Strategies

Carry Trade

Cryptocurrency Carry Trade

Borrowing low-yield assets to invest in higher-yield ones for interest differential profit

Definition

A carry trade involves borrowing low-yield assets to invest in higher-yield assets, profiting from the interest rate differential while exposed to exchange rate risk.

Example

Borrowing stablecoins at 3% APR to lend other tokens at 8% APR, earning 5% spread while exposed to the borrowed token's price risk.

1

What to check

Treat it as a strategy: map each step, each contract dependency, each exit condition, and the downside before committing capital. The main checks are: Currency/token price risk; Interest rate changes; Liquidity risk; Margin calls.

Risks to Consider

  • Currency/token price risk
  • Interest rate changes
  • Liquidity risk
  • Margin calls

Common Questions

What does Carry Trade mean in DeFi?

Carry Trade means Borrowing low-yield assets to invest in higher-yield ones for interest differential profit. The useful question is not only the definition, but how the mechanism changes risk, return, liquidity, or governance for the user.

How is Carry Trade used in practice?

A practical example: Borrowing stablecoins at 3% APR to lend other tokens at 8% APR, earning 5% spread while exposed to the borrowed token's price risk.

What should I check before relying on Carry Trade?

Check currency/token price risk, interest rate changes, liquidity risk, margin calls. Also verify liquidity, oracle assumptions, admin controls, and whether the protocol has been tested during stressed markets.

Related Terms

Related Articles

veNFTs: Autopilot, 40Acres and haiVELO

The landscape of veNFTs is rapidly evolving, ushering in a new era of decentralized finance where governance power and yield generation are tokenized. As the adoption of the veNFT model grew, the infrastructure supporting it matured, harnessing veNFT’s native yield to deliver novel services and automations. In this article I want to spotlight a few of these: Autopilot, 40Acres & haiVELO. You can refer to my previous articles if you are not already familiar with the veNFT model:

Leverage Like a Sir: Polynomial Gains, No Liquidation Pains

A few weeks ago, Sir Trading, a fascinating novel DeFi primitive was shipped, and I quickly fell in love with it. I’ve also decided to get involved, so welcome to this article introducing Sir Trading, explaining what I found interesting in the model, and announcing my involvement as an advisor. Sir.Trading explained like a business To understand Sir Trading (and it works well with most protocols), we can use a business metaphor: Who are the customers, intermediaries, and stakeholders?

LUSD Chicken Bonds: Liquity's Bonding Model

Liquity recently released the LUSD Chicken Bonds, a game-theory experiment merging DeFi and NFT elements to grow LUSD’s liquidity and reduce its price premium. Although Chicken Bonds are building on top of existing protocols, such as Yearn, b.protocol, or Curve, it also instigates novel mechanisms, the two leading ones being: No maturity principal-protected bonding: Chicken Bonds use a new type of bonding offering strong guarantees to the depositor, including the possibility to recoup the entire initially supplied capital at no cost (Chicken Out). Participate to Earn dynamic NFT: While interacting with the LUSD Chicken Bonds protocol, users obtain a dynamic NFT that evolves depending on their choices and previous onchain interactions. Chicken Bonds tackle one of the core challenges of DeFi, the sustainable growth of liquidity pools, first for the LUSD token only. Still, eventually, the model will be made available in a generalizable permissionless version for any protocol in need of liquidity to use.

DeFi Glossary