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- Magic Internet Money
Hey there! Welcome back to the IGIN newsletter. Thanks to the 36 new IGIN readers that have joined us this past week. That puts us at 83 people who can now impress their friends at a dinner party with their knowledge of web3, the creator economy, and the internet. Congrats. You get it now.
Wanna see a magic trick?
Imagine if I could take a $100 bill...fold it over itself...and then boom — magically more money. You'd be lying if you said you didn't want to learn how to pull this one off.
Luckily, decentralized finance (DeFi) actually allows you to perform a trick similar to this, but naturally, you're gonna need a bit more training before you can be a web3 magician yourself.
Don't worry. This training won't take long. Before you know it, you too will be able to harness the power of ~magic internet money~.
Let's get right to it:
Productive Assets. Money generating money.
Abracadabra Money. The place to find "Magic Internet Money".
Takeaways. DeFi brings power to the people.
Productive Assets.
Savings accounts suck.
Before most people begin looking into investing (or even spending) their money, often times the top priority is to build up a little financial cushion in a savings account. According to the FDIC, the national average interest rate earned on a savings account is a meager 0.06%. Ouch.
But if people actually want to grow their wealth, they need productive assets. Assets that work for you. Assets that are making you money.
DeFi is the KING of productive assets.
As you might remember from our deep-dive into the OlympusDAO model, DeFi projects are offering some huge APY's — aka. protocols that can turn your assets productive.
Interest Bearing Tokens
So, how do you make your assets productive in the DeFi realm?
There are tons of different ways, but we're gonna focus in one today — interest bearing tokens, or ibTokens for short. So, first and foremost, you're going to need to buy some crypto.
Let's walk through an example.
You start by heading over to SushiSwap, a protocol that allows you to swap between cryptocurrencies. You are confident in this protocol, so you decide to purchase some $SUSHI tokens. This is a cryptocurrency that gives you partial ownership of the SushiSwap protocol. (Reminder: a protocol is simply the code that a project is running on)
You plan to hold on to these $SUSHI tokens because you think their value will increase as the project grows. However, rather than simply holding them in your wallet, SushiSwap allows you to lock up your tokens in the protocol to earn you rewards (this is called staking). While you are staking your original tokens, you get $xSUSHI. These tokens basically acts as an IOU given out by the protocol.
Now, here's the fun part. Every time someone uses the protocol to buy something, a very small fee is collected. This fee is then paid out to people who have staked their $SUSHI for $xSUSHI — that would be you. So, your $xSUSHI is a productive asset. It is earning you more tokens.
This $xSUSHI you own is an interest bearing token. When you decide to unstake your $xSUSHI, you receive your original amount of $SUSHI tokens + any additional tokens earned over time.
Boom. It's that simple. Your asset is now earning you ≈15% APR. A wildly better rate than a savings account. (Keep in mind that this percentage changes daily based on how many fees are collected by the protocol)
Abracadabra Money
Good job. You've made it through the first step. Now we get to the magic part!
So we'll continue with the example above. You now are holding an ibToken, $xSUSHI. This token is earning you yield.
What if there was a way to use that ibToken to gain more yield?
Is it possible to earn yield on top of yield? With Abracadabra — Yes.
How does this work?
It's actually quite simple. It's called...wait for it...a ~loan~.
Yes. I know. You thought I was gonna throw out some brand new crypto term at you, and now you're disappointed that we're back to stupid old traditional finance.
Wait just a minute though... DeFi loans are way more exciting for two essential reasons:
They're permissionless.
They can unlock a magic trick called looping.
Permissionless Loans
In the world of traditional banking, if you want a loan, you need to file forms, provide documents, get your credit score checked, etc. before you even have a chance at getting anything.
In the world of DeFi, you don't need any of that. No intermediaries. No credit scores. Nada.
All you need in order to take out a loan is collateral. This is where DeFi platforms like Abracadabra come in to the picture. With a few clicks, you can turn your crypto assets into collateral for a loan. It's that easy.
Very importantly, in the case of Abracadabra, your loan is paid out in a stable-coin, $MIM. ($MIM stands for Magic Internet Money... I bet you're starting to see the full picture now)
Recall that stable-coins are pegged to a less volatile asset, such as the US dollar. This means you aren't at risk of having to pay back your loan in an asset that had its price shoot up. (Imagine if you took out a loan for 1 Bitcoin in 2015 and had to pay it back now... you'd be forced to cough up an extra $50k+ to cover the cost of the increased price of Bitcoin. This is what the stable-coin solution avoids.)
Looping/Folding
Unlike most DeFi lending platforms, Abracadabra uses interest bearing tokens as collateral...
To fully understand the importance of this, let's think back to our $xSUSHI, which was earning us 15% APR while we held it in our crypto wallet.
(This is the most confusing part, so buckle up.)
Imagine this — what if we used our $xSUSHI as collateral to take out a loan... then we used that loan to buy more $SUSHI...then we staked those new tokens for more $xSUSHI...then what if we did it all over again.
Did you follow me on that?
With Abracadabra, you can take an asset that is generating you interest...
Use it as collateral to buy more of that very same asset...
And all of a sudden, you are now earning 15% interest on more assets than you started with. Effectively, you just folded your money and POOF... you're now making extra interest.
There are some limits...
This looping magic trick can't go on infinitely. When you take out an Abracadabra loan, you pick a collateralization ratio (in simple terms, what percentage of your collaterals value you want to borrow). For example, if you had $1000 worth of $xSUSHI and pick a 25% ratio, you can borrow 250 $MIM (worth $250).
You could go through the whole staking process with your borrowed crypto and then start earning 15% APR on the new $250. When you repay the loan, you'll get to keep that extra interest earned. Effectively, you are multiplying how quickly you earn crypto.
If you looped again, you would be borrowing 25% of that $250. That would be 62.5 $MIM (worth $62.50). Every loop you do, that amount gets smaller until it isn't worth looping anymore.
What is the risk? Liquidation (aka. losing your original assets).
In our example above, you just borrowed 250 $MIM with a collateralization ratio at 25%. You are free to hold on to that loan indefinitely. However, if the value of your $xSUSHI were to drop below the value of your loan, you would be liquidated. So as long as $xSUSHI is still worth more than $250, your loan is safe.
It is important to pick your ratio carefully. If your $xSUSHI value begins to slip, you can either repay some of your loan in $MIM or deposit more $xSUSHI to lower your ratio. Also, don't forget that you do pay interest on your loan. This works to raise your ratio towards liquidation, however ideally your assets value would be growing faster than the interest rate.
Takeaways.
1. Accessibility: One of the biggest advantages of the new wave of DeFi is that it takes traditionally difficult-to-access financial tools and gives access to everyone. In the traditional finance world, loaning out money, borrowing money, and investing in productive assets have always been services skewed to favor those well-equipped with money and resources. Those same people still have the advantage in web3 (simply because they have more capital to work with), however, the opportunities they pursue in web3 are now equally accessible to the general public.
2. Yield, yield, & more yield. Remember when I called DeFi the king of productive assets? Now you can see why. There are limitless possibilities in this space to earn yield on your cryptocurrencies. Between staking, farming, liquidity pooling, lending, and more, you can unlock earning potential in all sorts of different ways. Now with Abracadabra, you can even multiply your yielding potential with looping.
3. Magic tricks are cool. There's a reason that we still have magicians in this world today. As much as people try to act like "doing magic" is for just nerds, no one is immune to the mesmerizing effect that a great magic trick has on us. Admit it. They're cool.
Much of the energy surrounding the web3 space feels like this right now. People like to downplay what's happening here. Yet when you see ~crypto magic tricks~ like Abracadabra...you can't help but be captivated.
So let's just admit it together.
They're pretty f*ckin cool.
How did you like this week's IGIN newsletter? Your feedback will help me make this great!
Thanks for reading! If you liked what you saw, make sure you share. I'm willing to bet that you know at least one person who'd find this interesting. And if you reallllly liked it, go ahead and click that button below. I'll see you there😉
-Levi
I do my best to explain how it all works in these letters, but I won't be able to outline all of the risks. So if you read this and want to get involved, make sure you do your due diligence. This letter is not financial advise.