RDNT 50% APR Behind: The "Dig Myself" ve(3,3) Game
Original author:0x Loki
1. Leveraged TVL
First, the TVL of RDNT contains a lot of moisture. RDNT has made a very large tilt in mining subsidies. The RDNT subsidized to borrowers is 5 times that of subsidized depositors, thus providing space for revolving loans.
On this basis, RDNT legitimates revolving loans. Revolving loans are essentially a kind of transaction mining, using high mining subsidies to stimulate borrowing and bring false demand. In the past, lending platforms used revolving loans to exchange their own air coins for users real money, 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%. Calculated based on 4 times the leverage of stable coins and 3.3 times the leverage of non-stable coins, a minimum real TVL of only 76 million US dollars is required. After adding leverage, it can reach TVL (Arb Chain) now worth $280 million. Of course, the actual situation will be higher than 76 million, but it will not be much higher. The reason is simple: who is the real borrower who will borrow USDC at 14.03%?
If you catch ten RDNT lenders and treat them all as revolving loan arbitrageurs, you may be wrongly killed, but if you think there are only nine, then there is a high probability that something 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. Offering USDT interest rates of up to 50% through revolving loans? Are you tempted, but if you are tempted, you will be fooled, because the target here in RDNT is only the deposit interest rate, and does not include the cost of borrowing.
If you deposit 100 USDC, mining with 4x leverage is equivalent to a deposit of 400 USDC and a loan of 300 USDC. Overall income = deposit interest + deposit mining output - borrowing interest + borrowing mining output. When applied to 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.
So congratulations, you have been fooled again. There are two problems:
To obtain RDNT mining output, you need to hold DLP with 5% of the mining volume, and the 5% here is an underestimation, because the mining volume is calculated based on the amount after leverage. This means that if you deposit 100 US dollars, then you need to hold 100* 4* 5% = 20 U of LP, or 5% * 4 = 20% of the principal of LP. So the question is, with such a high proportion and the ultra-long lock-in period, can your mining income catch up with Wu Chang?
The second question needs to be looked at from the net income back to the cost-benefit. The income and cost are also divided into currencies. Let’s take the example of depositing 100 USDC and mining for one year. You can finally get 4* 3.43% + 3* 14.03% = 55.81 Us RDNT, but the interest you pay is indeed real gold and silver USDC, and you need to pay 11.3% * 3-4* 2.23% = 24.98 Us USDC. And the problem is that your USDC interest needs to be paid immediately, but RDNT has a Vesting. If the average price you sell RDNT is lower than 44.75% of the current price, you will be kicked back, and you will have to lose money again after losing money and interest. .
3. Disappeared Reserve Factor
As mentioned before, falsely marked APY and revolving loans selling coins in disguise are not uncommon in DeFi, especially in the lending field. But another point to note is that the general lending model will have the following quantitative relationship:
Deposit interest rate = Borrowing interest rate * Utilization rate * (1-Reserve Factor)
Implicit behind this is that the borrowing interest will be divided into two parts, one part is distributed to depositors, and the other part is withdrawn as a protocol fee (the higher the Reserve Factor, the higher the protocol fee). One phenomenon caused by this is that if the utilization rate and the borrowing interest rate If both are high, then the deposit interest rate will also be high. But this rule does not apply here at RDNT.
It can be seen that 2.21/(13.92* 67%)= 23.7%, that is, only 23.7% of the loan income is distributed to depositors, while the remaining 72.3% of the income is distributed to DLP providers. The average daily income of the agreement in the past seven days is approximately US$47,000, and the corresponding annualized income is US$17.155 million. This part is the real income distributed in the form of USDC, ETH, ARB, and BTC.
The previous question is reversed here. If I deposit 100 U with 4x leverage to participate in RDNT mining, although the agreement will charge me a borrowing fee of 24.98 U per year, this part of the fee will be allocated to the DLP pool. An interesting thing will form. I mine RDNT, RDNT mines my USDC, DLP mines RDNT’s USDC, and I mine DLP again, so the result is:I dig myself?
The income from lending comes from the borrower, so if the following formula is met, the borrower can dig back all the handling fees that were poached, realizing I poach myself in the true sense.
Loan 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 total deposits on Arbitrum of US$280 million, and the total amount of DLP is US$48.38 million. As mentioned before, due to the leveraged revolving loan, DLP with a leverage ratio of 5% * is actually required. If estimated at 20%, a DLP of 48.38 million US dollars can provide mining subsidies for 4838/20% = 242 million US dollars, which also means that at least No RDNT gain is available for $38 million. (Of course they may only be depositing money so they won’t be kicked back).
4. The largest DeFi 2 pool
Obviously, this mechanism has created an extremely huge LP pool for RDNT, which is 48.4 million US dollars on Arbitrum alone. Since the end of the new public chain narrative and the Luna thunderstorm, I have not seen such a huge second pool for a long time. So what will such a large Erchi bring?
Undertake the selling pressure of mining output. * The biggest disadvantage of revolving loans is that a large number of tokens will be produced. If based on the previous 44% interest rate cost/mining output estimate, DLP will earn US$47,000 in income every day and will also bring selling pressure of US$100,000. However, the release mechanism of RDNT can delay this process. In this case, coupled with the huge second pool, the death spiral of mining coins will be greatly delayed.
Provide liquidity for exits. We still need to consider that the team and core contributors have a large amount of unlocked tokens and good liquidity is a huge opportunity for them. Hope they dont do this.
Another point we need to think about is: Compared with selling tokens directly, it is a better choice for teams core contributors to deposit their RDNT into DLP. After all, the 50% APR and annual income of US$17.155 million are very attractive. , this income is still distributed in highly liquid assets, and complies with all laws and on-chain rules. It should be noted that the return rate of DLP also depends on the locking time. You can get 51.9% APR by locking for 12 months, and you can only get 2.08% APR by locking 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 dilution is also appropriate. After all, Compound and AAVE also charge a Reserve Factor of about 20%. 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. Invisible Ve (3, 3) game
Teams and core contributors participate in DLP mining to obtain [taxes], and at the same time, they also play a role in muddying the water. Lets imagine that if the arbitrageurs reach an agreement and everyone saves for one month, then everyone can obtain a sufficiently high rate of return and bear as little impermanent losses as possible. But if the team and core contributors deposit a large amount of DLP locked for one year, the rate of return on DLP locked for one month will drop rapidly; of course, even if there are no teams and core contributors, there is a high probability that one of the arbitrageurs will appear. traitor.
So the end result is clear: locking in for 1 month was never going to be a valid option from the start. We can also see from the data that based on the income of 57,000 and the TVL of 48 million, the average annualized APY=35.3%, and the actual return of DLP locked for one year is 51.9%. The combination here is not unique and we cannot get an accurate ratio. But obviously a lot of DLPs choose to lock in for 1 year. This also means that if you choose not to lock in for 1 year, your borrowing costs will be divided among other players who lock in for 1 year.
Of course, this is ultimately a multiple-choice question. Choosing a longer lock-in period will share the benefits of others, but it also requires greater impermanence risks. There may be good reasons for players to choose 1 month, but choosing 3 or 6 months is not so cost-effective.
6. Last question: Will RDNT have a death spiral?
Theoretically, of course it is possible. The current mining model is a process of stepping on the left foot and spiraling to the sky, magnifying both APR and TVL by 3-4 times, and then using the miners cost to subsidize mining. Miners, attract them to keep mining, and use DLP and Vesting to lock up liquidity, so RDNT has not collapsed 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. At the same time, the demand for reinvestment in DLP will also decrease, and unilateral smashing will further lower RDNT With the price 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 Buy → Price continues to rise. Combined with multiple concepts such as Bn investment and Arb, the situation is not that bad.
At this stage, the cost-effectiveness of participating in revolving loan mining does not seem to be that good. If you are not optimistic about the prospects of RDNT, using the interest cost generated by the revolving loan 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.
