07/04/2020 UPDATE: Changes in the Compound protocol have deprecated the opportunity to earn high interest on lending BAT for the moment. However, the article stands as a guide to lending any coin on Compound.
The biggest trend in the DeFi space at the moment is Yield Farming. In this article, I’m going to briefly define Yield Farming and provide a basic example of how to participate in Yield Farming using Compound and $BAT, the Basic Attention Token.
I will also show you how it’s possible to earn a 45% net APY return (based on rates at the time of publication) by supplying BAT to provide liquidity for borrowers using the Compound protocol.
Before I begin, an important disclaimer: This is not financial advice and I am not a financial advisor. I am not recommending you try this, or purchase/lend anything. This article is for informational purposes only. If you decide to participate in any form of Yield Farming, know there are risks and you should exercise extreme caution and/or seek expert advice before doing so. Rates are current at the time of writing.
An additional risk worth calling out: new governance proposals like this one can affect the mechanics of COMP supply and interest payments. Which may or may not be favorable for your return (but hopefully make the protocol better overall).
With that out of the way, let’s get started!
Yield Farming is the act of leveraging a DeFi product or service to farm rewards from investing. There are many different forms this can take and there are multiple services available to choose from.
The service type I’m going to focus on in this article is Lending, and in particular, Lending BAT through the current DeFi Lending front-runner, Compound.
Part of the excitement of Yield Farming is tracking down the best rates and opportunities to maximize our return. There are a number of different ways to do that, but most basically we can use websites such as Defi Rate to find some of the highest lending rates.
As of the date of publication BAT is earning 13.99% APY on Compound.
Let’s talk about Compound. What is Compound? I will use the definition from the Compound website itself:
Compound is an algorithmic, autonomous interest rate protocol built for developers, to unlock a universe of open financial applications.
The autonomous part is what DeFi is all about. Compound uses a blockchain (Ethereum in this case) and smart contract technology to create a decentralized autonomous offering. There’s no middle man or significant human intervention. Just a series of smart contracts that precisely define and execute their financial product offerings.
Compound is pretty big. As of now it has almost $1bn in assets earning interest.
As I mentioned above, the financial activity we will focus on in this article is lending assets to earn interest.
Compound boasts the following features with respect to lending.
- Lend assets (in the form of cryptocurrency) to the platform in exchange for compounding interest.
- Interest is paid in the same currency as the lent asset and it is paid every 15 seconds(!).
- Lending is flexible — withdraw or lend anytime, no penalties (but there are blockchain transaction fees, paid in $ETH).
- Lenders earn a “governance token” called $COMP as a reward for lending which gives holders the right to vote on proposed changes to the Compound protocol. The COMP token is also exchange listed, meaning it can be traded and has a value.
Check out the Compound documentation for more details.
BAT is the asset we are going to lend to Compound. It is a form of cryptocurrency (an Ethereum ERC-20 token to be precise) that we can either purchase on an exchange or earn by opting into rewards through the Brave browser.
We are using BAT because it offers the best rate of return for lending on Compound.
Note that there’s a viability threshold and if you don’t have sufficient BAT to lend the returns may not cover the transaction fees. Watch out for this.
The 1000 ft View
Even though this is a fairly basic type of Yield Farming, an overview will help you visualize what we are going to do. I will go into more detail in the next section to further clarify each step.
The sequence of events is generally:
- Get crypto — BAT in this case, as it is offering the best return.
- Move it into a crypto wallet that Compound can talk to (Coinbase Wallet, Metamask, or Ledger are supported).
- Connect the crypto wallet to Compound.
- Lend the crypto to Compound through the connected wallet.
- Receive a token in the connected wallet as collateral for the crypto lent — $CBAT in this case.
- Earn interest on the crypto lent, paid in BAT every 15 seconds, and reflected in the CBAT balance in the connected wallet.
- Earn a reward for the crypto lent, paid in COMP, every 15 seconds.
- Sit back and relax!
It’s notable that Compound has a lot of BAT in its liquidity pool.
Now that I have given an overview of the steps we are going to take, let’s get into the details.
Get the Crypto
The first step is to acquire some BAT to lend out. As I mentioned above, BAT is a token that you can earn by using the Brave browser. However, it is also available for purchase from exchanges like Coinbase or Kraken. You can also acquire it by swapping it for other crypto via UniSwap.
Important Note: Compound runs on Ethereum so in order to use the service you will need to pay fees to process the transaction. For that you will need some Ether (ETH) in your Wallet. Around $10 should be plenty, although fees are climbing every day. Layer 2 applications and/or EIP 1559 can’t come soon enough!
Put the Crypto in a Wallet
Compound is capable of interfacing with three wallets — Coinbase Wallet, MetaMask, and Ledger. I’m not going to recommend one. Each has their own pros and cons so do your research.
For this step, transfer the BAT and ETH into your wallet.
Lend the Crypto to Compound
Now this is where the magic happens. There are a few pieces to this so I’m going to lay it out step-by-step.
Go to the Compound website.
Click on the App button at the top right of the page.
A pop-up should appear requesting you to connect your wallet. Read the Terms of Service before you connect.
For example, clicking on the Coinbase Wallet results in this:
After which you go to your Coinbase Wallet app on your phone and scan the QR code. This will auto-magically connect your wallet to Compound. The balances in your wallet will show up on Compound’s website in the App section.
Next click on the coin you want to lend in the Supply table— in this case Basic Attention Token.
You should see this a pop-up like this:
Enter the amount you want to lend. Whatever you provide will start earning the Supply APY as interest. When you’re ready click on Supply. This will trigger an event notification in your wallet prompting you to authorize the transaction. You will need to pay some amount of ETH from your wallet as a fee.
Once you approve the transaction the BAT will disappear from your wallet. After a minute or two, you will receive CBAT in its place, equivalent in value to what you have lent. This is basically your collateral and it’s dynamic, meaning as you earn interest in BAT the amount of CBAT you have in your wallet will increase.
The Compound website will present the amount you lent as shown below, with confirmation of the interest rate (APY), the interest earned to date, and the total balance (lent + earned) in BAT and USD.
You are now earning 13.99% compounding interest, paid in BAT, on the coins you have lent. Awesome!
Remember, it is possible to withdraw your coins at any time. The withdraw interface on the Compound website is shown below. Fill in the details and click Withdraw.
When you do the withdraw action you will receive a prompt in your wallet to accept the transaction. Remember you will need some ETH to pay for the transaction fee. If you accept, the CBAT will disappear from your wallet (assuming you withdraw everything) and the corresponding value in BAT will appear in its place.
What about that governance token COMP I mentioned earlier? Well, as long as you are supplying coins to earn interest you are earning COMP, too. But it doesn’t appear in your wallet by default. Instead, you can transfer it over whenever we like, or it comes over when you withdraw your BAT. You can see it ticking up every 15 seconds on the Compound website. From the App page, click on Vote.
The Voting Wallet shows COMP earned, and any COMP balance you may have in your wallet. You can use the COMP tokens to participate in voting, to delegate your votes, or you can collect them (transfer to your wallet) and sell on an exchange.
So What About That 45%?
How do we achieve such a high rate? Well, recall that you are lending your BAT to compound and earning interest at roughly 13.99%. At the same time you are earning COMP tokens. Those tokens have a value, and adding the interest earned to the value of the COMP tokens can result in an overall yield (based on current rates) of roughly 45%.
Let’s use the website Predictions.Exchange to visualize it.
Say we decide to lend a conservative 500 BAT with a value of $125. According to the calculator, over the period of 1 year we would earn 0.19 COMP (valued at $40.12 at current rates) and $17.75 in net interest, giving a total reward of $57.87, which is 45.63% net APY.
Obviously the net APY depends heavily on the value of COMP, but even if it went to zero, earning 13.99% on our BAT is still a pretty good deal! If BAT also went to zero… Well, let me wrap it up with this:
Always remember that there are risks involved and it goes without saying that you should proceed with caution. Software bugs, hacks, coin price drops, and other mishaps could mean that you lose some or all of your investments.
It’s been great learning about these new concepts in a slowly decentralizing world. Many of these services and protocols have only existed for a few years at most. Things are changing fast and after reading this, you’re one step closer to the forefront. Have fun and be safe!
I hope you enjoyed this guide.
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I’m not affiliated with the companies/developers mentioned in this article. Opinions are my own, and information is based on my own research from publicly available information. I am not a financial advisor. I make no recommendations or endorsements, nor do I warrant the accuracy or completeness of the information herein.