Although defi has largely been used for rampant market speculation, there are other use cases that enable clever individuals to pocket a handsome profit without burning the midnight oil scrutinizing candles of a different sort. Take stablecoin loans, for example, which offer a far higher yield than traditional products of comparable risk. Or arbitrage bots that enable tech-savvy traders to profit from minute price discrepancies.
One intrepid defi user has disclosed another clever strategy, one that enabled him to lease a Tesla Model Y (value: $51,490) with crypto yield. So, how did he pull it off? And is it a tactic you can emulate yourself?
Connecting Defi to the Real World
If you’ve spent any time at all in defi, the principles used by Aaron Ng will be familiar to you. If you haven’t, this story may cause you to disappear down a Google rabbit hole and explore ways of making your own wealth work for you.
Recently, Ng — an ex-Facebook employee and long-time crypto user — decided he’d like to buy a Tesla using cryptocurrency. However, he was dissuaded from this course of action by a friend, who pointed out that he might conceivably hold onto his precious digital assets while acquiring the vehicle using only yield from his savings.
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Yield-bearing defi protocols, for the uninitiated, enable investors to earn a generous APY (Annual Percentage Yield or the interest earned on an annual basis) on their digital assets by lending them out at a pre-agreed rate. In a world of low-to-negative interest rates (damn you, legacy banking world), defi provides a means of generating passive income without risking the lot on the notoriously volatile crypto markets.
While defi protocols certainly aren’t without risk, many savvy investors are making the most of their trustless nature. Anyway, back to our Tesla driver Aaron Ng…
As explained in a blow-by-blow blog post, Ng recently used a collateralized ETH loan to cover the $10K upfront down payment on the Model Y. In a nutshell, this means that he pledged 10 ETH (worth approximately $20K at the time) as collateral to open a loan for $10K LUSD, which was in turn used to cover the down payment.
Hang on, isn’t pledging a chunk of collateral to acquire a loan just par for the course? Well, not really: in traditional banking it’s a convoluted, paperwork-intensive process with unfavorable interest rates. By using the Liquity Protocol, Ng accepted a one-off 0.5% charge for acquiring an interest-free LUSD loan — a mere $500.
Of course, a down payment is just that — a down payment. And Ng was still on the hook for the $10K loan. The clever part is what he did next.
To cover the $700 monthly lease payment, Ng locked a separate crypto asset called Curve (CRV) into a staking protocol offering over 70% APR. “By staking $20K, I’ll be generating about $1.2K per month,” he explained, “$700 of which goes to the lease payment and another $500 for repaying the loan.
“Since the Liquidity loan has no repayment date and no interest, I can tweak that second amount as needed. At $500 per month, it’ll roughly be paid off in two years.”
All That Glitters…
And that’s how to buy a Tesla without spending money. All being well, Ng will eventually unlock his ETH collateral (which may well have appreciated by that stage) and drive off into the sunset in his Model Y, possibly cackling in recognition of his own ingenuity.
Now, it should go without saying that this little scheme isn’t without its risks. To be fair to the author, he acknowledges this in the blog post by conceding that the value of a token could plummet; or the favorable staking protocol interest rates could disappear. The loan could also be liquidated if the value of his ETH collateral falls below the collateral-to-loan ratio.
Oh, and let’s not forget that Ng — unlike many aspiring defi heroes — was in a position to collateralize $20K worth of ETH while staking another $20K to earn yield. This isn’t exactly an underdog story.
Perhaps the lesson here is that defi represents a gateway to promising financial primitives which, if you’re suitably clued-up and mindful of the risks, you can use to your advantage. BRB, off to lease a Lambo…
PS: in the US, selling your crypto to then lease a Tesla will be considered as a taxable event where you have to pay capital gains tax. Meanwhile, using the “technique” as explained in this article, is an interesting way to prevent that.