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Driving a Stake thru the heart of TradFi

(**Note to reader - This article was getting too long so I am going to split it up)

If it was possible to be even more of a crypto asshole douchebag than I already am, this title accomplished it. I hate the slang of "TradFi" which is what the zoomers call Traditional Financing and most of the time they just mean anything to do with a bank or institution. I dislike that idea that TradFi is dead and Defi (Decentralized Financing) is this new holy grail. The supporters of Defi would say that monetary policy and greed ruined Traditional Finance and that Defi is not subject to those same pressures. That, in my humble opinion, is total bullshit. There is significant money to be made in both the Traditional and Decentralized sectors and greed will not stop bc something is digital. So in reality the best strategy is of course balance and if played right Traditional Finance mixed with Defi can be a deadly combo.


But who gives a fuck about all of this, we are all here for the good stuff and that is how to make money from staking. So let get to that. Most articles on this subject will give you the entire background of Proof of Stake and explain why it makes sense and then walk you thru to the logical end that earning a yield on a staked coin is legit and the returns are not too good to be true. I am going to do the opposite. I personally think that Stablecoins are the best individual investment opportunity in the interest earning category. I think this because they are less risky than all other crypto bc the underlying coins back by something and the price is pegged directly to the US Dollar. You can also, in some cases, earn a VERY high APY (like 25%) and it is auto-compounded daily. The last part of that is the most important because Auto-compounding is an insanely powerful tool. Now let's get into the details of who, what, when, where, why.




WHAT IS A STABLE COIN?

 


Well Wikipedia says that Stable Coins are “cryptocurrencies where the price is designed to be pegged to a cryptocurrency, fiat money, or to exchange-traded commodities (such as precious metals or industrial metals).”


Stablecoins if managed correctly should be a token that represents $1 and is backed by something worth $1 (if the US Dollar is what the choose to peg it to). Its kind of like if you had a piece of paper that said it was worth $1 and it was backed by gold worth exactly $1. It cannot be worth more or less than a dollar bc each time you create a new dollar you have to buy $1 worth of gold. This all assumes that it is redeemable at anytime and so if you ever decided you want the gold instead of the dollar you can trade it in right then and there. I think you see what I am getting at. The exact same idea is behind a US dollar backed Stable Coin where the coin is backed 1:1 and redeemable 1:1 for exactly 1 US dollar and the reserve is held by a third party regulated entity. The other characteristic of Stablecoins that you wont find with many other fiat systems is that you can audit the money supply anytime and see every transaction made on the blockchain. Just imagine what the world would be like if the Central Bank was that transparent. I don't know if it would be good or bad but it would be better than the opacity set at its current level.


So what about staking these bad mother fuckers? It seems like a long term investors wet dream. Go tell Dave Ramsey that there is a digital dollar that you can earn 25% on without doing anything but clicking a button and is redeemable at any time of the day or night. He would ask the following questions...So whats the catch? Why is this allowed to happen? Why isn’t everyone dong this? Why isn't this offered by every major financial planner and bank in the world? Well Dave, the answer to that is exactly why anyone reading this document hasn’t done it yet and that is because 1) there isn't 100 years of examples where it has worked with no issues like normal savings accounts or money market accounts. 2) It seems more complicated to do than normal ways of earning a return. 3) And most importantly for most people, no one wants to be the guy that got beat trying some new shit in crypto. I will now lay out the reason why I think it is worth considering and why I will be doing it going forward along with traditional investing and ways of earning interest. Keep in mind I am not an expert. I am a functional R-word. I also have never staked an extremely large amount of money so most of this is theoretical and not in practice. I will also explain all of the downsides and how this all works later on but for now lets look at what I have chosen as my pick for best option in Stable Coin Staking.


Origin Coin (OUSD)

 

The largest stablecoin is Tether which you can get about 12.5% on. Second largest is USDC which you can get about 8%-10% on. But much farther down the list is OUSD with the 1,192 ranking by Market Cap. YIKES! That doesn't sound so great because bigger market cap coins are usually better, safer, more reliable but let me tell you why it seems like a good choice for a newbie in the staking game like me. One, is that it is a fiat backed stable coin pegged to the US Dollar. Two, it can remain in your wallet while your earning yield on it. Three, they are a seemingly VERY transparent company with everything laid out very clearly on their site. But...the entire value proposition for me is that IT STAYS IN YOUR WALLET!!! That is the most compelling factor. Losing your entire investment via theft would be worst case scenario but if the coins are in your wallet and the yield is deposited in your wallet and you have proper security than there is very little chance of that occurring. Not them mention that their entire code is published on Github for anyone to audit. Here is a link to their white paper and you can go and read it yourself but those are the main selling points for the company. After reading that the natural response is to think its bullshit marketing in an unregulated space where lying is not penalized very much and billions can be made from fly by night coins. So let's go thru that question by question and concern by concern to see if it is a good idea or not.


Question 1: How are they able to do this?


Their answer is that when you buy OUSD you are give them money and they are giving you a Stable Coin in return. They then take that money and (ex. lend it, yield farm it, collect trading fees, etc) and make money off of it. This along with a 0.5% exit fee is what mostly pays for the yield that holders receiving. I think all of that is pretty straight forward and is not that revolutionary. The process of earning interest on money from somewhere that takes that money and earns more than they pay you off of it is not new. But the rewards are actually not paid directly to the holders of OUSD but instead they claim that “The generated returns are passed on to the holders of OUSD via constant rebasing of the money supply”. I am not entirely sure what the fuck that means but it sounds like the opposite of debasing currency and my simple understand of that is that you debase a currency by adding more of it to the supply which causes the currency to be worth less which means you are losing money via negative yields. The opposite of that or rebasing currency sounds like you decrease the amount of supply in circulation making your OSUD more valuable and possibly the money taken out of circulation is what is paid to you as yield. Currently that would mean they are rebasing their currency at 22% per year which is the yield they are paying at the moment. This is somehow different from a deflationary asset but I am not entirely sure how, it could just be different terminology.


To put a final point on this question of “How are they doing this?” I would just say that they are either lying and no one has figured it out by looking at the code and auditing them or they are telling the truth...for now. Plus they go into the most granular detail about every single aspect of this process. Its actually shocking when you read it, you think you are reading something you're not supposed to like some classified internal document. They go into the EXACT formula they use to rebase the currency, the actual mechanics of how they earn money, how they make money, how they pay yield, etc. They also have the most complicated explanation for APY calculation I have ever seen and the reason for that being they are an elastic supply coin which is more complicated than a fixed supply coin to calculate. For me this information puts a check mark next to “How are they doing this?”


Question 2: How in the hell are they giving that big of a return?


Well again, and I will be repeating this often, they break it all down on their website. They have a FAQ section called: “How is it possible for the APY to be so high?” LOL. Their answer is very very very convincing and that answer is: “You can read about our various strategies in Yield Generation. We currently get most of the yield from harvesting rewards tokens (namely COMP and CRV). Additionally, the yield increases as more OUSD is held in smart contracts that do not opt into rebasing since the underlying collateral continues to earn for the average OUSD holder.” What I get out of that is they have some algorithm or strategy that goes out and gets the best yield on their money that it can using any and every coin while at the same time de-risking by not having all their eggs in one basket. They also are a market maker and provide liquidity to markets such as uniswap and sushi swap. Bc those are smaller trading platforms they pay liquidity pools to have funds available to process trades. The final part of that is the fact that when less people opt-in for the returns the people that have opted-in will get more returns. Sort of a splitting the pie deal where with less people there are the larger the slices get. I don't think my interpretation of that is exactly right but its in general what is happening. The questions of why would someone not opt in or how does that work is all explained on the site. Look in reality, I could spend another 1000 words telling you why and how it works but would that matter. It either works or it doesn’t regardless of how much information they are public about. When the rubber meets the road you either get paid the yield and you can extract it at anytime or you cant. It really is nice that they are open platform and you can inspect the code and audit their funds but that doesn’t mean shit if you don't get the yield promised.


Just for shits and giggles here is a projection of a $10,000 investment auto-compounded daily over 5 years at 25% APY. Just let this sink in after you read it. That is a return of 350% after 5 years. 10k turns into 35k in 5 years and it never leaves your custody the entire time.



Question 3: Why aren't more people doing this?


Well so this isn’t some hidden gem that only I found. I'm not some super smart financial mind that figured out a hole in the matrix. Instead, right now there is 100 billion dollars right now doing exactly this, yield farming. Lockheed Martin's market cap is 95 Billion and IBM's market cap is 103 billion just for a quick reference. Now to be fair not all of that is in Stable Coin staking but instead in the Defi realm as a whole. So this is not some well kept secret.

So you can either stop reading here because you are sold on the idea in theory or you can read the more in depth info below about why staking is a thing and why it makes sense to pay yields on staked coins.


Now here comes the way more interesting technical part so let me give a brief summary of what I am going to describe below. Crypto Currencies have 2 characteristics that tie them together. 1) Every single transaction is cryptographically signed which means there is no possible way to fake a transaction. When you send it you sign it with a unique code and when it gets there if that code doesn't match who sent it then it is denied. 2) There is a consensus mechanism to decide what transactions are correct. The network asks everyone if this transaction is correct and if everyone agrees then it's pretty simple but if someone disagrees then there has to be a way to decide who is right. Staking is used in the 2nd part of that equation in the consensus mechanism.


WHAT IS STAKING?

 

As Coinbase puts in their Q&A section that staking is “the process of actively participating in transaction validation (similar to mining) on a proof-of-stake (PoS) blockchain. On these blockchains, anyone with a minimum-required balance of a specific cryptocurrency can validate transactions and earn Staking rewards.” They also attribute 3 main features of staking.

  • When the minimum balance is met, a node deposits that amount of cryptocurrency into the network as a stake (similar to a security deposit).

  • The size of a stake is directly proportional to the chances of that node being chosen to forge the next block.

  • If the node successfully creates a block, the validator receives a reward, similar to how a miner is rewarded in proof-of-work chains.

  • Validators lose part of their stake if they double-sign or attempt to attack the network.

That's it. That's the whole game. The entirety of staking can be summed up in a few sentences. Now the "why" might be the more interesting question.


Why is there even a thing called staking in the first place?


The idea behind "Proof of Stake" (POS) is in contrast to "Proof of Work" (POW) which is how most Crypto coins have come to a consensus up until now. The touted benefits of Proof of Stake over Proof of Work is that it is less expensive and has more negative repercussions for people that try to trick or attack the system.

In a blockchain protocol the network validates the transaction and each node on the network looks at the transactions that just happened and vote either “Yes this is valid” or “No this is not valid”. To decide who is right they go to a consensus algorithm which is the miners in POF and the stake holders in POS. In POF the validator that gets chosen to validate a block and in turn get the reward for that plus the transaction fees. In POS that is just decided by the largest stake pool. So in POF the more money you have aka the more GPU cards you are running the faster you can get to the next block to validate it and win the reward. The rich get richer type of thing. In POS the validator is chosen with a weighted probability on the pools with the most money staked. Said in another way they more money in your stake pool the more likely you are chosen to validate the block and earn the reward. This is all why Proof of Stake was chosen going forward for most coins and why it is somewhat more democratic in how it chooses rewards. Instead of paying miners they pay stake pools rewards. The pools with the largest amount of money staked are more likely to be chosen to validate the block and earn more rewards. It would then be in your best interest as a Stake Pool owner to get as many people as possible in your pool (there are limits) by offering a great yield to stake with them. Other stake pool owners will do the same and competition ensues which is always great for the market. The end state is that the higher the yield, the more attractive the pool, the more people that will stake, the more rewards will be won for validating blocks. This particular piece of information is one of the main things that convinced me of the legitimacy of staking.


Before I go into the downsides I just want to put all of this together in a simple way. Staking is just a savings account that pays a return. If done properly and managed well I think this can be a safe investment as part of a larger strategy. For example, someone "could" take the profits from a trade they made in Ethereum or other coins and cash it out as a stable coin instead of USD. So you would sell it as ETH/USDC or ETH/OUSD or ETH/USDT instead of just selling it for US Dollars. Then someone "could" take that stablecoin and stake it and earn interest on profits you just made.


DOWNSIDES


Just as an interesting note on attacking the network in POS models one of the only ways to do this would be to buy up 51% of a single asset and then lie about what blocks are valid. Besides the fact that it would cost billions in most cases to do that and the reward would also be very small, the process of the attacker buying 51% of an asset would make the the price for that coin go sky fucking high and everyone would be rich anyways. But anyways...

Let's look at the downsides of something like this. My main concerns are 1) Coin going out of favor/support 2) reserves being faked 3) The yield being realized is harder that it should be 4) the yield paid is lower than it should be. So if you cant access the money easily then it would be pointless. If a coin you are staked in just loses support and people stop buying it there is a possibility of it just going under. If the reserves were faked and found out it could cause the coin to be taken off the market. If the yield paid was not as good as expected then the stake might not be worth it, maybe you could have made more elsewhere.

For example, Tether, the largest stablecoin by market capitalization, has faced accusations of being unable to provide audits for their reserves while continually printing millions; many have attributed their unverifiable creation of new coins to Bitcoin's rise in price in 2017. Stablecoins can be prone to failure as well due to volatility and upkeep required in many cases. The stablecoin project Basis, which had received over $100 million in venture capital funding, shut down in December 2018, citing concerns about US regulation.


The next post will be about staking non stablecoins and how that can be used as a trading/investing/interest strategy as well.



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