower can collateralize eth or other tokens and have that collateral be sufficient to get wbtc.

Likewise if they have actual bitcoin, they first need to wrap it with it in this case necessarily done in a custodian manner, but that’s by prominent projects with everyone able to audit as it’s blockchain to blockchain.

We haven’t kept up with how exactly you do this, but if interest grows then even Coinbase can offer the somewhat simple function of you giving them bitcoin and they giving you wbtc.

Now that you have wbtc, you put it down on Compound and earn this 1% at the current rate. In addition to this 1%, that wbtc you’ve put down also entitles you to borrow eth or other assets that are currently on offer.

So just because you’re a bitcoiner, it doesn’t mean you can’t margin long on MakerDAO by borrowing DAI to buy eth until you lose it all.

Soon enough you can probably do with wbtc itself everything that other tokens can do in decentralized finance, with access to decentralized exchanges potentially being one useful aspect which may well facilitate bot arbitrage.

Beyond trading, margin longing, hedging, bot arbing, and bitcoin based decentralized stable coins, or stocks, or gold, or even oil, you can also use this wbtc pretty much as you use bitcoin although the infrastructure isn’t really quite there as there aren’t many, if any, popular exchanges that list wbtc.

So for now it’s mainly finance. Like for eth, you can put it down on a CPD, get dai, put that down on compound, borrow eth, put that down on a CPD, and with the new dai now borrow wbtc and so loop around until you lose it all or maybe you’re far too smart.

That smartness would however be subject to price uncertainty, but much of this is also algorithmic, numbers, with compound itself a smart contract, open for all to see its interest calculations and much else as we detailed last year.

So from a non gambling perspective there’s things one can do, or more correctly their bots can do, like arbing liquidations or arbing supply and demand and so on.

With all this being just the beginning. Wait until they tokenize property loans and package them into loan tokens which you can long and short with it then either all collapsing – which is fine we can shake gov for money – or perhaps with the new digital design proving to be far safer with little systemic risk.

Things here however work best when everything is natively digital, when it’s just code “talking” to code as once you include custodians, which would be necessary to tokenize property, then you have to deal with humans who can cheat and lie.

Yet some years down the line, especially once a generation grows with all this blockchain defi stuff, having a paper title to a property as well as an officially issued ERC-20 token of it might be something common. Until then, we’ll just have to wait and see if Hayek was indeed right when he said:

“The older generation of bankers would probably be completely unable even to imagine how the new system would operate and therefore be practically unanimous in rejecting it. But this foreseeable opposition of the established practitioners ought not to deter us.

I am also convinced that if a new generation of young bankers were given the opportunity they would rapidly develop techniques to make the new forms of banking not only safe and profitable but also much more beneficial to the whole community than the existing one,” Hayek in the Denationalization of Money.



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