Can you really make 20% APR on a collateralised DAI position?

If you have over half a million dollars’ worth of REP tokens, you could earn yourself a cool 20% APR via DAI on the Compound platform.

The 724,000 REP needed would represent 7% of the current circulating supply. The mechanic would work by putting the REP up as collateral on the Compound platform and borrowing the DAI available at 20%. After doing this, you could still hedge against any collapse of the DAI contract by swapping the DAI for ETH (at a number of exchanges) and then lock the ETH back into the MKR platform (to re-collateralise)

According to the latest data from mkr.tools, we can see that the current CDP collateralisation is over 250%. This means that there is currently over 2.5x ETH (at the current market rate of $107) to back the $60 million DAI market cap. The amount of ETH currently pegged into the DAI represents over 1.45% of the ethereum supply.

Even Vitalik commented that this figure is maybe getting too high. He said, “they should increase fees to disincentivize use a little”.

Eric Conner questioned the REP opportunity offered on the compound platform by pointing out: “With 88,000 ETH on the line, this user clearly doesn’t care about paying 20% APR on their Dai borrow.” His hunch was that you should worry about potential tax liabilities.

Listing DAI on Compound

After winning a community stable coin vote, Compound (an entity making protocols for Ethereum money markets) launched DAI on their platform.

The platform at Compound gives the ability to earn interest on DAI, use DAI as collateral to borrow ETH / ZRX / BAT / REP, or finally borrow DAI using the same listed tokens as collateral.

Two days after launch, the DAI APR went to 7.8%, before rising to 17.4% in the two days after. At this point, over $1 million worth of volume had been processed.

Withdrawal Liquidity wasn’t always there however, Daniel Witte did warn: “when DAI Liquidity dries up like it did this afternoon, we had only 46 DAI Liquidity left to withdraw. At this point, lenders can’t withdraw their deposits. This should be made clearer.”

If, however, you are happy with the current CDP ratio at 2.5x (a proxy measure of stability for the DAI project), then it’s no issue to simply leave the DAI earning interest, and locked into the platform.