[0] https://www.binance.com/en/support/announcement/2dd9fba94afd...
Behind the scenes they use the capital deposited with them to get 30% and more, in these Defi protocols of the day, and just pocket the difference. Similar to banks, just with much wider yields.
"Why bother explaining just offer them something ‘super edgy’ like 3 percent higher than their bank gives!"
The pyramid scheme parts of crypto offer much larger percentages, by multiple orders of magnitude. Although each protocol has to be evaluated independently.
Typically these protocols earn from volume and size of transactions moving through other parts of the economy, as they take a cut while providing a service that makes it easier for volume to occur. They then just extrapolate the earnings over a prior time period, compared to the current amount of capital deposited with the protocol, and display a percentage return. These are not fixed returns as many factors can affect the actual return on capital.
One primary factor is that if there was more capital deposited then the % would be much lower. People don't deposit capital to that extent because there are so many other places to get higher than 30% yields. Its just a boomtown, the pie is really that big.
In traditional markets something similar occurs but people move capital chasing yields down to 2% or less. Using the same logic on the next opportunity "Oh I won't except 0.75%, I can get 2% on this other bond!"
its actually kind of crazy about the ones that yank all of the liquidity and disappear, when they make enough from just the “normal” ponzi operation
there are a couple that are sustainable models
It’s interesting to see what happens when incentives end on the platforms that don’t just run away with customer funds. 98% of the capital is in place today because of incentives. These all must end eventually.
This is how arbitrage works. But wouldn't the arbitrage opportunities disappear if enough people know that this token yields more elsewhere? Surely the market prices would adjust accordingly.
The arbitrage opportunities can and do dry up. Typically the larger the arb, the faster it dries up, at which point you're back to earning X% but with more overheads. At most you can probably be sitting on Y% for a few months before you need to find a new strategy.
Arbitrage
- Borrowing, swapping and paying back in the same function call.
Liquid Staking
- Say i have a POS coin. When i stake i secure the network with collatoral and get paid a certain APR. But now that token is stuck staking. But if you create a smart contract the aggregates the coins together, stakes them and loan them out to represent their underlying value, you get slight divergence between the total value in the smart contract and your underlying ownership in it. So now i have this Liquid X coin, that is rising in value at a set rate to normal X Coin. So now, i can then go and utilize the underlying value of the Liquid coin by utilize it as collatoral to mint more X_Coin. Rinse and repeat until you are at a respectable collateralization ratio.