TL;DR
- Get some ETH. Move it into your MetaMask wallet.
- Set up MetaMask for the Polygon/Matic sidechain.
- Wrap your ETH and move it over to Matic Network as PoS-WETH.
- Deposit your money in the Aave platform to earn MATIC reward tokens.
- Borrow from Aave, re-deposit what you borrowed. Loop. 🤯. Earn more MATIC reward tokens.
- Use Quickswap to find high-yield liquidity pools. Buy those coins, stake them into LP pairs, then deposit those pair tokens for huge APY in the form of QUICK reward tokens.
- Stake your QUICK reward tokens back into Quickswap to earn dQUICK (which auto-converts into more QUICK on withdrawal).
- Lambos and money hats. 🚀
The 2021 crypto bull market is flattening out, and if the past is any indicator (it isn’t) we’ll see a couple of lackluster years before the next BTC halving pushes a new wave of growth. Or so the youtube hype-men claim.
I’ve been playing the long game for a while, but I want to get better at earning while the market is flat. Here’s how I took my first step into the deep water of recursive yield farming and hyper-compounding on the Matic Network.
For anyone following along, please recognize that every step of this journey has significant risk. I’m going through a lot of smart contracts (each of which could have bugs or vulnerabilities), touching a lot of currencies (which could rug-pull or be crashed by the wrong tweet), and opening myself up to a lot of impermanent loss. These big APY numbers are not sustainable, sometimes falling within hours. This is the riskiest 5% of my portfolio.
1. Pre-requisites
This isn’t a My First Bitcoin™ article; all of these pre-requisites are easy to search for.
- Use a centralized exchange (CEX) like Coinbase to buy some ETH.
- Install MetaMask on your browser and set up a wallet. Keep the private key and mnemonic recovery phrase somewhere safe.
- Send your ETH from the CEX account out to your MetaMask wallet.
2. Connect MetaMask to the Matic Network
We’ll be moving funds off of Ethereum’s primary blockchain (mainnet) and onto a layer 2 sidechain called the Matic Network by Polygon.
Open up MetaMask, pull down the “Main Ethereum Network” menu at the very top, and add a Custom RPC.
Network Name: Matic Mainnet
New RPC URL: https://rpc-mainnet.matic.network
ChainID: 137
Symbol: MATIC
Block Explorer URL: https://explorer.matic.network
Matic is a sidechain of Ethereum so you don’t need to generate a new wallet. However, MetaMask isn’t good at switching between the networks yet so you do need to be mindful of which network you have selected at any given time.
To test things out, you can head over to https://matic.supply/ and get a little bit of free MATIC coin.
3. Move your ETH over
Open up Polygon’s wallet dapp here: https://wallet.matic.network. Make sure MetaMask is on Ethereum Mainnet and then connect the website to MetaMask.
Click on the button labeled Move funds to Matic Mainnet to get to the bridge interface.
From the Bridge page, select Ether, type in an amount to move, then hit Transfer and follow the dialogs. The instructions claim that it will take 7–8 minutes, but mine took closer to 20.
Under the hood, you are sending your ETH to a “custodial vault” address somewhere. When that is done, Polygon’s servers tell the sidechain to credit you with an equal amount of PoS-WETH, which is Matic’s “wrapped” version of Ether.
4. Recursion layer 1: Aave
We’ve burned a lot of gas fees up to this point, but we’re in the sidechain now so fees are down to thousandths of a penny and we can start to farm some interest.
Go to https://aave.com/ and click on Enter app. In the top right corner, make sure your market is set to the Polygon version.
Polygon and Aave have partnered to make an incentive program to use both technologies. Polygon is giving away 1% of all MATIC coins as a reward to people who provide liquidity to the Aave market. At the time of the deal, that amount is roughly $40 million USD. These rewards are divided among the people who stake their money into the system, and the incentives are scheduled to run through April 13th, 2022.
To get a slice, all you have to do is deposit your money into Aave. Click the Deposit tab in the header and you’ll see a list of currency that Aave wants. Notice that the APY column has two numbers in it. The top number is the normal interest rate you’ll earn for locking up your money, which is paid by the borrower. The lower number with the Matic icon next to it, is the amount of extra interest you’ll earn from the incentive program.
At this point there is a decision to make: if you want to maximize interest, you can use Quickswap to convert your PoS-WETH to another coin, like WBTC or MATIC native coins (more on Quickswap in step 6). Alternately, if you expect one coin to go up or down, you can keep your money in/out of that currency. For instance, if you think Ethereum is going to go down, you may want to swap over to a stable coin like DAI.
NOTE: USDT (Tether) can’t be used as collateral on Aave, so it doesn’t support the next steps in this article.
In my case, I started by depositing equal parts USDC and MATIC coin. Once the money is locked in, you can look at your dashboard and you’ll see the deposits and interest rates listed. In the top right corner you’ll see your rewards start to add up in the form of MATIC token.
5. Recursion layer 2: More Aave!
It’s finally time to get weird! Since the incentive program is rewarding borrowers on the platform as well as lenders, we can double dip. We’ll use the money we deposited as collateral to take out a loan.
Open up the Borrow tab and take a look at the rates. Again there are two numbers here. The top number (APY) is how much the loan will cost you. The bottom number with the MATIC icon (APR), is how much the reward program will pay you to take on that loan. While the network is still small, the rewards are actually high enough that you can earn a positive reward for borrowing!
Again, think about market volatility here before taking the loan. If you borrow WBTC for instance, and the price of bitcoin goes up, your loan has gotten more expensive to pay back.
When you click into a currency to borrow, you’ll see a slider that lets you control your risk level. As the different coins change price against each other, your risk level fluctuates. If it ever goes below 1, Aave will automatically start to pay off your loans with the collateral you have locked, so avoid maxing out your borrowing power.
After the loan processes, you’ll see the funds you borrowed show up in MetaMask, ready to use.
You can deposit this money back into Aave again as more collateral, and borrow against it again in a loop. There is a diminishing return, and your risk level goes up each time. At the end of this step, you want to end up with a Loan-to-Value ratio around 30% and a loan of some amount back in your wallet for the next step.
6. Recursion layer 3: Quickswap liquidity pools
At this point, the volatility (risk) goes up steeply. It’s also the place where the ridiculous APY numbers live, so we’re going to do some gambling.
Open https://quickswap.exchange. This site lets you swap between different coins on the MATIC sidechain. If you want to change your PoS-WETH into DAI, you can do that here. Since Polygon is a Proof of Stake solution, the fees are functionally free, and the network is fast, so you can experiment here without the same costs associated with Ethereum mainnet.
If you can’t find the token you want in Quickswap, you can look here for new listings, or see if there is a mapping from Ethereum mainnet. Since this platform is so new, it can take some detective work.
Like most exchanges, Quickswap uses liquidity pools to make sure there is inventory to buy at all times, and the people providing that inventory (liquidity providers) get paid when the borrowers pay fees. In the current gold rush, some coins are giving away additional incentives to lenders to help kickstart their economies.
On Quickswap, click into the Rewards tab to see the details for each liquidity pool. Notice that the rewards are typically higher for pools with smaller value locked. This means you can get a bigger share of the rewards, but each person in the pool has more power to manipulate that market.
Currently, the highest reward is the TITAN-ETH pool, with a combined reward rate of 16,306% APY. The APY was almost twice that yesterday, so you’ll want to obsessively check these numbers all day long so you’re not the last one left in the pool when the rewards run out.
Before chasing this big APY number, you should do your research on the coins involved, the team behind it, and the general crypto fundamentals. If you get rug-pulled you‘ll be sitting on 10,000% of nothing.
Providing liquidity here is a multi-step process. First, use Quickswap’s swap tab to convert your money into the two coins in the LP pair. For instance, half TITAN and half PoS-WETH. The actual ratios are hard to predict, and the fees are so low that you can kind of guess-and-check here.
On the Rewards page, click on the Deposit button for the pair you want to stake, then click on the Add liquidity button. You’ll probably want to hit MAX on one coin or the other to find which side of the ratio lets you buy the most LP tokens.
Once you buy the LP token, you’ll have your two input coins removed and the LP pair shows up in MetaMask. You’re now providing liquidity, but you’re not getting those rewards yet.
The final step here is to return to the Rewards page on Quickswap and use the Deposit button to stake your LP tokens into Quickswap. The page will show you the amount of money you have invested, which can fluctuate with the market prices, and the rewards you’re earning in the form of QUICK tokens.
It’s a good idea to bookmark the reward pool page so you can find the Withdraw button in the future.
7. Recursion layer 4: Quickswap staking
At this stage, we have Aave compounding MATIC tokens for us, and Quickswap compounding QUICK tokens. And we can harvest those any time without changing anything.
We can use the MATIC generated in Aave to reinvest in the Aave platform, so let’s do the same thing on Quickswap.
At the top of the Rewards page is a special pool called the Dragon’s Lair. This is Quickswap’s reward system for providing liquidity to the rest of the platform.
When your liquidity pool has accrued some QUICK reward tokens, go ahead and hit the claim link (from the pool page under Quickswap Rewards) and see the QUICK tokens show up in MetaMask.
Now head back to the Rewards page and click into the QUICK-dQUICK pool. Here you can Deposit your QUICK tokens and they will acquire dQUICK coins, which are a representation of the amount of fees that Quickswap has taken in from borrowers. When you withdraw your QUICK later, those dQUICK coins are cashed in for even more QUICK.
You are now earning dQUICK coins for staking QUICK, which is your reward for providing liquidity, which you borrowed on Aave, from yourself, which is earning you MATIC tokens on both the borrowing and lending side!
Update
This post got a lot of good conversation going and folks asked me for an update, so I made a more controlled experiment and posted about it here: https://neznein9.medium.com/i-put-10-000-into-the-riskiest-defi-i-could-find-for-24-hours-heres-what-happened-f15f55cd4941
