Best Twitter threads of the day – September 6th

If you are borrowing ETH ahead of the Merge, you might want to read this.

With just a few days to go we can see more clearly what DAOs are doing to prepare and how it impacts lenders and borrowers.

— Michael Bentley (@euler_mab) September 6, 2022

The three largest lending protocols on Ethereum are all going in different directions right now. @compoundfinance is proposing to raise max interest rates@AaveAave is pausing borrowing@eulerfinance is proposing to do nothing

— Michael Bentley (@euler_mab) September 6, 2022

If you're an ETH lender or borrower right now, pay close attention.

There could be significant differences in interest rates and utilisation across these protocols in the coming days that could impact your P&L.

Let's look at how traders are impacting lending markets.

— Michael Bentley (@euler_mab) September 6, 2022

The Merge trade on a lending protocol is pretty simple:

People are borrowing ETH to get 'free' $powETH from the inevitable cash grab PoW fork immediately after the Merge.

— Michael Bentley (@euler_mab) September 6, 2022

Of course, nothing in this world is 'free'. Borrowing ETH costs you ETH.

How much interest you pay depends on how early you start borrowing and the variable rate of interest paid at each moment.

— Michael Bentley (@euler_mab) September 6, 2022

Some people are certainly excited about this trade though. It has already driven up ETH borrow rates, especially on @AaveAave.

This has prompted Aave to take action.

— Michael Bentley (@euler_mab) September 6, 2022

To prevent withdrawal problems, liquidation issues, and guard against a further fall in the profitability of leveraged staking, the Aave community has voted to pause further borrowing to try to stem further increases in utilisation (more on this later).https://t.co/xica7xcgYv

— Michael Bentley (@euler_mab) September 6, 2022

Meanwhile, on @compoundfinance a different type of proposal is underway to drive up the maximum ETH borrow rate to 1000% APY to limit the potential for maximum utilisation.

Cc @MonetSupplyhttps://t.co/GnEaxqiEnz

— Michael Bentley (@euler_mab) September 6, 2022

How effective will these proposals be and what impact will they have on traders?

Let's explore some very hypothetical scenarios using hand wavy logic and some back-of-an-envelope game theory. pic.twitter.com/Ih1FUooHNl

— Michael Bentley (@euler_mab) September 6, 2022

First, note that, at the time of writing, $powETH is being valued on futures markets at ~3% of ETH value: https://t.co/isukWsDjaZ

Here's @RNR_0 reflink, as is customary: https://t.co/TlJHyLdHCC

— Michael Bentley (@euler_mab) September 6, 2022

We can use this to price the maximum amount of interest a borrower should be prepared to pay in order to get powETH.

For every $100 ETH borrowed they should pay no more than $3 worth of ETH aggregate interest leading upto the Merge.

— Michael Bentley (@euler_mab) September 6, 2022

So, if we're 1 day out from the Merge, and there's ETH available to borrow for less than 1095% APY, then you might as well borrow that ETH.

— Michael Bentley (@euler_mab) September 6, 2022

You should be prepared to pay upto 1/365 * 1095% APY a loan for 1 day, because that is equal to 3% annualised (the gain from acquiring powETH).

— Michael Bentley (@euler_mab) September 6, 2022

To make a profit you obviously should borrow at lower interest rates.

You should also leave the borrowing until the last minute if possible to minimise interest rates.

But what about front-running? If you leave it late, won't utilisation hit 100% and you'll have missed out?

— Michael Bentley (@euler_mab) September 6, 2022

Yes, anon, but that doesn't make borrowing early a great strategy.

In fact, if you've been borrowing early already on @eulerfinance/@compoundfinance/@AaveAave, I might have bad news for you.

— Michael Bentley (@euler_mab) September 6, 2022

The problem is that when trying to forecast your borrow costs, you have to price in the late comers who will most likely drive up utilisation to 100%, even if only for a short time.

Why?

— Michael Bentley (@euler_mab) September 6, 2022

Because, if your lending protocol of choice supports 1000% max borrow APY (e.g. as per the Compound governance proposal), then anyone who hasn't borrowed on the day preceding the merge below this rate is leaving easy money on the table.

— Michael Bentley (@euler_mab) September 6, 2022

So even if you're paying only 5% APY now to protect your position and feeling pretty comfy, you'll be almost certain to have to factor in 1/365 * 1000% APY ~ 2.7% annualised borrow costs from the last day of trading before the merge alone.

Eek.

— Michael Bentley (@euler_mab) September 6, 2022

Because of this, I would wager that many of the people borrowing ETH now will have paid more in interest by the time the Merge comes than they can hope to earn in $powETH.

— Michael Bentley (@euler_mab) September 6, 2022

In contrast, if your lending protocol supports 100% max borrow APY (as on Euler now), then you can 'safely' borrow up to the max APY for almost 11 days before the Merge and not stand to pay more in ETH interest than you'll earn in powETH.

— Michael Bentley (@euler_mab) September 6, 2022

That's because 11/365 * 100% APY ~ 3% annualised. So even if Euler interest rates go to 100% APY tomorrow, you would still be able to break even when that sweet powETH shitcoin lands in your wallet in a week or so.

— Michael Bentley (@euler_mab) September 6, 2022

The possibility to lock in a 'profitable' trade early like this could drive up utilisation on Euler in the coming days, well before the Merge happens.

Isn't this bad?

— Michael Bentley (@euler_mab) September 6, 2022

Well, perhaps, but lending protocols do not exist in a vaccuum.

With higher rates on Euler than other protocols, new lenders may be tempted to migrate to capture higher APY.

— Michael Bentley (@euler_mab) September 6, 2022

Indeed, many lenders might be quite happy to get high ETH APY and sacrifice withdrawals for a day or two than hold ETH directly in order to claim powETH.

— Michael Bentley (@euler_mab) September 6, 2022

After all, the latter is a token with questionable value that may be hard to dispose of after the Merge.

Why not lock in some profit by just lending ETH instead?

— Michael Bentley (@euler_mab) September 6, 2022

As for the question of whether or not pausing borrowing can protect lenders, I personally don't think it is likely to achieve this goal.

That's because pausing borrowing does not guarantee low utilisation; it just creates a one-sided market.

— Michael Bentley (@euler_mab) September 6, 2022

One-sided markets almost never end well and should generally be avoided in my opinion, as I argued in the lead up to the stETH 'depeg' debacle.

— Michael Bentley (@euler_mab) September 6, 2022

Lenders have just as every reason to withdraw their ETH ahead of the Merge as borrowers do to borrow ahead of the Merge.

And lenders withdrawing ETH supply has the same impact on utilisation as borrowers borrowing it.

— Michael Bentley (@euler_mab) September 6, 2022

If utilisation is not at 100% on the final day, why not withdraw your ETH, claim your powETH, and redeposit ETH shortly after?

That way you get all the benefits of the speculative borrowing before the event and claim some powETH to instadump on top.

— Michael Bentley (@euler_mab) September 6, 2022

As a lender, you might want to withdraw for lots of other reasons too.

You might be worried about leveraged staking positions getting liquidated, or exposure to the ETH price after the Merge, or just see juicy rates on another lending protocol.

— Michael Bentley (@euler_mab) September 6, 2022

Anyway, it seems likely borrow rates will spike ahead of the Merge and utilisation of lending protocols may reach 100% regardless of what strategy protocols take.

How soon may depend on the max interest rate on protocols and whether or not borrowing is paused.

— Michael Bentley (@euler_mab) September 6, 2022

If you're lending/borrowing right now and don't feel comfortable with the uncertainty ahead, it may be best to withdraw ETH and sit this one out.

But, no one really knows what's going to happen.

These are just my personal – highly speculative – thoughts on the matter.

— Michael Bentley (@euler_mab) September 6, 2022

I've submitted a radicle proposal to the EulerDAO to do… nothing.

It seems more people agree with this proposal than I would have expected. But let me know what you think.https://t.co/O3BIZND4rY

— Michael Bentley (@euler_mab) September 6, 2022

The ETH merge is a few days ahead, "what should I do?" is a frequently heard question.

here are some thoughts of possible strategies in a spectrum of risk you can consider according to your own risk profile anon

— Marc "Aavechan.lens" Zeller (@lemiscate) September 6, 2022

1) DO NOTHING.
safest play.

As a user you don't have to prepare for the merge, it's seamless.

EVERYONE telling you u should do x and y and "download this merge-ready version of MM" is a scammer trying to get your money.

No exception.

Doing nothing is a valid strategy

— Marc "Aavechan.lens" Zeller (@lemiscate) September 6, 2022

2) for EthPoW play,

Stay out of CeFi that will likely not support ethPoW (unsure but likely coinbase, kraken won't support ethPoW as examples) otherwise no ethPoW coins for u anon.

but don't leave CeFi if you don't know how to secure your wallet.

— Marc "Aavechan.lens" Zeller (@lemiscate) September 6, 2022

but anon, if you wanna 2), do it now.

it's VERY likely CEXs will hit the pause button ahead of a major upgrade of deposits/withdraws.

if you wanna get in or out, do it before the doors are closed.

— Marc "Aavechan.lens" Zeller (@lemiscate) September 6, 2022

3) Deposit your ETH in mainnet DeFi

during the gold rush, the maths of profits/risk largely favored the tools shops.

Sell the picks & shovels by providing liquidity (>9% ETH yield on @AaveAave now) and let the degens take risks for you while u cash in the interest they pay.)

— Marc "Aavechan.lens" Zeller (@lemiscate) September 6, 2022

4) If you're a long-term investor in ETH, monitor StETH.

there's very likely volatility for Staked ETH in the next few days as rising ETH borrow rates currently make degen stETH/ETH leverage loop in the red and some traders wind down to avoid liquidation

— Marc "Aavechan.lens" Zeller (@lemiscate) September 6, 2022

as liquidity for stETH is not infinite, some depeg as seen during celsius events might happen.

The current discount is 3.5%, which is almost a year of staking reward for "free" if you can wait 6-9 months for an unstacking upgrade.

— Marc "Aavechan.lens" Zeller (@lemiscate) September 6, 2022

For the patient investors, stETH is quite safu, and if we reach a larger discount, buying stETH is a very likely superior trade than ethPoW and much safer.

— Marc "Aavechan.lens" Zeller (@lemiscate) September 6, 2022

5) monitor "exotic" liquid staking tokens if you're more risk-friendly.

cbETH (coinbase) is at a high discount now
but there's plenty, many legit, some shitty, DYOR.

— Marc "Aavechan.lens" Zeller (@lemiscate) September 6, 2022

6) Markets are efficient in textbooks, but the reality is far from that.

if you wanna borrow ETH to do the EthPoW play, monitor L2, Alt-L1 liquidity.

ETH cost you 23% on Aave mainnet to borrow, but only 1.92% on Aave arbitrum.

— Marc "Aavechan.lens" Zeller (@lemiscate) September 6, 2022

if you're degen but safu u can even borrow on an L2 and deposit on aave ETH to get sweet arb yield but none of the EthPoW risks.

if markets learn to be efficient, you still have the ETH and can wind down the trade.

— Marc "Aavechan.lens" Zeller (@lemiscate) September 6, 2022

"Wait marc! u gave us 6 strategies but none actually use the EthPoW chain?"

that's right anon. the PoW chain shitshow is already written, only MEV bots will be able to be included in blocks during the first hours.

only delusional ppl think they will be able to profit onchain. pic.twitter.com/kmN0EJAx5s

— Marc "Aavechan.lens" Zeller (@lemiscate) September 6, 2022