Today’s explainer is a bit more light-hearted.
There is a big misconception in the blockchain space. TradFi people like the SuperBonds founders shake their heads in disbelief at this, but, well, that’s crypto for you…
We’re, of course, talking about the difference between yields and interest rates.
Leave aside the fact that million-percentage APYs on “decentralized currencies” probably won’t get crypto closer to being taken seriously. You have a bigger problem:
These APYs are draining your wallet.
That’s right. Behind grandiose yield promises is often a cleverly-designed system, where you end up leaving the table (or protocol) with less than you had at the beginning.
The SuperBonds cheatsheet will explain the difference between yields and interest rates and where to get the most bang for your buck.
What Yield Is
The yield on an investment is the return you receive measured as a percentage figure on the principal. For example, if you stake 10 ETH at 5%, your yield will be 0.5 ETH (5%). Simple enough.
The yield is always based on the interest rate a protocol is willing to pay you on your principal.
What Interest Rates Are
In the simplest terms, interest rates measure the time value of money. If you receive $1,000 today, that is better than receiving $1,000 next year because you can consume or invest the money. That’s why next year’s $1,000 is maybe worth $1,100 today — the difference is the interest rate.
So if a DeFi protocol pays you an interest rate on your investment, they pay you to put your money to use for the protocol. The smart contract receives your investment, and you receive interest as compensation.
What Yield Is Not
In crypto, many people — willingly or unknowingly — misuse yields and interest rates. But a yield in itself does not tell you anything about the return on your investment.
Say you invest $1,000 in a “decentralized reserve currency” with a 30,000% yield. Does that mean that you will be a comfy millionaire after a year?
The decentralized reserve currency does not tell you anything about:
- the currency risk (you receive the yield in its token, not in dollars or stablecoin).
- the variability of the yield (it can decrease).
- where this yield comes from (the interest rate is a much lower, unspectacular figure that is compounded heavily to generate this “shocking” yield).
In the end, you may get a massive yield but a negative return on your investment. A yield in itself does not tell you anything about an investment’s profitability.
What Interest Rates Are Not
Interest rates are not returns on investment. For example, you might buy a 90-day bond at SuperBonds at a 2% interest rate. But after the 90 days are over, you can roll over your investment into a new bond and compound your profits.
An interest rate can be the same as a return on investment, but you can compound it for bigger returns.
How SuperBonds Puts Money In Your Pocket
DeFi protocols use clever psyops to confuse investors with a smoke show of yields and interest rates. Because yields change almost daily in DeFi and most protocols calculate yields in their native tokens, it’s hard for investors to understand whether their return will be positive (and worth the risk if it is).
SuperBonds goes at it from a different angle.
The world’s easiest investment is actually a bond. You lend someone money and receive interest on your investment. That’s all a bond is.
Clearly, there’s a way to do this in crypto as well. Risk-averse investors that prefer simplicity lend risk-affine folks money. That’s what you can do by buying SuperBonds.
You buy a 30-day SuperBond and receive an NFT symbolizing your bond. Your yield is equal to your return because the bond is denominated in USDC. For instance, on a 30-day bond, you can initially receive a 10% APY, which translates into a 0.66% return on your investment.
Is that as sexy as a 30,000% APY?
Nope. But it’s risk-free money and a predictable return without currency risk or other smoke-and-mirrors distractions. That APY may go up or down, depending on the demand for SuperBonds, but your return is guaranteed by the liquidity providers underwriting your risk.
Below’s a TLDR conclusion for those preferring visuals. If you want to learn more about SuperBonds, check out the Dummies’ Guide to SuperBonds to get a better understanding of the idea behind the protocol.