DeFi Yield Farming: How to Earn 45% Net APY Lending BAT on Compound

Image for post
Image for post
Source: Gozha.net

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

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.

A table showing Compound is the top ranked lending DeFi site.
A table showing Compound is the top ranked lending DeFi site.
Source: Defi Pulse

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.

A table showing BAT has the highest APY at 13.99% on Compound.
A table showing BAT has the highest APY at 13.99% on Compound.
Source: Defi Rate

As of the date of publication BAT is earning 13.99% APY on Compound.

Compound

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.

Image showing Compound protocol has $988,125,883 of assets earning interest across 9 markets.
Image showing Compound protocol has $988,125,883 of assets earning interest across 9 markets.
Source: Compound

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

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

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.

Image showing the Compound protocol has $316,552,727 of BAT earning 13.99% interest.
Image showing the Compound protocol has $316,552,727 of BAT earning 13.99% interest.
Source: Compound

The Details

Get the Crypto

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

For this step, transfer the BAT and ETH into your wallet.

Lend the Crypto to Compound

Step 1:

Go to the Compound website.

Step 2:

Click on the App button at the top right of the page.

The Compound website App button.
The Compound website App button.
Source: Compound

A pop-up should appear requesting you to connect your wallet. Read the Terms of Service before you connect.

A picture showing the 3 wallets that Compound supports.
A picture showing the 3 wallets that Compound supports.
Source: Compound

For example, clicking on the Coinbase Wallet results in this:

A picture showing a QR code allowing the user to connect their Coinbase Wallet to Compound.
A picture showing a QR code allowing the user to connect their Coinbase Wallet to Compound.
Source: Compound

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.

Table showing a list of coins that are lendable in Compound. BAT is shown with 500 units and ETH is shown with 0.09 units.
Table showing a list of coins that are lendable in Compound. BAT is shown with 500 units and ETH is shown with 0.09 units.
Source: Compound

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:

Image showing the Supply screen for BAT on Compound.
Image showing the Supply screen for BAT on Compound.
Source: Compound

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.

Image showing total balance, APY, interest earned on the Compoud website.
Image showing total balance, APY, interest earned on the Compoud website.
Source: Compound

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.

Image for post
Image for post
Source: Compound

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.

Step 3:

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.

Image of Compound voting screen.
Image of Compound voting screen.
Source: Compound

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%?

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.

Image for post
Image for post

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.

Final Remarks

I hope you enjoyed this guide.

  • If you have feedback you can reach me on Twitter or Reddit.
  • If you think others would benefit from this guide then please share it using the friends link!
  • Tips are always appreciated: somer.eth

Disclaimer

Written by

Passionate about Ethereum and decentralized technology.

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store