TRANSCRIPT: Aaron Lammer On Yield Farming, DeFi, And Ethereum


On this episode of Odd Heaps, we communicate with Aaron Lammer, the host of the Exit Rip-off podcast and an avid DeFi dealer. He talks about his buying and selling on Uniswap, the idea of yield farming, and far more. Transcripts have been frivolously edited for readability.

Joe Weisenthal:  Whats up, and welcome to a different episode of the Odd Heaps podcast. I am Joe Weisenthal.

Tracy Alloway:  And I am Tracy Alloway.

Joe: , there’s most likely like, let’s be trustworthy: There’s most likely some connection between the truth that we have been doing a bunch of crypto episodes currently and the massive selloff that we’ve in crypto immediately. That is simply at all times the way it works. It is such as you get to one thing and by the point you begin speaking about it, a bunch, it is most likely the highest.

Tracy: You suppose it was our fault and never Elon Musk’s?

Joe: No, I do not suppose it is like our fault per se, however possibly it is identical to, you understand, it is simply how timing works. By the point the mainstream media is concentrated on one thing, the mainstream media, just like the Odd Heaps podcast, it is the ultimate chapter.

Tracy:  That is the curse of the journal cowl, proper? Like as quickly because it hits the duvet of Barron’s or the Economist or no matter, um, it is time to promote and get out.

Joe: Nicely, we’re recording this Might thirteenth advert final evening, Elon Musk tweeted that as a result of electrical energy consumption of Bitcoin, they might not use it. They are going to nonetheless maintain it, however they don’t seem to be going to be concerned in transacting it at any extra. I do not actually know what the actual purpose is. I imply, that is what he says. And he, you understand, all of the cash are falling, however you understand, there’s volatility at this house, however all of the cash are falling immediately. Even those that are not mined with a number of electrical energy, so we’ve a mini crypto bear market

Tracy: Yeah. They’re positively falling and Bitcoin and different cryptocurrencies have at all times been risky. That is true. However I do suppose, you understand, individuals speak about crypto as this decentralized concepts, one thing that works as an inflation hedge, one thing that is type of past the power of governments and central bankers to govern. And so it is sort of ironic that one tweet from a CEO may cause this type of mayhem out there.

Joe: Yeah, completely. Proper. And you understand, I’ve to say like earlier in my profession, I’d have mentioned one thing like, “Oh, that is the highest, the bubble burst or no matter.”  However I not suppose that. I imply, I do not know, like cycles come and go. Elon might tweet no matter he needs. It is clearly not going away any, uh, any time quickly as a phenomenon — part of the world and possibly part of the finance world.

Tracy:  Yeah. I agree. Uh, we have realized our lesson about calling bubbles in Bitcoin. We’re not going to try this anymore, however what we’re going to do is speak about among the issues which are serving to crypto, I suppose, grow to be extra broadly adopted or are extra entrenched. One of many the reason why it is not going away.

Joe: Yeah. So listeners might recall a pair weeks in the past, we did an episode on decentralized exchanges. So, you understand, a centralized change like Coinbase, you ship them fiat forex, after which you’ll be able to commerce cryptocurrency like Bitcoin or Ethereum. On decentralized exchanges, they do not maintain your cash. Uh, you do not even want to begin an account or something like that. Actually, you’ll be able to’t begin an account and all of the buying and selling is completed on the blockchain itself. We talked to Hayden Adams, the developer of the Uniswap protocol, which is behind the change Uniswap and speak about automated market-making and so forth. And it was tremendous fascinating, however like, I nonetheless have to study extra. I am solely like possibly like twenty-five p.c of the way in which there when it comes to like getting how this all works. Possibly simply 10%.

Tracy: Identical right here. And for these of our listeners who really take heed to the very finish of that podcast, you would possibly’ve heard us say that we needed to document an episode on yield farming, which is that this phenomenon that has come about due to DeFi. So the DeFi ecosystem has principally allowed this to occur. I do know completely nothing in regards to the house, aside from it is a approach to earn cash or curiosity in your cryptocurrency. So I am very, very excited about studying extra.

Joe: Proper? So, and once more, individuals ought to most likely take heed to that episode, however the premise of those automated market-making mannequin is sure, you’ll be able to commerce one coin versus one other like every change, however you may also stake your cash. You might put cash that you just maintain right into a liquidity pool. As you might have your coin stake there, you’ll be able to earn curiosity yield, you’ll be able to farm yield. There’s every kind of loopy stuff you can do. So we will study extra about how this all works from the angle of an precise dealer slash yield farmer. We’ll have a farmer on the episode immediately.

Tracy: We’ve had precise farmers on the episode earlier than, however we’ve but to have a yield farmer. So let’s do it.

Joe: Yeah, precisely. Proper. We have had corn and different stuff like that and a cattle farmer and stuff like that, cows, however now, uh, somebody who farms yield. So I am very enthusiastic about our visitor immediately. Uh, really very long time good friend of mine, acquaintance, a minimum of we will be talking with, uh, Aaron Lammer who himself additionally has a podcast. So he’s the host of the Exit Rip-off podcast, model new podcast out, which chronicles the collapse of the Canadian crypto change Quadriga. Completely fascinating story. He’s additionally the host of a highly regarded Longform podcast. And I have been speaking to him for years as he’s dived deeper and deeper into the crypto rabbit gap. And one time, a couple of, uh, a number of months in the past, I believe it was final summer time. He DMd me and he says, Joe, I am DeFi-pilling, all the suburban dads of Lengthy Island. So he is, he himself has been hooked. He’s hooking different individuals into DeFi yield farming. And he’ll clarify his descent into insanity or possibly how he is made a bunch of cash. So, uh, I am very excited. Aaron Lamer is on the podcast. Aaron, thanks very a lot for becoming a member of us.

Aaron Lammer:  Hello Joe. Hello Tracy. Thanks for having me.

Joe: You are totally DeFi pilled, huh?

Aaron: 100%. While you have been saying that the market had crashed, I used to be considering not likely for me, as a result of I haven’t got any Bitcoin and I am deep into the Ethereum world. Ethereum seems to be the place it was at an all time excessive earlier this week. So I am not anxious. I am simply saying I am not anxious.

Joe: Okay, good to determine that.

Tracy:  Are we going to grow to be yield farmers by the top of this episode? Are you going to transform us?

Aaron: I imply, the rationale I DMd Joe within the first place was to check whether or not he was open to farming a bit bit with me and I nonetheless, I believe I’ll, I believe I’ll flip him ultimately.

Joe: It’s best to’ve simply mentioned, “Joe, I’ve received this large cash making alternative drive over to my home on lengthy Island proper now. I’ll make you a bunch of cash.” And if I had listened, like I believe that was like, I dunno, that was a number of months in the past. I most likely would have made a bunch of cash.

Aaron: Completely

Tracy:  Can we begin with the very, very primary query, which is what’s yield farming?

Aaron: Yeah, I imply, I believe we sorta have to love rewind by means of a Ethereum historical past a bit bit. I did not begin off eager to grow to be a farmer. And I ought to say that my farming is like when somebody strikes from Brooklyn to Vermont and has like a couple of chickens and possibly one cow. I am not, I am not doing this on an industrial scale. There are individuals you’ll be able to really take a look at different individuals’s wallets and Ethereum, as a result of it is all open. So like I am wanting, there is a actually large farmer named, uh, ox0xb1 and he is farming lots of of thousands and thousands of {dollars} in his pockets. You’ll be able to simply watch him farming. So if you happen to’re excited about like farming, uh, visuals, you’ll be able to really add them to your individual pockets. I’m a small farmer and I sort of backed my means into it. Um, I used to be excited about Bitcoin, excited about Ethereum.

I’ve at all times believed that to essentially perceive these things, you really need to do it. Like it’s a must to attempt the merchandise with like actual cash and play dwell. So I’ve at all times like tried all the bizarre Ethereum world, issues that existed. Like I used to make markets on this factor known as Auger, which was a decentralized prediction market. I believe that was the primary Ethereum product that I really used. And all of those Ethereum merchandise, what they’ve in frequent is that you just log in with a pockets. Most individuals might use Metamask, I believe might be the preferred one. And that is each an Ethereum pockets that holds your cash. And it is a type of pseudonymous identification. It is principally all, any of those companies find out about you as this individual makes use of this pockets they usually have entry to the personal keys.

So I began stepping into the yield stuff after I began buying and selling on Dexes. And a Dex is precisely what Hayden Adams, who was on the present, and he  makes the most important, most well-known one. I’d say that if you happen to’re acquainted in any respect with a Dex it is most likely Uniswap. After I first began utilizing it, I did not even actually know what was so completely different about it than say buying and selling on Coinbase. I perceive loads higher now. However Uniswap is what’s known as a automated market-maker, do not quote me if I received that acronym incorrect. And principally as a substitute of getting a central order e-book, it makes use of a giant liquidity pool to create trades and it makes use of algorithmic arbitrage principally to determine a worth inside that. So I began buying and selling there primarily as a result of I discover centralized exchanges fairly sketchy, and I’ve had some sketchy experiences.

I did not lose cash in Quadriga, however I used to commerce cash on an change known as Cryptopia that went down. So I have been burned by earlier than by, um, sketchy exchanges. However if you happen to like buying and selling these tiny, small cap cash, it is unlikely they will be on someplace like Coinbase or Gemini. So that you sort of need to discover a place the place you’ll be able to commerce them. And the actually unimaginable factor about Uniswap and different dexes is, is there’s this type of coin known as ERC 20. And I take into account it like a, a varietal of Ethereum, like, uh, you understand, there’s completely different wines that come from completely different areas. These are all like takes on the essential Ethereum coin they usually’re all interoperable and the protocol can acknowledge all of them. So principally any ERC 20 may be traded on Uniswap or any dex.

It is a fairly highly effective thought. It signifies that anybody can simply come out with a challenge. And if individuals put a bit liquidity into Uniswap, you’ll be able to commerce it. Typically I’ve discovered cash which are so small that they will not even be acknowledged by Uniswap. You must copy and paste within the sensible contract after which Uniswap goes, okay. Yeah, I do know what that’s. Yeah. You’ll be able to commerce it, go forward. It may not have a emblem for it, however just like the protocol acknowledges it. So I used to be buying and selling this fashion for some time and I began to see these unimaginable yields that you can get by, um, offering liquidity for these pairs of cash, a lot of which I occurred to have already got. So I’d see, wow, this pair is paying 70, 80% APY. And after I say 70, 80% APY, that may imply if I saved my, my cash within the liquidity pool for one 12 months. And that fee was secure by means of that 12 months, which it is unlikely to be. I’d earn 70 to 80 on high of, uh, the cash I already had, which is a reasonably interesting thought.

Joe:  So let’s speak about this some extra. I imply, that is actually the important thing factor. So there’s two issues {that a} dealer can do on a dex like Uniswap. You’ll be able to determine a coin that you just suppose goes to go up, which is, I suppose, what most individuals consider as buying and selling or speculating or no matter. You see some challenge that you just like, it is small. You suppose the quantity goes to go up. That is type of the essence of what quite a lot of what attracts individuals to crypto. However then the opposite side of it’s this concept you could, you probably have a coin, you’ll be able to put it into this pool and earn yield. So simply clarify to us the mechanism there, how that works and why you receives a commission to place your coin right into a pool.

Aaron: So this is not really the one approach to get yield. And I believe that is one factor that is complicated about farming. There’s really like dairy farming and like, um, large farming. And every of them are a bit completely different, however this type of yield, principally you take a pair of two cash. So I’ll get, say for instance, Ethereum and Dai, which is a secure coin. Lots of people are buying and selling Dai for Ethereum on a regular basis. So I can provide equal quantities of Ethereum and Dai into the pool. After which that shall be used to facilitate trades. Every of these trades pays a charge and I get a portion of that charge relative to how a lot of the pool I personal. So the perfect swimming pools for me to be in are the swimming pools the place individuals are buying and selling essentially the most and the place there’s the least liquidity relative to how a lot buying and selling there’s. So because of this you are seeing issues swinging wildly. When it comes to these APIs,

Joe:  So the least liquidity. You imply the, the smallest swimming pools. So there’s quite a lot of quantity of buying and selling, however not many individuals have put their pairs into the pool.

Aaron: Precisely. So you’ll be able to really see in Uniswap, how a lot of the pool you personal. So there is a pool for, that is going to get a bit complicated, however there is a pool for FF2X, a token that principally tracks the value of Ethereum with 2X leverage. So I occur to carry {that a} token and the Ethereum token. So I put them into that pool. I now personal at present about 0.1%. So I personal one one thousandth of that pool. One one thousandth of all the cash in that pool is cash I put in and due to this fact every charge that will get paid, I get one, one thousandth of that charge. And due to this fact I am searching for locations the place I can both personal quite a lot of the pool or, um, there’s huge quantity on the pool. And my little share, uh, is efficacious. And these are swinging in actual time as a result of everybody’s out chasing this yield. So immediately’s yield shouldn’t be tomorrow’s yield in any respect. I’ve received, I’ve seen the pool I am in go from 80% APY to below 10% APY in the middle of 24 hours as a result of individuals are pulling their liquidity out and in.

Tracy: So are you able to possibly stroll us by means of, I do not forget that Hayden talked about this a bit bit, however stroll us by means of the precise charges you could earn on one thing like this and you understand, how does it work being the most important one in a pool versus being in a pool the place there’s quite a lot of exercise occurring, which one’s extra worthwhile and likewise how labor intensive is yield farming. So that you simply described having to type of transfer from factor to factor, to factor to chase the liquidity. Um, does it take up quite a lot of time?

Aaron: I imply, crypto typically, I believe takes up quite a lot of time, however that is extra of a mind illness than an precise like, have to do something. So you can probably simply deposit into a pool and depart it there for a 12 months. And you’ll simply get a, you understand, a rolling common of regardless of the APY was over that point. The extra you need to maximize yield, the extra you’ll do. However each time you deposit into certainly one of these swimming pools, you pay gasoline. And if you happen to’re doing this on the Ethereum community, gasoline may be very costly proper now as a result of it is scaled by Ethereum being value $3,800 per coin. So you actually would not need to be transferring these a number of instances a day. I attempt to do as little as potential. Now there is a website you could go to and log in together with your pockets known as charges.wtf, and it tells you the lifetime worth of all of the charges.

You’ll be able to see all of the gasoline you have paid on the Ethereum community. And after I checked out mine, it like ruined like a month of my life. I imply, I’ve misplaced some huge cash to gasoline charges. So there’s sure properties about which swimming pools are helpful that I believe you’ll be able to type of see as patterns. Swimming pools which have secure cash pay very properly. And the reason being most individuals in crypto do not need to maintain a bunch of secure cash as a result of they’re degen gamblers. They might somewhat maintain Bitcoin or Ethereum or a good smaller coin that is going up. So as a result of not many individuals need to maintain stablecoins, secure cash swimming pools pay very properly. There is a factor the place you’ll be able to pool with different individuals in a type of automated means known as pool collectively and stablecoin swimming pools often pay 30 to 40% APY. That is in opposition to, I do not know, what’s a financial institution pay entrance a area proper now, most likely 0.1 at finest.

Okay. So that you’re holding principally a token that represents $1 and also you’re getting paid 30 to 40% APY versus lower than 1% of this financial institution. However a few of this yield stuff is to, uh, infect different components of the ecosystem. So now Coinbase and Gemini are saying, you’ll be able to stake your Ethereum most likely in a means that is extra secure than the way in which I simply described for I believe, 6 to eight% APY. So relying in your tolerance for threat, there are different methods to earn yield. The best means is to stake your Ethereum for, uh, ETH 2, which is a giant replace that is coming to Ethereum and you may principally stake your Ethereum now and receives a commission. I am undecided if it is 6 or 8%. I believe it relies upon who you do it properly with, um, for your complete time till that occurs. And when ether, Ethereum upgrades to ether to your tokens are unlocked and also you receives a commission that yield for that complete interval. So the sort of yield farming the place you are offering liquidity is possibly essentially the most lively and the way in which you could optimize essentially the most to your outcomes. However there’s different methods which are way more passive, you could extra safely earn. What’s nonetheless a reasonably good yield in comparison with like a financial institution.

Joe: All proper. Let me ask you a query in regards to the pool mechanics that I suppose I nonetheless like do not fairly get, so there’s a pool, you understand, just like the ETH-DAI pool or the ETH-USDC, completely different, each of them are secure cash. I assume among the greatest pairs that exist on the Uniswap community, you stake each side of the coin. What occurs? How does it work? Okay. For example I need to make a directional guess. I’ve some USD. See, I might be like, alright, I need to commerce it for Ethereum. So I’m going into that pool and I simply purchase some Ethereum in that pool. Does the ratio change contained in the pool? Clarify like, what does what’s taking place there? Like who’s ETH am I getting precisely the place does it come from?

Aaron: It is a fascinating query. And, uh, I’m nonetheless not completely clear on it. So I’ll provide you with what I believe with out being completely proper. So there’s one thing known as impermanent loss. And this has to do with the truth that the 2 issues within the pool aren’t being equally drawn, proper? If the Ethereum goes up and there is extra demand for Ethereum, extra Ethereum is getting pulled out of the pool, then Dai. And due to this fact, to be in a pool like that’s to really lose a few of your publicity to Ethereum you would possibly find yourself getting put in equal quantities, Dai in Ethereum, however due to adjustments within the pricing of Ethereum relative to Dai, you would possibly get out extra Dai. So going into these liquidity swimming pools can blunt a few of your upside to holding crypto, however you are getting paid a charge to try this.

And somebody would possibly take a look at ETH-DAI and say, Hey, I do not need to be in that pool. If ETH moons, I’ll find yourself with extra Dai than I need. And that is a loss for me. So in some methods we’re incentivizing individuals to create liquidity and their liquidity makes their buying and selling a bit bit much less helpful.

Joe: Simply, simply to be clear right here, you place in each side of the coin in equal proportion, appropriate. However you are not assured to drag out the identical quantity of them or like clarify like what are you assured to have the ability to pull up?

Aaron: Nicely, this is sort of a tough idea, however like, let’s simply take into consideration one thing that is pegged and one thing that is not pegged.  So as an instance I deposited $2,000 value of Ethereum when ETH was $2,000 a coin and I put in 2000 Dai, however now ETH as of yesterday had doubled to $4,000, proper?

So principally the entire time, the liquidity pool, as I perceive it’s performing as type of a balancer, like as if it was balancing an ETF in order that I’ve the identical quantity worth of every. In order a Ethereum goes up in worth I am, it is tilting in the direction of Dai, so that they are value the identical quantity. And that after I withdraw, I am getting extra of the opposite factor that looks like a foul deal when crypto goes means up and also you’re pegging it in opposition to a secure coin. It is a bit extra difficult once you’re speaking about pairs the place it is say an alt coin like Compound or Maker and Ethereum, you do not essentially know which course they are going. So I believe in follow, it virtually acts extra type of like a price common, the place it is frequently rebalancing these two property that you’ve got so that you’ve got equal quantities of them. The pool at all times must have equal quantities of each. I see. And I am going to admit that is complicated and I do not completely get it.

Tracy: Nicely, I needed to ask precisely on this level on the type of like chain of possession or chain of transaction. So all of that is enabled by means of Uniswap’s, automated market-maker system which we might not fairly perceive all the main points of, however you talked about that you just grew to become excited about yield farming since you did not belief, uh, conventional crypto exchanges. It sounds bizarre to place it like that. Um, however centralized crypto exchanges, trigger you had a foul expertise, what would occur to your cash if you happen to Nisswa pour to go down out of the blue? And I noticed, I am saying that and Hayden informed us that it could not go down out of the blue as a result of it’s decentralized, however I am simply curious, like how a lot of this depends on uni swap functioning whereas and the selections that they’re making.

Aaron: I believe it depends little or no on choices which are people are making it Uniswap. And it relies upon deeply on how properly the protocol itself works. The cash shouldn’t be like locked up in some workplace that Uniswap owns it is locked up into the sensible contracts. So all of stuff is as sturdy because the sensible contracts that help it. The nice factor is that these sensible contracts are one thing you could simply see. You’ll be able to see the cash’s there. Not like within the case of Quadrigas, which was a centralized change that was mendacity and operating a fractional reserve. If unit swap did not have the cash that it was speculated to locked into its sensible contracts, we would all know. And quite a lot of these protocols have gotten hacked. So there’s threat. I’d, I’d not downplay the danger of these items. You’ve gotten people who find themselves typically pseudonymous creating merchandise that lock up billions of {dollars} in worth, and there might be a disaster, however not like the centralized change system, I believe it is extra probably that disaster, it could occur on the code degree and fewer probably it could occur on the human thief flies degree.

And my very own orientation is to type of belief that system way over I’d belief. Um, any one that was operating an change and people sorts of concepts. I imply, you have talked about DRI centralization on the present. It type of goes past simply security and threat. I believe it is essentially, you understand, who’s in management once you go to a centralized change, they’re selecting which cash you’ll be able to commerce, they’re influencing the market closely just by letting you purchase sure issues and never letting you purchase different issues.

Joe: What occurs in each cash simply tumble on greenback worth. So as an instance you are buying and selling in some pool and it is like ETH versus some coin. We have most likely by no means heard of, you understand, and certainly one of these tiny cash and it pays some fats APY, however then somebody tweets one thing or it is like a bunch of stuff occurs they usually each go down. How do you, as a dealer, take into consideration the type of price advantage of yield versus worth and principally discovering good alternatives, such that the yield appeals to you with out having to fret about draw back worth threat, as a result of though, you understand, cryptos and this multi-year bull market that’s not assured. And naturally there have been many crashes previously.

Aaron: I began as a dealer and I do not actually take into account myself like a hardcore farmer. So I am largely speculating on cash. It is a means for me to get yield on the cash I have already got. And a bit extra Ethereum, some crashes, and I’ve 1.2 instances as many Ethereum as I did earlier than and nonetheless in a greater place. So I do not actually select what I purchase primarily based on what farming I can do. I am extra utilizing farming as a bonus. And one different factor I did not point out about that type of charge that you just get from Uniswap is Uniswap is that this like very austere, non-scammy presentation sort of firm, however they’ve quite a lot of opponents who would somewhat you place their liquidity with them as a substitute of Uniswap. And people individuals supply incentives on high of the charges to the worth of offering liquidity there.

And I believe you talked about Sushiswap on there.

Joe: Yeah. The vampire assault!



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