A new wave of Defi 2.0 is here. Mass investors and Defi enthusiasts are slowly gravitating towards high yield staking through leverage and yield-bearing tokens. We have seen Olympus DAO offer 7,614% APY through OHM staking. At first, it sounded like a Ponzi scheme to many investors, but later, we got to know that it was treasury-regulated APY. The OHM minted for staking rewards is backed with a reserve from the treasury, and it makes it insanely profitable by applying the compound interest after each locking period.
While we have yet to see how sustainable this staking approach is, other decentralized protocols like Abracadabra Money and Wonderland are ramping up onboarding users by emphasizing high annual yields and zero tax liabilities. At the moment, if you put $1000 for staking $TIME, you are promised $71,208% APY. And in the case of MIM tokens of Abracadabra money, you can borrow money from the yield-bearing tokens you staked and leverage a position via only a single multi-part transaction.
All of this sounds too good to be true, right? But before dismissing it, let us first understand why the APY is so high and how lending/borrowing works on Abracadabra Money
Magic Internet Money ($MIM)
In only a couple of months, Abracadabra Money had a major run-up in price and overall protocol users. It is proof that Defi 2.0 is the next major trend in crypto. But why is that the case?
Abracadabra Money is a decentralized protocol that offers a high yield staking pool with the help of asset-backed stablecoins. Unlike regular stablecoins, the $MIM tokens are not governed by any central authority. So, the adoption rate is much higher than other centralized protocols. Also, the governance token of Abracadabra Money, $SPELL, observed astronomical growth in a short period, all thanks to its ever-expanding community.
As more people recognized the potential of Magic Internet Money, the total locked value on Abracadabra skyrocketed. We can see it touched $4.65 billion on November 18th, and it was less than $100 million in July. Also, the circulation of MIM tokens is steadily growing, putting its value over $2 billion.
It’s not only about stablecoins growth in this bull cycle that attracted thousands of users to stake on Abracadabra Money. Due to SPELL’s cross-chain compatibility, it made it possible for anyone to access the protocol. Some of the protocols currently supported by Abracadabra are Ethereum, Arbitrum, and Arbitrum. Users also make the most out of its cross-chain integrations including Convex Finance, Yearn Finance, Curve Finance, and Sushiswap.
Apart from stablecoin functionality and cross-chain features, the MIM tokens have another element that is favorable to all Defi users. It is decreasing the circulating supply and tokenomics structure. The token holders of $SPELL can claim their voting rights on emissions which helps control network inflation. Also, recently, the team decided to burn 8.7 billion SPELL tokens from the supply, as the price saw a major uptick in the last few weeks.
Now that we know the background of Abracadabra Money and why Defi users are so bullish on $SPELL, it is time to understand how lending and borrowing work.
The core functionality of Abracadabra lies in its ability to use yield-bearing tokens as collateral and borrow against Magic Internet Money. Some of you might think the risk of liquidation is high when more money is borrowed, but that is not the case with $MIM. As the value of these interest-bearing tokens increases, the risk of liquidation goes down over time.
Another way to put it is these tokens will act as your proof of deposit. So, when the collateral is untouched in yield-bearing tokens, you can unlock a massive share of your deposit and earn high interest. For example, your yearn tokens can earn anywhere between 7-9% on average, but the interest you have to pay for borrowing against MIM is only 0.8%. In simple terms, you have exposure to yield-bearing tokens that go up in value and access to capital that can earn high yield through farming.
That is the basic stuff many people know about Abracadabra. But there is something else you can do to maximize APY without taking on huge risks. To understand this better, let us take an example. Imagine you deposited 10,000 dollars and you bought $UST stablecoin. You can now take that money and borrow $MIM.
This is where the magic happens. You can also loop your position up to 10 times. After the 10x loop, you will borrow 57,432 MIM tokens, which would give you 112% APY with a 90% liquidation price. If you do the same on Anchor Protocol, you will only get 16.5%. So, by using the $MIM tokens and loop feature of Abracadabra, you are able to earn 10x your normal yield. In other words, you are stacking debt to earn more yield.
The only risks associated with such approaches lies in the smart contract. Also, liquidation is always going to be a concern. If you are new to Abracadabra, it is recommended not to put money you can’t afford to lose. Start small with less number of loops and liquidation levels, and see how the APYs turn out after a couple weeks.
The DeFi Wonderland ($TIME)
Wonderland is a reserve currency protocol on Avalanche that offers high yield through staking and compound interest. The $TIME of Wonderland is backed by not one, but multiple LP tokens like MIM and TIME-AVAX. It was created by the same team as Abracadabra with Daniel as the Founder.
TIME is a fork of Olympus DAO, so we can see why the rewards are so high. For instant, the APY is more than 90,000%. It changes all the time, as $TIME is based on an algorithm. The supply can expand or contract based on the staking and minting conditions.
In Wonderland, you can mainly do three things — stake, bond, and sell. If you stake $TIME, the APY goes up. And it goes down if you sell. The treasury balance of Wonderland increases when people purchase bonds. If the treasury increases, the intrinsic value goes up. If the treasury decreases, the intrinsic value goes down.
Here is what people don’t understand and why people think $TIME is a Ponzi. The APY for staking is 71,200%. That would normally mean that if you had $1,000 today, you would have $712,000 in 1 year. But that’s not the case for $TIME. The APY is only telling you how much your $TIME balance will increase based on the minting schedule. So if you buy 1 $TIME today you might have 712 $TIME tokens in 1 year, but there would probably also be many more $TIME tokens in circulation.
So, if the price continues to rise, then you would make crazy gains over time. Even if the price consolidates, the overall gain would still be significantly high, as the number of $TIME tokens will increase after one year. This is why people are paying more than 7x premium to buy $TIME now, as it holds long-term value.
However, we need to consider the risks behind these insane APY promises. If the protocol fails to achieve a certain number of bond sales (depending on the number of $TIME staked), the APY of 71K% cannot be guaranteed. I remember the APY was around 30K% APY a month ago.
Also, if in the future, the community loses interest or trust in Wonderland, then we would see the intrinsic value plummet. So, the risks are high, but that applies to almost every asymmetrical bet. If you want to explore, start small and learn stuff to stay ahead in the coming Defi 2.0 run.
No one can deny the amount of innovation taking place in the Defi landscape. But everything is associated with certain risks. Magic Internet Money is a one-of-a-kind approach to have exposure to yield-bearing tokens and still have excess capital to explore other investment opportunities. While we have to wait and see if such high APY is sustainable, it is worth exploring these new Defi protocols and being ahead of the curve.
Born and brought up in India, Karthikeya Gutta is a crypto journalist and freelance contributor for ItsBlockchain. He covers various aspects of the industry with in-depth analysis and research. His passion towards blockchain and crypto ecosystem is mainly because he believes it can really change the world and help millions of people.
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