DeFi, yield, and APY are three words that go well together. Parallel Finance now offers a way to increase your yield on DOT. If you take part through Parallel Finance in a crowd loan, you receive cDOT.
In this article, we explain what cDOT is. We also show you why this is the best long-term option for DOT holders. All this with the Parallel Finance unique Money Market. Without liquidation risk! So, let’s take a look into this.
What Is cDOT and How to Use It
If you contribute 1 DOT token to a crowd loan on ParallelFi, you receive 1 cDOT. However, there are other similar tokens given by other protocols:
- Binance earns you bDOT.
- Acala Network earns you lcDOT.
Therefore, Lennart Laubisch made a thread on this. He shows why cDOT is the best DOT version to have. Laubisch is Head of Community Management at ParallelFi.
Note: We already wrote a guide on how crowd loans and parachains work on Polkadot.
How longterm $DOT 💎🤲 can maximize their staking APY.
Instead of 14.5% APY up to 50% (and more)
A thread 🧵 (Not financial advice)
— Lennart Laubisch (previously illu_te) (@illu_te) June 21, 2022
Nowadays, you can take part in a crowd loan of a Polkadot project, and it wins the parachain. You enter with an ‘x’ amount of DOT and this DOT gets locked for 2 years. Therefore, that platform will give you a derivative token, like the cDOT token on ParallelFi. This is proof that you own the locked DOT.
Therefore, this gives you a couple of options. For example;
- Sell the cDOT: Most likely at a cheaper price than DOT. On the other hand, you can just let it sit for two years.
- Buy more cDOT.
That’s where our angle is today, get more cDOT tokens. Here are five steps on how to do this.
1. Get cDOT With $DOT on Parallel Finance Swap
This is a unique feature of Parallel Finance. It gives you the option to get the most out of your APY on your DOT. Here’s a sample that we keep as simple as possible: If you have 100 DOT, you can stake it for 14.5% APY. In October 2023, you will have 119.3 DOT. Because, with APY, the yield compounds. See the picture below.
2. Lend cDOT on the Money Market.
However, the cDOT strategy offers more. You can swap your 100 DOT to 146 cDOT and hodl until October 2023. But here is the kicker, how about lending your 146 cDOT on Parallel’s Money Market? This includes a liquidation-free loan.
Here’s how this works:
Lend your cDOT one the Money Market and borrow 50% of your cDOT value in DOT without getting liquidated. Remember, 1 cDOT is at the end of the lease period exactly 1 DOT. That’s why this is possible. See the picture further below.
3. Borrow DOT
In our case, your 146 cDOT are worth 100 DOT. So, this allows you to borrow 50 DOT. At a current borrow APY of 14.32%. This gives 9.54 DOT to pay back by October 2023. However, you can buy another 73 cDOT. In October 2023, we convert this 73 cDOT to 73 DOT. We need to repay 50 + 9.54 =59.54 DOT.
4. Buy cDOT With $DOT and Lend It
So, we make an extra profit of 73 – 59.56 = 13,56 DOT. But, stop, we just bought 73 cDOT, right? These you can lend again, and the whole spiel starts again. This you can keep doing until you run out of borrow limit. This next step works out like this: 73 cDOT are worth 50 DOT. So, we can borrow 25 DOT, and swap these for 36.5 cDOT. Your profit after repaying the DOT and the borrow APY = 6.73 DOT.
5. Repeat This Until You Have No More Desire
Now, we can lend 36.5 cDOT once more. Now you borrow 12.5 DOT and buy 18,25 cDOT. This you lend and borrow 6.25 DOT and so on. Until you run out of borrow limit. Laubisch continued this process until his borrow limit was just above 1 DOT. However, you can stop earlier if you wish to do so. In this example, we stop by borrowing 6.25 DOT to buy 9.12 cDOT.
What Does Your Profit Look Like?
So, remember, we started with 100 DOT and bought 146 cDOT. We borrowed in total 93.75 DOT. However, in October 2023, we need to repay 93.75 + 17.9 DOT (loan fee) = 111.6 DOT.
On the other hand, we bought an extra 136.87 cDOT. In October 2023, we need can convert our cDOT to DOT. We have the original 146 cDOT, and we accumulated another 136.87 cDOT. In total, we can convert 146 + 136.87 = 282.87 DOT. We also need to repay 111.6 DOT. Therefore, this gives a total of 171.27 DOT.
Now, if we would have just hodled, we would have had 100 DOT. With 14.5% staking APY, we would make 119.3 DOT in October 2023. However, with this strategy, we got the most out of our APY. In 16 months, we started with 100 DOT and ended with 171.27 Dot. That’s a 54% APY. Remember that more is possible if you continue the process.
A few things to look out for:
- You need to check the cDOT/DOT ratio when you swap. Compare it regularly with the borrow APY to stay in profit.
- Once the APR rises to, for example, 25% and you only got 1.25 cDOT for 1 DOT, it’s not profitable anymore.
We showed you how you can make the most out of your DOT with DeFi when you take part in a Polkadot crowd loan. Our sample showed an APY of 54%. This is much higher than the 14.5% in case you hold your DOT and don’t stake it on Parallel Finance.
Finally, according to CoinGecko, the current DOT price is $7.61. That’s up 0.2% from yesterday. However, over the last 30 days, DOT lost 23.3%. The market cap is $8.55 million with 1,12 billion tokens in circulation out of 1,2 billion DOT. The ATH was $54.98 in November 2021.
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