Behind RDNT 50% APR: "I dig myself" ve(3,3) game

Original Author: 0x Loki

1. Leveraged TVL

First, there is a lot of water in the TVL of RDNT. RDNT has made a very large tilt in mining subsidies, and the RDNT subsidized to borrowers is 5 times that of subsidized depositors, thus providing space for revolving loans.

On this basis, RDNT justifies the revolving loan, which is essentially a kind of “transactional mining”, using high mining subsidies to stimulate borrowing and bring false demand. In the past, lending platforms engaged in revolving loans to exchange their own air coins for real money from users, but RDNT is more about leveraging its own TVL and APY.

It can be seen from the data that the utilization rate of most tokens is more than 60%. According to the calculation of 4 times leverage of stable coins and 3.3 times leverage of non-stable coins, at least only 76 million US dollars of real TVL is needed, which can be achieved after adding leverage Now $280 million TVL (Arb chain). Of course, the actual situation will be higher than 76 million, but not too much higher, the reason is very simple: Who will borrow 14.03% USDC as a real borrower?

If you catch ten RDNT lenders and all ten arbitrageurs who are revolving loans, you may be wrongly killed, but if you think there are only nine, there is a high probability that you will slip through the net.

2. The agreement tells you the APY and the APY you can earn

“Secondly, there are also some problems with the nominal APY of RDNT.” Offer up to 50% USDT interest rate through revolving loans? Are you tempted, but if you want to be tempted, you will be fooled, because the target of RDNT here is only the deposit rate, not the cost of borrowing.

If you deposit 100 USDC, it is equivalent to 400 USDC deposit and 300 USDC loan according to 4 times leverage. Overall income = deposit interest + deposit mining output - loan interest + loan mining output, put it into the above data, it is:

APR= 4* 2.23% + 4* 3.41% -3* 14.03-3* 11.43 = 14.76%

If you see this, some people may think: Fine, 14.76% is also a high enough APR.

Then congratulations, you got fooled again. There are two problems:

• To obtain RDNT mining output, you need to hold DLP with 5% of the mining amount, and the statement of 5% here is estimated to be less, because the mining amount is calculated according to the amount after leverage. That means, if you deposit $100, you need to hold 100* 4* 5% = 20 U of LP, or 5% * 4 = 20% of the principal LP. So here comes the question, with such a high proportion, coupled with the super long lock-up period, can your mining income catch up with impermanence?
• The second question needs to be looked at from the net income back to the cost-income, the income and cost are also divided into currencies, or take depositing 100 USDC for mining for a year as an example, you can finally get 4* 3.43% + 3* 14.03 % = 55.81 U of RDNT, but the interest you pay is real money USDC, you need to pay 11.3% * 3-4* 2.23% = 24.98 U of USDC. And the problem is that your USDC interest needs to be paid immediately, but RDNT has a Vesting. If the average price of your RDNT is lower than 44.75% of the current price, you will be reversed, and the interest will be lost again after the impermanent loss. .

3. Disappeared Reserve Factor

As mentioned earlier, it is not uncommon in DeFi, especially in the field of lending, to sell coins in disguised form with fake APY and revolving loans. But another point to note is that the general lending model will have the following quantitative relationship:

Deposit rate = borrowing rate* utilization rate* ( 1-Reserve Factor）

Implicit in the background is that the loan interest will be divided into two parts, one part will be distributed to the depositor, and the other part will be withdrawn as the agreement fee (the higher the Reserve Factor, the higher the agreement fee), a phenomenon brought about is that if the utilization rate and the loan interest rate If they are high, the interest rate on deposits will also be high. But this rule does not apply here in RDNT.

It can be seen that 2.21/( 13.92* 67% )= 23.7%, that is, only 23.7% of loan income is distributed to depositors, while the remaining 72.3% of income is distributed to DLP providers. The average daily income of the agreement in the past 7 days is about 47,000 US dollars, and the corresponding annualized income is 17.155 million US dollars. This part is the real income issued in the form of USDC, ETH, ARB, and BTC.

At this point, the previous problem has been reversed. If I deposit 100 U with 4 times leverage to participate in RDNT mining, although the agreement will charge me a yearly loan fee of 24.98 U, this part of the fee will be allocated to the DLP pool. It will form an interesting thing, I mine RDNT, RDNT mines my USDC, DLP mines RDNT’s USDC, and I mine DLP, so the result is: **I mine myself? **

The income of the loan comes from the borrower, so if the following formula is satisfied, the borrower can dig back all the handling fees that have been poached from him, realizing the true sense of “I poach myself”

Borrowing amount of a single borrower/total borrowing amount of the platform = DLP amount provided by a single borrower/total DLP amount of the platform

Next, let’s look at the data. There are a total of 280 million US dollars in total deposits on Arbitrum, and a total of 48.38 million US dollars in DLP. As mentioned earlier, due to the leveraged revolving loan, DLP with a leverage ratio of 5%* is actually required. If estimated at 20%, DLP of 48.38 million US dollars can provide mining subsidies for 4838/20% = 242 million US dollars, which means at least $38 million is not available for RDNT benefits. (Of course they may only make deposits so they will not be reversed).

4. The largest DeFi 2 pool

Obviously, this mechanism has created an extremely huge LP pool for RDNT, with only $48.4 million on Arbitrum. I haven’t seen such a huge second pool for a long time since the end of the new public chain narrative and the Luna thunderstorm. So what will such a large Erchi bring?

1. Undertake the selling pressure of mining output. * The biggest disadvantage of revolving loans is that a large number of tokens will be produced. If estimated according to the previous 44% interest rate cost/mining output, DLP will generate a daily income of 47,000 US dollars and will bring a selling pressure of 100,000 US dollars. However, the release mechanism of RDNT can delay this process. In this case, coupled with the huge secondary pool, the death spiral of mining coins will be greatly delayed.
2. Provide liquidity exit. We still need to consider that the team and core contributors have a lot of unlocked tokens, good liquidity is a huge opportunity for them. Hope they don’t.

Another point we need to think about is: Compared with selling tokens directly, it is a better choice for the team & core contributors to deposit their RDNT in DLP. After all, the 50% APR and the annual income of 17.155 million US dollars are very attractive , this income is still distributed in highly liquid assets, and it complies with all laws and the rules of the rivers and lakes on the chain. It should be noted that the rate of return of DLP also depends on the lock-up time. You can only get 51.9% APR if you lock it for 12 months, and you can only get 2.08% APR if you lock it for 1 month.

This question will reverse the previous question [I dig myself] again, and the answer becomes [I can’t dig myself], because the team and core contributors will deposit additional excess DLP, which will dilute the amount belonging to users. income. But objectively speaking, this kind of dilution is also appropriate. After all, Compound and AAVE also charge about 20% of the Reserve Factor. The only problem is that if the team, core contributors invest too much in DLP and choose to lock it for the longest time, they are likely to share 50%, 60% or even higher DLP revenue.

5. The invisible Ve(3, 3) game

While the team and core contributors participate in DLP mining to obtain [tax], it also plays a role in muddying the water. Let’s imagine that if the arbitrageurs reach a consensus and everyone saves for one month, then everyone can get a high enough rate of return and bear as little impermanent loss as possible. However, if the team and core contributors deposit a large amount of DLP locked for 1 year, the rate of return on DLP locked for 1 month will drop rapidly; “traitor”.

So the end result is clear: locking for 1 month would never have been a valid option in the first place. From the data, we can also see that based on the income of 57,000 and the TVL of 48 million, the average annualized APY= 35.3%, and the actual income of DLP locked in for 1 year is 51.9%. The combination here is not unique and we cannot get an accurate ratio. But obviously there are a lot of DLPs that have opted for a 1 year lock. This also means that if you choose not to lock for 1 year, your borrowing cost will be divided among other players who lock for 1 year.

Of course, this is ultimately a multiple-choice question. Choosing a longer lock-up period, although it can share the benefits of others, also requires a higher risk of impermanence. Players who choose 1 month may have good reasons, but choosing 3 or 6 months is not so cost-effective.

Six, the last question: Will RDNT be a death spiral?

Theoretically speaking, it is certainly possible. The current mining mode is a process of stepping on the left foot and stepping on the right foot to ascend to the sky. The APR and TVL are magnified by 3-4 times, and then the cost of the miner is used to subsidize the mining. Miners, attract them to keep digging, and use DLP and Vesting to lock up liquidity, so RDNT has not “collapsed mines” in the past few months.

But it cannot be ignored that the APR of RDNT has dropped to a low enough level, 14.76%, the long unlocking period and the impermanence loss of DLP, the current RDNT does not look so attractive. Then if the number of revolving loan miners decreases, the rate of return of DLP will also drop significantly, and the increase in impermanence risk will require a higher necessary APR. The price of RDNT and mining yield, the death spiral will accelerate from here…

Of course, this is only a possibility, the current capacity of the second pool is still tens of millions of dollars, and the daily trading volume of RDNT on BN is only a few million dollars, FDV is only 300 million dollars, and the market value of circulation is less than 100 million dollars . In addition to the death spiral, the same method can also cause RDNT to appear a “reverse death spiral”: RDNT price increases → mining APR increases → accommodates more revolving loan funds → DLP income increases → reinvestment demand increases, bringing more RDNT Buying → the price continues to rise. Combined with multiple concepts such as Bn investment and Arb, the situation is not so bad.

At this stage, the cost performance of participating in revolving loan mining does not seem to be so good. If you are not optimistic about the prospects of RDNT, using the interest cost generated by revolving loans to buy and hold or do DLP may bring higher capital utilization efficiency . And if you are not optimistic about RDNT, not participating will always be the best choice. (As always, not investment advice). But regardless of whether RDNT will die at a certain point in time, the DLP mechanism itself still provides a very meaningful idea for economic model construction, which is worth further exploration.