Dear Bankless Nation,
Timing the market is hard. You might be able to do it every now and then, but doing it perfectly (and consistently) is impossible.
There’s temptation to time the top. To try to get out before the next bear cycle. Most people lose money doing this—they sell too early or too late.
The bankless program is closer to #neversell. Why sell when you can stake, right?
Here’s the conundrum for some of us: we can’t time the market and we don’t want to sell our crypto but there’s possibly of life altering money if we convert to fiat now!
So what do you do?
Well…what if you could solve this problem using DeFi?
Leveraging the possibilities in DeFi is probably the most capital efficient way to manage your gains and ensure that you’re sitting comfy.
It’s risky. It’s new. You can lose everything you put in. (Much smart contract risk).
But also, this is the future of finance.
You can cash out on some of your gains and never sell your crypto.
David shows you how.
📺 Watch our livestream with Gary Vee!
We chat crypto, NFTs, and his new project: VeeFriends. (Beeple make an appearance!) 🤯
Bankless Writer: David Hoffman, Co-Founder of Bankless
The Never Sell Plan
Everyone would love to be able to time the market. Everyone wants to enjoy the fruits of the assets we hold and improve our lives and the lives of those around us…. but we all know it’s not that simple.
Timing the market is hard. Some say it’s impossible.
And in a bull market, everyone wants to time the top. But…
What happens if it’s not actually the top?
What if the bear market never comes?
What if this is truly a new paradigm’; crypto is mainstream now and here to stay
Will I ever be able to get the same price I just sold my ETH for?
DeFi apps can help us navigate these waters.
Can we use DeFi apps to tap into the value of our assets, without actually having to sell them? Using the composability of DeFi apps, I believe there are many viable paths to adding some cushion to your bank account, while retaining most, if not all, of your assets on Ethereum.
The following is a theoretical strategy for someone to be able to #neversell their ETH, or other assets on Ethereum, while still being able to access the value inside of it.
If you’re like me, and you have a fear of letting go of your ultra sound money, this strategy can allow you to ‘take profits’ and put real dollars in your boomer bank account—without selling any ETH to do so.
No, it’s not magic. It’s DeFi!
This strategy is currently under construction. ⚠️ And like everything on the bankless journey, it’s risky. You could lose what you put in. It’s not for everyone. The DeFi landscape moves quickly. Things could change and this could no longer be a viable strategy. But it works today.
With all of that in mind, we still need a few things to happen to make this work as intended:
Ethereum needs to merge with the Beacon Chain, and allow Beacon Chain ETH to become fungible with Ethereum ETH.
Rocket Pool needs to go live with rETH
rETH needs to be accepted as collateral in MakerDAO
It’s actually a pretty short list of needed features in order to make this strategy work out, and they’re all pretty reasonable goals. All of this could happen within the next 6-12 months.
Ok…here’s how we cash out without selling:
Stake your ETH in Rocket Pool (mint rETH)
Deposit rETH into MakerDAO
Borrow DAI against rETH
Deposit DAI into Alchemix
Borrow alUSD from Alchemix
Sell DAI to USDC, send to Bank
Improve the Lives of You and Those Around You
🚨 Disclaimer: David holds RPL and ALCX. Projects can be swapped out with other similar protocols to achieve the same plan.
1. Stake your ETH in Rocket Pool
Rocket Pool is a decentralized staking as a service provider. It’s an app on top of Ethereum that match-makes between node operators who need ETH, and ETH holders who need node operators.
Rocket Pool is unique versus other staking service providers in that it upholds the core principles and values of Ethereum with regards to decentralization, trustlessness, and permissionlessness, which is why we can feel good delegating our ETH to the Rocket Pool protocol. It’s deep down in the protocol sink, and designed to function without human dependency.
The reason why we want to hold rETH, or any other tokenized staked ETH, above ETH is simple: rETH has staking rewards baked into it. rETH goes up in value over time, in ETH terms. rETH is ETH + validating rewards baked into one single asset. It grows in value parallel to staked ETH in your home validator.
This makes rETH a very competitive collateral asset, even beyond ETH itself. Because rETH is ETH, but it’s an ETH derivative that outpaces ETH supply growth, by capturing ETH staking rewards.
2. Deposit rETH into MakerDAO
If Rocket Pool has built its code correctly, then rETH should be an extremely favorable collateral type in every DeFi application that also accepts ETH.
If you allow ETH collateral, wouldn’t you also be interested in a staked ETH derivative asset? Controlling for contract risk (the risk that Rocket Pool smart contracts might have a bug or exploit), then rETH should actually have favorable risk parameters versus ETH, because of how it’s designed to naturally outpace ETH.
We should expect some sort of tokenized staked ETH asset like rETH to be added as a collateral to MakerDAO, which means we can borrow DAI against our staked ETH!
And because rETH is ETH, the risk-parameters around rETH as collateral should be generally pretty favorable. This means a lower collateralization ratio and lower stability fees, but that will be up to MKR governors to decide.
3. Borrow DAI against rETH
Once rETH is approved collateral inside MakerDAO (and I believe it’s likely this will happen if Rocket Pool finds meaningful adoption, which I think it will), then rETH holders can use this as collateral inside Maker.
In this strategy, we specifically want DAI, because of the DeFi app that comes next in the process.
DAI is the only US Dollar collateral type that Alchemix uses, so it makes sense to go straight to the source of DAI issuance. Going to Aave and Compound can have advantageous features too, as they could offer different and compelling rates for borrowing DAI or collateralization rETH.
All possible paths to collateralizing staked ETH and borrowing DAI are viable.
But going straight to Maker cuts out the middle-apps between your rETH and DAI, and Maker is generally considered one of the most hardened and secure protocols. This strategy requires a long-term mindset, so protocol security needs to be strict, and MakerDAO is an exemplar of strictness.
4. Deposit DAI into Alchemix
Alchemix is an Ethereum credit facility, alongside other applications like Compound, Aave, and Maker. What sets Alchemix apart is that Alchemix offers USD loans against USD collateral.
This property is a key piece of the ETH exit strategy. It is essentially an arbitrage between the ‘risk-free rate’ of borrowing DAI from MakerDAO, and the maximum dollar-denominated yield that Yearn can offer, which is the yield-optimization engine that Alchemix plugs into.
The DAI you’ve deposited into Alchemix is then deposited into Yearn, and finds yield in DeFi.
5. Borrow alUSD from Alchemix
With your DAI deposited into Alchemix, you can withdraw 50% of the value of your deposit in alUSD (Alchemix-USD). alUSD is Alchemix’s synthetic stablecoin, that can be swapped 1:1 for DAI.
Your DAI deposit is sent to Yearn, which finds and captures yield in DeFi. This DAI yield is the mechanism that automatically pays your alUSD loan back. Alchemix automatically earns the yield of your deposited DAI, and instead of charging you interest on your borrowed alUSD, it simply pays back your loan.
Alchemix charges a small fee to manage this process, and you get to have a free loan that you never have to pay back, so long that you wait enough time.
You don’t have to pay back this loan. You can, if want get the value of your underlying DAI collateral back faster, or you could simply wait for the yield of your deposit to pay back your borrowed alUSD.
6. Sell alUSD to USDC, send to Bank
Once you’ve deposited your DAI to Alchemix, and borrowed alUSD against it, you can trade that alUSD for USDC. This USDC can then be sent to your bank account, and finally, you can make the number in your bank go up, thanks to all the precious ETH you’ve accumulated in DeFi for the past few months and years.
7. Improve the Lives of You and Those Around You
Congratulations. You made money in crypto, and you lived to tell about it. You now have cash in the bank. While using banks isn’t our favorite thing in the world, it’s liquid in the world we live in. It can help change lives.
Remember to use it responsibly, and that others have not had the fortune of being able to take advantage of the crypto revolution as you may have.
Money has the power to change the world, and with such power, you have the responsibility to use your money for good. Improve your life, and the lives of those around you, and do it in ways that also foster the improvement of the lives of all others.
This last step is the hardest. But before we talk about it, let’s recap our current position:
rETH deposited as collateral in MakerDAO
Outstanding DAI loan from MakerDAO, accruing interest fees
Deposited DAI in Alchemix, collecting yield from Yearn
Borrowed alUSD from Alchemix, which you swapped for USDC and bought a lambo (maybe).
This position is characterized by three fundamental properties:
rETH is a risk-free, interest-bearing ETH derivative. Its value is designed to have outsized exposure to the growth of the Ethereum economy, in ETH terms.
DAI is pegged to the dollar, and the dollar is functionally designed to be devalued by central bank monetary policy.
You are borrowing DAI using a ‘risk-free rate’ protocol (MakerDAO) and supplying that DAI to a yield-optimizing engine (Yearn). By collecting the difference between MakerDAO interest rates and Yearn yield, you can pay back your loan with time as the only input. This is not pure arbitrage, you get increased yield by also accepting increased risk.
Collateral = ETH
Your collateral is ETH. Not just ETH, but a derivative of ETH that captures ETH staking issuance and ETH MEV fees. Its intrinsic scarcity and utility in DeFi could make it perhaps the world’s best collateral.
Debt = Dollars
Your debt is dollars. Dollars are at the whim of central bank monetary policy, as a necessity to keep the magnitude of global debt under control. Central banks and fiat-based financial systems rely on being able to devalue debt in order to function.
Therefore, it’s advantageous to have dollar-denominated debt, backed by scarce digital-asset collateral. In theory, your dollar debt melts away in real terms, while the value of your collateral appreciates in nominal terms at least, and also real terms at best.
In addition to your dollar debt being devalued, while your rETH collateral appreciates, Alchemix is actively paying back your dollar debt. By being short the dollar and long crypto assets, you already had the wind at your back, pushing you leisurely to your destination…but Alchemix added a modest yield-engine, puttering you just ever so faster to your private island in the Bahamas… even if it is just an Airbnb for a week.
All you have to do is wait. Your debt melts away, your collateral perpetually appreciates, and you have a yield machine accelerating the repayment.
My favorite thing about this strategy is how manageable the liquidation risk is.
When you borrow DAI from MakerDAO, you never actually sell that DAI. You maintain ownership over your borrowed funds. The 10,000 DAI that you borrowed from MakerDAO gets deposited straight into Alchemix, and doesn’t leave your control.
The worst-case scenario you have is that you can retrieve only 50% of your deposited DAI into Alchemix.
Borrow 10,000 DAI from MakerDAO
Deposit 10,000 DAI to Aclhemix
Borrow $5,000 from Alchemix
ETH price crashes, and you need to come up with emergency funds to cover your rETH collateral in MakerDAO
You liquidate your Alchemix position and receive 5,000 DAI back (10,000 DAI - $5,000 borrowed debt)
You immediately repay 5,000 DAI of your 10,000 DAI MakerDAO loan.
You now should have plenty of breathing room for your collateral in Maker. You can decided to liquidate rETH for further protection, or hodl on.
The combination of MakerDAO and Alchemix allows for extremely favorable risk management tools for even large ETH price drawdowns, and if managed appropriately, can allow you access the value inside your ETH, without ever having to sell it. The bonus here is that you’re also accumulating more ETH with rETH (thanks Rocket Pool!).
The best part is that DeFi is modular, meaning that different legos in this structure can be swapped out for others:
MakerDAO 👉 Compound, Aave, Cream, Liquity
rETH 👉 ETH, stETH, WBTC, DeFi Tokens
Alchemix is really the critical piece here. The self-repaying loan acts as one of the most capital efficient ways to borrow dollars today.
There is rapidly growing optionality for how one can leverage the value in their digital assets in DeFi. DeFi seems to be on an unstoppable march towards better and better capital efficiency and risk-management tools that aren’t even remotely close to feasible in the legacy financial world.
This is a core feature of this new financial paradigm occurring in DeFi and with ETH. ETH receives the most exposure from the the DeFi capital efficiency competition, and I expect there to become numerous new viable paths towards increasing the dollars in your bank account, while simultaneously increasing your ETH on Ethereum.
All it takes is good risk management, trustless DeFi apps, and some time.
I’m looking forward to #neverselling with you all.
Review the steps on how you could never sell your crypto assets
🙏Thanks to our sponsor
Aave is a decentralised, open source and non-custodial liquidity protocol enabling users to earn interest on deposits and borrow assets. Aave Protocol is unique in that it tokenizes deposits as aTokens, which accrue interest in real time. It also pioneered Flash Loans and Credit Delegation as innovative DeFi building blocks. The Aave Protocol V2 makes the DeFi experience more seamless with features that allow you to swap your assets for the best yields on the market, and more. Check it out here.
Want to get featured on Bankless? Send your article to email@example.com
Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.
Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here.