How to do APY arbitrage. Using DeFi and CeFi platforms to profit… | by oldschripp | The Capital | Aug, 2022


Using DeFi and CeFi platforms to profit from APY arbitrage with BUSD. Earn passive income by using this technique.

There are many use cases for cryptocurrencies and blockchain technology. You’ve obviously heard of DeFi. There is a nice way to use DeFi and CeFi to perform APY arbitration.

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To use APY arbitrage, you borrow an asset and then lend it out again. To make it work, the APY you borrow the asset with has to be lower than the APY you lend it out with. That way, you earn more interest through lending than you have to pay for your own loan of the same asset.

For example, imagine borrowing bitcoin for 2% APY. On another platform, you then use the same bitcoin to loan it out at 4% APY. You can see the APY difference is 2% which goes straight into your pocket.

While this process may well work using DeFi technology only, CeFi platforms tend to offer higher yields.

That could be because of more institutional borrowers involved, a short-lived marketing campaign to gain more users, or because they use some sort of tier-level. If a tier-level system is in place, the amount you can make will be limited. For instance, Binance currently gives you a 5% savings rate on your Bitcoin, but only on your first 0.01 BTC. After that, the savings rate will be 0.8% until you reach 0.5 BTC. Above that amount, you can only earn 0.1% interest.

In order to make this work, you need to have some Web3 wallets available and know how to use them. If you don’t know how to use Web3 wallets, you probably should not start investing in DeFi. Get to know the basics. There are tons of tutorials out there 🙂

Let us use a DeFi app on the BNB Chain: Venus. Use your Web3 wallet and head over to https://app.venus.io/.

As you can see, we currently would have to pay 2.45% interest on a BUSD loan. On Venus, you can also calculate your APY with the XVS token that you receive on your loan, which would, in theory drop the APY to around 1%. I am personally not a fan of that, as the redemption and selling of XVS will cost high transaction fees, which are hard to calculate. So usually, I do not take XVS profits into account. Our APY is then 2.45%.

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Borrow rate for BUSD (without XVS)

At the time of writing, Binance offers 10% APR on flexible BUSD savings up to a point of 2000 BUSD.

10% APR on Binance

Now, APR is not APY. You can convert APR to APY if you know the compounding rate. By default, Binance Flexible Savings will not compound. However, you can turn on “Auto-Subscribe,” which will then every day add your BUSD in your Spot Wallet to your flexible savings.

If we assume a compounding interval “daily,” we get an APY of 10.52%. You can check yourself on https://www.aprtoapy.com/.

Screenshot taken from https://www.aprtoapy.com/

So what we get is a loan on which we have to pay 2.45% interest. At the same time, we earn about 10.52% interest on our savings. Nice one!

There are some risks to consider.

  • The APY on DeFi platforms tends to fluctuate and depends on the utilization rate of the asset. That means how much of the provided asset is currently being lent out.
  • Liquidation. In order to borrow BUSD, you have to supply another asset. If that asset drops in value, your position may be liquidated.
  • All the known risks of DeFi protocols. (Smart-Contract issues, hacks, etc.)
  • All the known risks of CeFi platforms (not your key not your coins, bankruptcy, etc.)

APY arbitrage is a nice way to earn some extra income by leveraging your assets. You could, for instance take a BUSD loan against your BTC holdings and earn more on your BUSD savings than you have to pay interest on your BUSD loan.

You can do this with any asset. You just have to pay attention to the interest rate you earn and the interest rate you have to pay. Earnings have to be higher than the costs (obviously).

For taking the time to read this story. I hope you learned something new!

Photo by Hanny Naibaho
  • This is not financial advice. Do your own research.
  • If you click on a referral link of mine and register to Binance, I am going to earn 10% of your trading fees. You will get a 10% rebate on your trading fees as well.

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