How to Make (Essentially) Risk-Free Money on Compound DeFi

Have you looked at global interest rates anytime in the last few years? It’s embarrassing. Today we discuss how to instantly make money on Compound protocol and how DeFi pays you much better.

Standard disclaimer: I am not your financial advisor.

The Problem

Let’s not sugarcoat it. Interest rates are terrifyingly low. The yield on US 10-year Treasury notes means lock your money away for 10 years, and the US government pays you 0.6% a year. Wait, don’t start crying yet. Because as if that’s not dismal enough, if you factor in inflation eating away at your gains, you’re actually looking at -1% returns. Not ideal.

Before switching into crypto, I spent my 20s as a bond trader in an Australian fund. I’ve been looking at interest rates curves for years and have witnessed the steady erosion of yield on highly rated government bonds. But DeFi yields? They caught my attention because of how juicy they are for what’s essentially a risk-free rate of return.

Or at least, as risk-free as crypto can get.

A Superior Risk-Free Rate

What’s a risk-free rate? It’s the theoretical return on an asset that has zero risk. Theoretical.

Normally we use US government bonds as this benchmark. Some economics or finance professors said so. They believe the probability of the US defaulting on their borrowing is low enough to be considered negligible.

Risk-free rates are important inputs in traditional asset valuation techniques such as the Capital Asset Pricing Model (CAPM), or the Discounted Cash Flow (DCF). To summarise, your asset needs to perform better than the risk-free rate, otherwise why are you taking risk to make a subpar return? Fund managers use risk-free rates in their calculations when deciding how to invest money.

Currently with the US 10-year T-Note only paying 0.6%, I am suggesting that DeFi yields in crypto are a far superior risk-free rate. With yields greater than 5%, that’s going to tremendously upset a lot of valuation models in major financial institutions.

Interest Rates on Compound Protocol

There is a special class of crypto called stablecoins. Their value is pegged to the USD. Today we concentrate on a stablecoin called Dai (the token is DAI). Dai is liquid and has mechanisms that make it a viable substitute for the US dollar.

Make money lending DAI on Compound and try DeFi yield farming. At the time of writing you can make 5.45% per year. The interest fluctuates throughout the day with changing money supply and demand.

make money on compound defi

Compound pays 5.45% annual interest on DAI. 8.51% on USDT.

And it’s not just Compound that’s paying these rates. On Aave the rates can sometimes even be higher. Aave was paying almost 60% annual interest on DAI last week. It didn’t last for more than a few hours, but in those few hours your interest accrues absurdly fast.

Is Dai Even Safe?

Hold up, ask yourself this first. Are US government bonds even safe? With dollar devaluation, inflation, and a crushing $25 trillion in national debt, is that what you’d call a risk-free investment?

What I’m saying is, if you’ve taken US bonds to be risk-free, then you have already subconsciously accepted some major risks that come with the territory.

Why not consider a proxy to the dollar, with returns that compensate you for its own set of risks? Risks which it has, in fact, logically mitigated by design?

The Mechanism of DAI Stablecoin

You can skip this section if you want to get straight to the money making part. This part only explains why DAI acts as USD.

  1. To mint DAI on Maker, users have to first deposit ETH into a computer programme called a smart contract.
  2. ETH deposited into this smart contract acts as collateral, to back the value of the DAI that’s created.
  3. Yes, ETH is volatile. So users must overcollateralise their loan, meaning, they put down more value in ETH than the value of the DAI they’re producing. Usually 200% and above.
  4. If ETH price falls, then a user should top up more collateral to keep the position healthy, or his ETH will get opportunistically liquidated by other users.
  5. The stability of the dollar peg is achieved with a fluctuating DAI savings rate that regulates demand and supply for DAI. Its own monetary policy.

The above means that 1 DAI will always be redeemable for $1 in ETH. This is a completely decentralised and trustless mechanism that depends on a network of users to maintain the integrity of the system, all thanks to game theory and each looking out for their personal financial gain.

So DAI is reasonably convincing as a USD proxy. Great, now where’s the money?

How to Make DeFi Money on Compound

First, get the MetaMask wallet extension on your Chrome browser.

Then, you can either mint DAI, or just acquire it on an exchange. Usually I go to Uniswap to get all the ingredients I need for yield farming recipes.

You can easily get your DAI from Uniswap (instead of minting it on Maker)

Deposit DAI on Compound protocol and you begin making interest right away. When you supply DAI on Compound, you are lending your money to make 5% per year.

You can lend your money for a few days, or for a year. No fixed duration. For as long as your money is sitting on Compound, you’re earning interest in real time.

When you park DAI on Compound, you will receive cDAI, a coupon that you can then use to claim back your DAI and withdraw your deposit plus interest from Compound whenever you wish.

Is Compound Even Safe?

Was Lehman Brothers safe? Bear Stearns? Nothing is safe, philosophically. You gotta find what your acceptable level of risk is, or you’ll starve to death in safety too. (Just like how you’re actually losing money in real terms on a US bond investment, after inflation.)

But can we justify the safety of Compound protocol? Possibly.

These blockchain security audit and research firms have done the risk assessment homework for you. Read their reports here.

  1. OpenZeppelin
  2. Trail of Bits
  3. Certora
  4. Gauntlet

Compound is also backed by high profile VCs in the blockchain space such as Coinbase, Polychain Capital and a16z. Not saying that you can blindly trust Compound because of that, but at least some people with more money at stake have done their due diligence.

To protect lenders from default risk, the protocol requires borrowers to post excess collateral.

With the above measures, $1.7 billion in crypto assets have deemed Compound safe enough. Not a trivial amount. Taken from Compound’s home page.

$1.7 billion in crypto assets making money on Compound with the DeFi trend

Earning Bonus COMP Tokens

Happy with your 5% interest that’s tolerably safe? Great. That’s already a return that outperforms dividend yields on many low beta stocks, which fund managers tend to take cover in in risk off environments.

But there’s more.

If you have any deposits on Compound, you earn COMP governance tokens automatically. COMP is worth about $130 today. I personally don’t even care how volatile the price of COMP is, the COMP tokens are cream.

You’re already making an interest rate for depositing DAI, and COMP is a bonus you’re taking on no additional risk to earn. This makes this part a truly risk-free return. You’re making COMP with no marginal risk on top of that which you’ve already assumed, from depositing your money on Compound for the interest.

Apart from interest, you also earn COMP instantly.

COMP allows you to take part in governance decisions and vote on how the platform grows. If you’re bullish on Compound and DeFi in general, this is a great way to build up your ownership over time. The protocol rewards you for being a useful member of the ecosystem.

With the COMP incentives included, this is where you start to produce incredible double digit percentage returns on your DAI deposit.

Show me a bank today that pays you higher than 10% interest. That was possible only in the 1980s.


DAI is an algorithmically adjusted USD stablecoin whose value is backed by a surplus of ETH. Deposit DAI on Compound, a thoroughly audited lending platform for high interest rates with negligible default risk. Earn even more by receiving COMP tokens as your reward for providing liquidity to the network, at no extra cost or risk. You can expect double digit annual yields.

Risk-free is theoretical. Even risk-free assets like US bonds come with risk. DeFi smart contracts also come with risk. But for now it looks like those systems are secure enough – although you shouldn’t invest more money than you’re okay to lose.

Learned something from this article? Then take your yield farming to the next level with Balancer protocol.

Learning to make money in crypto and DeFi. Everyone’s gotta start somewhere. Adventures in yield farming, written by a wrestler. How hard could it be?

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