Original Title: "Behind RDNT's 50% APR: Ve(3.3) Game of "I Mine Myself"

Original Author: Loki

One, Leveraged TVL

First of all, there is a lot of water in RDNT's TVL. RDNT has made a very large tilt in mining subsidies, and the subsidy given to borrowers by RDNT is 5 times that of depositors, providing space for the circular loan.

On this basis, RDNT legitimized the revolving loan, which is essentially a form of "transaction mining" that stimulates borrowing with high mining subsidies and creates false demand. In the past, lending platforms used revolving loans to exchange their own air coins for users' real money, but RDNT is more focused on leveraging its TVL and APY.

From the data, it can be seen that the utilization rate of most tokens is above 60%. According to the calculation of stablecoin 4x leverage and non-stablecoin 3.3x leverage, the minimum real TVL required is only $76 million, and after leverage, it can reach the current TVL of $280 million (Arb chain). Of course, the actual situation may be higher than $76 million, but not too much, for a simple reason: who would borrow USDC at 14.03% as a real borrower?

抓十个 RDNT 的贷款人，十个全部当循环贷的套利佬，可能会有错杀，但如果认为只有九个，那大概率有漏网之鱼。

Arrest ten RDNT borrowers, all of whom are arbitrageurs of revolving loans. There may be some mistakes, but if you think there are only nine, there is likely to be a fish that slips through the net.

二、协议告诉你的 APY 和你能赚到的 APY

Translation:

2. The agreement tells you the APY and the APY you can earn

Secondly, there are also some issues with the nominal APY of RDNT. Are you tempted by the offer of up to 50% USDT interest rate through loop lending? But if you fall for it, you will be deceived, because RDNT only refers to deposit interest rate, without taking borrowing costs into account.

If you deposit 100 USDC and mine with 4x leverage, it is equivalent to a deposit of 400 USDC and a loan of 300 USDC. The overall profit is equal to the interest earned on the deposit plus the mining output from the deposit minus the interest paid on the loan plus the mining output from the loan. Applying this to the above data, we have:

APR= 4*2.23%+4*3.41%-3*14.03-3*11.43= 14.76%

If you see this, maybe someone will think: Fine, 14.76% is also a high enough APR.

So congratulations, you've been fooled again. There are two problems:

(1) If you want to obtain RDNT mining output, you need to hold 5% of DLP mining volume, and the 5% statement here is an underestimation because the mining volume is calculated based on leveraged amount. This means that if you deposit $100, you need to hold 20U of LP or 20% of the principal LP. So the question is, with such a high proportion and a long lock-up period, can your mining income keep up with the impermanence?

(2) The second question needs to be viewed from the perspective of cost-benefit analysis, with both benefits and costs being divided by currency. Taking the example of mining 100 USDC for one year, you can ultimately receive 55.81U of RDNT, which is calculated as 4*3.43%+3*14.03%. However, the interest you pay is in real USDC currency, which amounts to 24.98U of USDC, calculated as 11.3%*3-4*2.23%. The problem is that your USDC interest needs to be paid immediately, while RDNT has a vesting period. If you sell RDNT at an average price lower than the current price by 44.75%, you will suffer losses twice - first on the interest and then on the sale of RDNT.

Three, Disappeared Reserve Factor

As mentioned earlier, it is not uncommon for DeFi, especially in the lending field, to use virtual APY and circular loans to sell coins. However, it is important to note that there is usually a quantity relationship in typical lending models:

Deposit interest rate = Borrowing interest rate * Utilization rate * (1-Reserve Factor)

Behind this is the implication that the loan interest will be divided into two parts, one part distributed to depositors, and the other part extracted as agreement fees (the higher the Reserve Factor, the higher the agreement fee). One phenomenon that arises is that if the utilization rate and borrowing rate are both high, the deposit rate will also be high. However, this rule does not apply to RDNT.

It can be seen that 2.21/(13.92*67%)=23.7%, which means that only 23.7% of the loan income is distributed to depositors, while the remaining 72.3% of the income is distributed to the providers of DLP. The average daily income of the agreement in the past 7 days is about $47,000, and the corresponding annualized income is $17.155 million, all of which are real profits distributed in the form of USDC, ETH, ARB, and BTC.

Before reaching this point, the previous question was reversed. If I participate in RDNT mining with 100U4 leverage, although the protocol will charge me a borrowing fee of 24.98U per year, this fee will be allocated to the DLP pool, which will create an interesting situation. I mine RDNT, RDNT mines my USDC, DLP mines RDNT's USDC, and I mine DLP, so the result is: I mine myself?

The income of lending comes from the borrower. If the following formula is satisfied, the borrower can dig out all the fees that have been taken away and truly achieve "I dig myself".

A single borrower's loan amount/total platform loan amount = DLP amount provided by a single borrower/total DLP amount on the platform.

Next, let's take a look at the data. There is a total deposit amount of 280 million US dollars on Arbitrum, and the total amount of DLP is 48.38 million US dollars. As mentioned earlier, due to leveraged lending, DLP at 5% * leverage ratio is actually needed. If estimated at 20%, the 48.38 million US dollars of DLP can provide mining subsidies for 242 million US dollars, which also means that at least 38 million US dollars cannot obtain RDNT returns. (Of course, they may only deposit money and not be affected by the anti-arbitrage).

Four, the largest DeFi 2 pool

Obviously, this mechanism has created an incredibly large LP pool for RDNT, with only $48.4 million on Arbitrum. Since the end of the new chain narrative and the Luna thunderbolt, I haven't seen such a huge secondary pool for a long time. So what will such a large secondary pool bring?

(1) Undertake the selling pressure generated by mining output. The biggest disadvantage of a circular loan is that it will generate a large number of tokens. If calculated based on the previous 44% interest rate cost/mining output estimation, DLP will bring in a daily income of $47,000 while also bringing in $100,000 in selling pressure. However, the release mechanism of RDNT can delay this process, and coupled with the huge secondary pool, the death spiral of mining coins will be significantly postponed.

(2) Provide liquidity for exits. ** We still need to consider that the team and core contributors hold a large amount of unlocked tokens, and good liquidity is a huge opportunity for them. We hope they don't do this.

Another point we need to consider is that, compared to directly selling tokens, it is a better choice for the team and core contributors to deposit their RDNT into DLP. After all, the 50% APR and $17.155 million annual income are very attractive, and the income is distributed in high liquidity assets, which is also in compliance with all legal and on-chain rules. It should be noted that the yield of DLP also depends on the lock-up period. Only by locking up for 12 months can you get a 51.9% APR, while locking up for 1 month can only get a 2.08% APR.

This question will once again reverse the answer to the previous "I dig myself" question, and the answer becomes "I cannot dig myself" because the team and core contributors will deposit excess DLP, diluting the profits belonging to users. However, objectively speaking, this dilution is also appropriate, after all, Compound and AAVE also charge around 20% Reserve Factor. The only problem is that if the team and core contributors invest too much DLP and choose to lock it for the longest time, they are likely to take away 50%, 60%, or even higher DLP profits.

Five, the invisible Ve (3,3) game

Team and core contributors participating in DLP mining not only obtain "tax" benefits, but also play a role in stirring up the water. Let's imagine that if the arbitrageurs reach a consensus and everyone agrees to deposit for one month, then everyone can achieve a high enough rate of return and bear as little impermanent loss as possible. However, if the team and core contributors deposit a large amount of DLP locked for one year, the rate of return for DLP locked for one month will quickly decrease. Of course, even without the team and core contributors, there is likely to be a "traitor" among the arbitrageurs.

So the final result is very clear: locking for 1 month from the beginning is not a valid option. From the data, we can also see that based on an income of 57,000 and a TVL of 48 million, the average annualized APY is 35.3%, and the actual yield of locking DLP for 1 year is 51.9%. The combination here is not unique, so we cannot determine the exact proportion, but it is obvious that many DLPs have chosen to lock for 1 year. This also means that if you choose not to lock for 1 year, your borrowing cost will be shared among other players who have locked for 1 year.

Of course, this is ultimately a multiple-choice question. Choosing a longer lock-up period may allow for a share of other people's profits, but it also comes with higher volatility risks. Players who choose a one-month lock-up period may have sufficient reasons, but choosing three or six months may not have as high a cost-effectiveness.

Sixth, the last question: Will RDNT experience a death spiral?

Theoretically speaking, it is possible. The current mining model is a process of spiraling upwards with one foot on the ground and the other in the air, magnifying APR and TVL by 3-4 times, and using the miner's cost to subsidize them, attracting them to keep mining, and using DLP and Vesting to lock liquidity. Therefore, RDNT has not "collapsed" in the past few months.

However, it cannot be ignored that the APR of RDNT has dropped to a sufficiently low level, 14.76%, and the long unlocking period still needs to bear the impermanent loss of DLP. The current RDNT does not seem so attractive. Therefore, if the number of miners in the loop lending decreases, the yield of DLP will also significantly decrease. The increase in impermanent risk will require a higher necessary APR, and the demand for reinvestment in DLP will also decrease. Unilateral selling will further lower the price of RDNT and mining yield, and the death spiral will accelerate from here....

Of course, this is just one possibility. Currently, the capacity of the second pool is still worth tens of millions of dollars, while the daily trading volume of RDNT on BN is only a few million dollars, and FDV has only 300 million dollars in circulation with a market value of less than 100 million dollars. In addition to the death spiral, the same approach can also create a "reverse death spiral" for RDNT: RDNT price rises → mining APR rises → more cyclical loan funds are accommodated → DLP income increases → demand for reinvestment grows, bringing more RDNT buying pressure → price continues to rise. Combined with multiple concepts such as Bn investment and Arb, the situation is not so bad.

At present, the cost-effectiveness of participating in the cycle loan mining seems not so good. If you are not optimistic about the prospect of RDNT, using the interest cost generated by the cycle loan to purchase and hold or do DLP may bring higher capital utilization efficiency. And if you don't believe in RDNT, not participating will always be the best choice. (As always, this is not investment advice). However, regardless of whether RDNT will spiral to death at some point in time, the DLP mechanism itself provides a very meaningful economic model construction idea, which is worth further exploration.

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