Comparing risk on DAI lending platforms

Earning interest on crypto is in a sweet spot between profitability and ease of use. In a previous piece, I touched on some platforms that make the process of investing very simple, but exactly how risky can lending crypto assets get?

Coinbase holding risk

Coinbase is the most regulated of the options. CENTRE (Coinbase & Circle), who manages USDC, lists reserve bank partners and compliance organizations that ensure “checks and balances.” There, you can also find attestations from an accounting services firm, updated every month. 

The biggest risk of earning through Coinbase is if suddenly, everyone sold their USDC and Coinbase had backed money in contracts that they couldn’t get out of. This scenario seems very unlikely. Still, there is not much information on how the interest is calculated on Coinbase, and it would be a good idea to follow them closely incase something changes. 

DyDx lending Risk

DyDx puts borrowers in over-collateralized positions ranging from 125% to 150%. Margin traders collateral only needs to be 25% because they can’t withdraw their loan. Each borrower has a liquidation point to ensure the lender will be paid back.

If a borrower’s collateral becomes worth only 115% of their loan, it is liquidated. The other 15% goes to DyDx’s insurance fund. Everything is collateralized through Ethereum, so liquidation can occur if Eth becomes less valuable. DyDx says the insurance funds are there for times of “extreme volatility.”

So far there are no reports of the insurance fund running out of money. 

Dharma lending Risk

Lending on Dharma means that you’re adding value to the Compound protocol. Like DyDx, Compound requires 125% collateralization for both USDC and DAI. Instead of building an insurance fund through a liquidation buffer, 1/10th or 1/20th of interest paid by borrowers is set aside for “reserves.” 

Like DyDx, nobody has reported the protocol running out of reserves. 

Still, there have been times of high lending pool usage. If someone puts millions of dollars into compound, which right now contains around 150 million, they could risk not being able to pull. out. If 96% of compounds funds were being lent out, only 6 million would be able to be removed.

Multiple people being afraid that they won’t be able to pull their friends could cause a “run on the bank” scenario where everyone pulls out and causes panic. Still, the higher the usage, the more interest lenders get paid. Users have to put trust in that system of incentives.

Risk between tokens

USDC risk has been summarized in the Coinbase platform section because of how closely the two operate. DAI on the other hand has a very complex system that is tied to the volatility of Ethereum. 

To make it short, DAI has a system of checks and balances that hasn’t fallen apart yet. Still, it’s peg to the dollar is choppy. Throughout history, DAI has stayed within 5% of the dollar mark. This means that earning 5% APR could either put you at a total of 0% earnings or 10% earnings depending on the price of DAI when it is purchased and sold. 

If passed, on November 18th, “Multi-Collateral Dai” will allow users to use more than Eth for collateral. Theoretically, the feature will give DAI a wider safety net for when extreme volatility strikes the market.

Remember, it’s new technology 

Compound offers a “bug bounty” to encourage people to report issues rather than taking advantage of them. On the Dharma “risk” faq, they warn you that you are using new technology that is prone to bugs. Not all the kinks have been worked out of these systems and developers are aware. 

With that being said, all protocols have been audited to an extent by third parties. There are no records of either 0x or Compound being hacked. Keeping up with news about the protocols should help mitigate risk as it is less likely for a whole insurance fund to be taken out in one day than it is over time.

 

Three easy ways to earn interest on USDC and DAI

Decentralized finance (DeFi) is a field in blockchain tech that has gained traction even throughout crypto’s price bubble. A primary reason for this is how everyone can identify with the urge to lend and borrow. There are many ways to earn interest on crypto assets, but these four polished platforms are safe (not financial advice) starting points. 

Earning interest with USDC on Coinbase

Not all blockchain tech is decentralized, especially not Coinbase and USDC. The massive spot exchange seemed to follow the “earn interest on your coins” wave after DeFi lending had been long established. Regardless of whether or not this method is for blockchain purists, people are going to use it off the strength of Coinbase’s brand.

Coinbase is the easiest place to start earning interest. All you need to do is buy some USDC with debit card or bank account and Voilà! You are now earning 1.25% APR. It’s the least you’ll earn from platforms on this list, but probably more than your bank’s savings account will give you. 

USDC is backed 1:1 by the USD and was founded by Coinbase and Circle. The two companies created what is called the CENTRE Consortium where they look for other institutions to “help change the global financial landscape.” Coinbase is able to offer interest likely because they are earning more than 1.25% with the cash that they back USDC with. 

Earn even more on Dharma 

Dharma used to be a peer-to-peer lending service which linked a lender and borrower into a contract. Recently, they decided to scrap that whole idea and become an interface for the Compound protocol.

Now, Dharma is a gateway into contributing USDC and Dai to the Compound lending pool. The change means that users can deposit and withdraw their tokens at any time. Earning interest on Dharma is as simple as purchasing DAI or USDC from a spot exchange and sending it to your Dharma address.

Right now, USDC earns 4.66% APR while DAI earns 7.39%. As the lending pool becomes more used, APR increases for lenders. As more lenders contribute or less is borrowed, interest decreases. 

Compound is a decentralized protocol and Dharma is a centralized organization that acts as a forum for users to connect with the protocol. 

Lend to margin traders

DyDx is one of the only decentralized exchanges that lets users trade with leverage. They are able to lend money to traders by using protocols similar Compound. 

Interest rates currently don’t differentiate much from Dharma. This could change throughout time since it uses the 0x protocol and along with a proprietary one. It’s also worth noting that users can earn interest by holding Ethereum, but only a measly .06% right now. 

Earning interest on DyDx might be appealing to someone who actively trades DAI/ETH pairs on decentralized exchanges. The liquidity on their DAI/ETH pair is pooled with Maker’s own Oasis exchange, so it’s not horrible compared to other DEXs. 

DyDx requires one extra step that Dharma doesn’t have. You will need a MetaMask wallet with an Eth balance. Eth is required for gas fees when withdrawing from the wallet which usually costs 10s of cents. 

So, in order to get your DAI or USDC onto DyDx there are a couple of steps: 

  1. Buy at least $5 of eth for gas. Send that to your MetaMask wallet.
  2. Buy your DAI or USDC. Send that to your MetaMask wallet. 
  3. Deposit DAI or USDC onto the exchange with the MetaMask wallet. 

Now might be the best time to lend

These platforms are in their infancy and decentralized credit ratings aren’t in existence yet. If more people learn how to lend their crypto assets, the lending pools get bigger and interest earned will decrease. 

Trading crypto is dangerous if you don’t have the time to learn, or aren’t in the position to take risk. Lending is a good way to earn interest without converting back to FIAT.

To learn more about risk on said platforms and currencies, check out our information on that here

 

How to report Cash App Bitcoin transactions on tax forms

If you’ve purchased, sold or traded Bitcoin on Cash App, you will need to know where to find the necessary forms to help report for taxes. 

A draft of an IRS tax form was released in October 2019 that asks whether or not you’ve dabbled in the virtual currency world. 

“At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?

Cash App form 1099-B

Cash App will be one of the easier exchanges to file taxes in since there is only one crypto and no advanced trading interface. 

The company is required by law to file a copy of your 1099-B form to the IRS every year. Buying Bitcoin is not a taxable event, but net profits from selling it is.

By going to your account page on Cash App’s website, you should be able to receive your 1099-B by February 15th. 

According to Cash App, “The proceeds box amount on the Form 1099-B shows the net cash proceeds from your Bitcoin sales.”

If you sent Bitcoin to an exchange

If you sent your Bitcoin to Coinbase Pro for trading purposes, you shouldn’t need to report anything as long as you had under 200 transactions. 

In most states, those 200 transactions have to have earned over $20,000 in order to require payment. For the few states that have lower thresholds, see the previous link.

Bitcoin sent to an exchange like BitMex or Deribit that doesn’t have KYC requirements will likely not be recognized like Coinbase Pro but keep records just incase.

Transferring between crypto wallets is non-taxable, but again, net profits are. This means that the amount of Bitcoin received on a regulated exchange minus the amount that you’ve purchased with fiat can be subject to taxation. 

The barrier to entry in crypto trading is much lower than in traditional markets, but it doesn’t mean that the IRS doesn’t take it as seriously. Before you make big money, it’s important to know the big facts on how you will be taxed.

How to find Ethereum updates

As a nerdy gamer, I was excited to find out that Ethereum lists updates to their network in a similar manner to how Blizzard releases patch notes to World of Warcraft. As long as you know where to look on GitHub and can memorize one acronym, you’ll be ahead of the curve when it comes finding updates about Ethereum

Finding Ethereum updates 

GitHub can be stressful and confusing to navigate as a new viewer. Luckily, on Ethereum’s GitHub, it only takes a couple clicks to see what’s being proposed, tested and implemented. 

  1. Navigate to github.com/ethereum
  2. At the top of the page, under “pinned repositories”, click “EIPs”
  3. Click the folder called “EIPs”
  4. On the top right above the list, click “History”

History section on Ethereum's GitHub

Unfortunately, using the history tab is the only way to sort information by date. The history section sorts by commits which are new files or saved changes to a file. 

“A commit, or “revision”, is an individual change to a file (or set of files). It’s like when you save a file, except with Git, every time you save it creates a unique ID”

What is an EIP? 

EIP is short for Ethereum Improvement Proposal. You can think of them as patch notes that aren’t promised. There are three types of EIPs according to EIP1 which acts as a guideline. 

  1. Standard Track EIP – any change or addition that affects the interoperability of applications using Ethereum
  2. META EIP – like Standards Track EIPs but apply to areas other than the Ethereum protocol itself
  3. Informational EIP – describes an Ethereum design issue, or provides general guidelines or information to the Ethereum community, but does not propose a new feature

EIP1 goes much more in depth than these descriptions, but will give you the gist of what you’re sifting through. 

Finding current implementation 

Ethereum Cat Herders is a community that helps Ethereum developers coordinate network upgrades. They recently were in charge of finding people to audit progPoW and have published straight forward updates about istanbul.  

By following their medium page, you will likely find the most updates to Ethereum without having to read through GitHub. It is always beneficial to your understanding of Ethereum to get in the weeds a bit though.