DeFi Part 9: DeFi 2.0 and 80,000% Annual Returns

Up until this point, we’ve mostly talked about investment strategies that have been relatively safe and understandable. While 10% or 15% do seem like fantastic ROIs, what about those wild numbers that many in the world of decentralized finance keep raving on about?

With the rise of what many are hailing as DeFi 2.0, we’re seeing projects pop up with the promise of unbelievable APYs. And that’s exactly what we’re going to explore in today’s installment of Intro to Decentralized Finance.

Table of Contents

  • DeFi 2.0 and the Unbelievable APYs It Offers
  • The Catch Behind +80,000% APY
  • The Sustainability of DeFi 2.0 Tokens
  • Key Takeaways

DeFi 2.0 and the Unbelievable APYs It Offers

Most investment opportunities, even in the world of decentralized finance, offer returns ranging from single-digit to upper double digits at most. But a new breed of applications collectively known as DeFi 2.0 is completely reimagining the concept of achievable returns.

For instance, Wonderland Time is one of the most popular DeFi 2.0 projects. As of this writing, the official website is boldly promising an annual percentage yield of more than 80,000%. No, you’re not reading that wrong. That’s eight with four zeroes.

In other words, if you buy 10 TIME tokens right now and stake them, your portfolio is estimated to hit over 800 by the end of the year.

If your spider senses are already blaring with disbelief, that’s completely understandable. After all, even Ponzi schemes don’t make promises that tall. However, Wonderland Time is very much a real project with almost a year of operations under its belt. People have already staked over $440 million worth of assets in their protocol.

In case those figures were not impressive enough, TIME is a semi-pegged token, which means that it can’t dip below a specific value At the same time, its upside is completely uncapped and driven purely by market demand.

If you’re wondering how does this works or that there must be a catch, you’re in luck because that’s exactly what we’re going to dig into.

The Catch Behind +80,000% APY

Wonderland Time indeed rewards users with 80 TIME tokens for every token they stake for a year. We’re using the time period of a year for illustrative purposes only. As far as your assets are concerned, you can withdraw them at any point you want. There’s no catch there.

However, where things get interesting is when you reconsider the earlier statement. The project rewards users not in fiat or other popular cryptocurrencies, but with more TIME tokens. As the creators of this project and with zero limits on the total supply, the Wonderland team can mint almost as many of these tokens as it wants. We say almost because there is a limit due to the soft-pegged nature of it. We’ll touch on this later.

In practice, what that means is that despite such staggering APYs (annual profit yield with compounding accounted for), it’s possible to come out with a loss on the other side.

It’s best to consider an example to illustrate what we mean by that. So let’s assume that you bought 100 TIME tokens for $200 each and a total cost of $20,000.

If you stake your 100 tokens for a full year from now, either of the following outcomes could be true:

  • Price Goes Up: If the price of TIME goes up to $225, your 8,000 tokens will be worth a whopping $1,800,000
  • Price Plummets: However, if the price plummets to a record low number like $2, your holdings will be worth $16,000 only, even though you have 80 times more tokens

Unfortunately, since Wonderland is paying those rewards by minting new tokens, it’s going to be an uphill battle as far as maintaining token pricing is concerned. For example, TIME has dropped from a record high of almost $10,000 in November last year to $210 that it’s trading at as of this writing.

In other words, anyone who bought and staked TIME in November probably suffered a loss higher than the extra tokens they received in return.

However, it’s not time to discard these projects altogether. There is one aspect that makes them worth consideration.

The Semi-Pegged Nature of TIME

TIME is one of the first DeFi 2.0 projects to soft-peg its value. Unlike stablecoins that are pegged to a fiat currency like the US dollar, TIME is backed by a treasury of Magic Internet Monet (MIM) and some lp tokens. MIM is a wholly decentralized stablecoin that maintains a value of $1 without relying on fiat. It maintains this peg by holding an equivalent amount of other crypto tokens.

At this point, Wonderland’s treasury has over $476 million worth of those assets. Out of this treasury, every TIME token is backed by one MIM token. What that means is that it’s technically impossible for TIME to fall below the price of $1, but it can go as high as the market decides it’s worth.

The current price of time is $210. Even if it drops ten times from here and reaches $21 by end of the year, it would still be an incredibly profitable investment. That’s because users are projected to have 80+ TIME tokens for each token they stake today.

The Sustainability of DeFi 2.0 Tokens

Hyper-inflation is a term that perfectly captures the essence of these tokens. To provide such extreme returns, the team continues to mint new tokens at faster rates. The supply can expand ad-infinitum. So what happens when the demand struggles to keep up with such extreme growth of supply?

The entire ecosystem would likely collapse in such a situation. While the team retains some controls to adjust returns and use treasury to contain crises like those, it’s still a ticking time bomb.

At the same time, what these projects are attempting is truly ambitious and daring. The goal of these projects is not just to deliver insane APYs to holders, but it’s also to become the de facto asset of the decentralized finance world. In other words, they are trying to become the US dollar of DeFI. That’s the end game here.

Key Takeaways

  • DeFi 2.0 projects like Wonderland Time payout rewards in their native token. Since they control the supply, they can mint as many as they want.
  • While 80,000% or higher APYs can be enchanting, it’s always a good idea to investigate the tokenomics and sustainability of the underlying token instead. The alternative may leave you holding a bag of million tokens worth nothing.
  • Decentralized Finance is only getting started. As these projects show, the future is going to be well beyond our imaginations.

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