[marcinjachymiak]

I don't know what happens behind the scenes at Celsius.

I do know there are many ways to get those high ROIs in DeFi.

With zero evidence suggesting they are lying about returns, the charitable guess I can make is that they are getting high DeFi returns and giving their customers slightly lower ones after taking a cut.

[adam_arthur]

Can you explain some of the ways then?

Not the user facing side, but the backend/underlying part that generates the returns necessary to sustain those yields.

[TimJRobinson]

Most of the high yields come day traders paying trading fees. For example on sushiswap on Polygon there are pools of ETH/USDC that people trade back and forth with trying to play the market. Every time they do a trade they pay a 0.3% fee. If you provide liquidity to these pools there is so much trading going on that the returns are currently 20% - 30% per year.

You can earn even more if you provide liquidity for riskier assets that have a higher chance of dropping in value.

The risks are impermanent loss and that the token you're providing liquidity for drops in value.

Yearn is a decentralized automated tool to find the platform that is giving the best returns and moving all the money they manage into it.

All of this is open source and on the blockchain.

[adam_arthur]

But the fees are taken from people speculating in crypto to make money.

Even though these are "fees" or "loans", the purpose is strictly speculation. It's not driven by intrinsic value, but people attempting to make money via speculation.

If I take a loan for a house, I can live in it. That's intrinsic value.

So the system only works to the extent that people are willing to pay for tokens without intrinsic value. Does not seem sustainable to me

[TimJRobinson]

I don't particularly care why they're trying to trade the markets, or if they're providing intrinsic value, but I'm happy to invest money and collect 20-30% dividends from them.

If everyone suddenly decides they don't want to trade any more, then I'll find somewhere else to invest my money.

[sec400]

Not Celsius specifically but you can see details about yearn's strats here: https://docs.yearn.finance/getting-started/products/yvaults/...

Specific vaults strats: https://medium.com/yearn-state-of-the-vaults/the-vaults-at-y...

Links to the actual contracts: https://yearn.watch/

[adam_arthur]

I just glanced through these and don't see any explanation.

They basically just say "we put it in a vault and harvest the rewards".

What I'm asking is where do the rewards come from. What is the underlying mechanism that makes this model sustainable.

If you invest in a REIT, tenants earn money through their business and pay rents. If you invest in a BDC, the BDC makes loans to businesses and collects interest. Relationship and risks are quite clear here.

If you're Bernie Madoff you generated high yields for investors for decades by taking money from one investor to pay another, and ultimately was not sustainable and bankrupted many people. For example.

So are DeFi yields like a BDC, or like a Bernie Madoff?

[bhouston]

I think the main answer to most of these questions is that everything works well as long as BTC and most others currencies continues to rapidly increase in value as a result of a lot of cash inflows into these cryptocurrencies. This papers over all of the fraud at least for now...

When the explanation is too complex for anyone to really grasp or verify, realize that this is probably intentionally opaque in order to hide the fact that it is either hugely risky, built on a house of cards or it may be just outright fraud.

[anonymoushn]

Yeah, you'll see defi yields go a lot lower in a bear market. They were tiny for a couple months over the summer.

[SilasX]

FYI, I made a big reply that includes a response to your claim:

https://news.ycombinator.com/item?id=29501396

[anonymoushn]

Some yearn vaults invest in liquidity pools that let users pay 10bps or whatever to trade one stablecoin for another. So the yield comes from that 10bps fee.

The sUSD yVault deposits sUSD into overcollateralized lending protocols and collects interest on loans to other users (who are presumably using Aave or CREAM as places to buy leverage to get super fucking long crypto). So the yield comes from other users paying interest to borrow sUSD.

[SilasX]

I think I can answer your questions.

Background/Disclaimer: I'm long crypto and have significant assets in Gemini's Earn program, a regulated variant of crypto lending that pays 8% on their stablecoin, GUSD.

I found Celsius and Yearn to be too sketchy/inscrutable to bother with[1], so I'm not going to defend anything about them, only the narrower claim that (some) DeFi liquidity pools are a non-Ponzi, sane way to earn returns in some conditions.

Liquidity pools [2] function as automatic market makers, using their assets to allow traders to trade between two cryptocurrencies. As a liquidity provider, you lock up two cryptos in return for a cut of the fees it takes from traders; your cut is proportional to how much liquidity you contributed. Those pools expose an interface to the Eth network that lets anyone put one of the cryptos in and take the other out, with a pre-determined formula for how it figures the exchange rate. Its profitability comes from the extent to which this exchange (after accounting for both pool fees and Eth network fees) gives a better deal to traders than their other alternatives (like centralized exchanges).

Like any market maker, you face the risk of "impermanent loss" from the shift in relative value of the cryptos, as market makers make standing buy/sell offers which look stupid when the market moves against them. There are also setup fees and all the usual risks associated with smartcontracts. When you consider how long you have to leave them in the pool to make a profit, and those fixed setup fees, plus the opportunity costs of lending through other providers with less volatility[4], the returns (3-100%) just about barely compensate you for the risk.

I experimented with them starting about three months ago and made a presentation, for which you're welcome to see the slides (slide 7 summarizes the downsides):

https://docs.google.com/presentation/d/1BrMMbL5vOzdnkaPVj5mO...

Contra bhouston's claim [3], these LPs don't require ETH to perpetually gain value: as long as traders continue to use the pool, ETH could stay stagnant or even fall significantly and they will still pay a return, though a long-term fall would induce a big impermanent loss (in an ETH-stablecoin pool) that would take a while for fees to compensate you for. (Edit: Although I suppose you could argue that people won't keep trading between ETH and other tokens unless that speculation, in the aggregate, is merited -- but it's not a simple matter of the pools only being profitable as some kind of derivative of ETH's value.)

[1] In the case of Celsius, largely because of this: https://prohashing.com/guides/earning-interest-on-crypto

[2] I've mainly worked with Uniswap v3; some of the details may vary slightly in other protocols.

[3] https://news.ycombinator.com/item?id=29498814

[4] For example, Gemini will lend out your GRT tokens at 6.4%, so that's your minimal return for this to be a good idea.

[adam_arthur]

Even though these are "fees" or "loans", the purpose is speculation. The whole web of connections in the flow of the money is rooted by people speculating to make money.

These aren't loans that are made to acquire some intrinsic value, like buying a house, investing into growing a business and so on. People use this liquidity or take crypto loans to try to make more money elsewhere in crypto.

Is that right? Is there a tie to the real world in there?

To me, this appears quite unsustainable and prone to failure if a risk off event comes. How would crypto have performed during the GFC? It's fallen 80% before even in times where economy has been perfectly fine. The whole ecosystem is ripe to implode due to 0 intrinsic value to owning the tokens that would otherwise cushion a fall in value.

Even in a severe recession, cashflowing businesses have value, rental properties have value. Crypto has none that I can tell.

[SilasX]

Wait, what? The entire purpose of my previous comment was to clarify the role of liquidity pools, part of something in another reply that you asked about, and you are asking about wholly unrelated things I have no expertise about. Can you at least comment on whether that (IMHO honest and thorough) attempt to explain LPs addressed anything you asked about?

>Even though these are "fees" or "loans", the purpose is speculation. The whole web of connections in the flow of the money is rooted by people speculating to make money.

LPs don't have "fees", they just have regular fees, no need for scare quotes.

>These aren't loans that are made to acquire some intrinsic value, like buying a house, investing into growing a business and so on. People use this liquidity or take crypto loans to try to make more money elsewhere in crypto.

I don't have an special expertise on what the crypto loans on Gemini/Celsius are for, beyond what their literature says. However, everything you've said there applies just as well to (secured) margin loans that brokerages make. Do you have the same objections to those?

[notahacker]

There may well be many ways to get ROIs in excess of 12.68%. There are also many ways to obtain investment capital on better terms than a fixed 12.68% APR, especially if you're really, really good at investing. And if you want as much USDC as possible it's even odder to lend some of it back out at 1%!

I guess the charitable explanation for them raising capital as expensively as possible from randoms on the internet is they're feeling charitable themselves. I seem to remember that was how all the pre-crypto HYIP "investments" explained the generosity of their compounding daily return offers

[marcinjachymiak]

There are also other ways to get these returns outside of DeFi, like by staking ETH, selling covered calls, or various other strategies on centralized services

[yellow_postit]

And these are also mostly speculation.

The crux of the OP’s argument to me is that The company and others in this space position the yields as being “in kind” to savings account yields despite it very much being a different risk ballgame. See the frequent hacks on https://rekt.news/ for example.

Do sites like Celsius explicitly claim to be as safe as insured savings banks? No of course not but they play a similar linguistic game of association to Tesla’s “autopilot” nomenclature.

As with most things do your own research and don’t risk what you can’t lose.

[gruez]

>like by staking ETH

What's the ROI on staking ETH right now? Is it anywhere near the rate that they claim?

>selling covered calls

you're taking on risk when doing that. It works well until you get assigned, in which case you take a massive loss and unable to pay back your investors.

[quickthrowman]

How do you take a “massive loss” on covered calls being exercised? They have defined risk, you give up some potential upside to collect premium. If they are exercised, the underlying is called away.

Selling naked calls has a lot more risk, see the blowup of optionsellers.com on naked natural gas options

[gruez]

>How do you take a “massive loss” on covered calls being exercised?

The loss comes from the opportunity cost of what you could have sold the underlying asset for. That might or might not be "massive", but the potential is definitely there. At the end of the day you're picking up pennies in front of a steamroller. Maybe it even has expected value greater or equal to the advertised APY, but failing to disclose that and/or pretending like it's guaranteed is deceptive. I'd be pissed if I put my money into some sort of "savings account" with 8% APY, then get wiped out next time there's a spike/dip, because it turned out that they were using it to write covered calls.