I understand why the lender demands 20%. The economic problem is that the borrower has no conceivable use for the funds which could reasonably be expected to cover that yield (short of inventing the money out of thin air)

The other side of the trade is frequently a pump & dump. With that much borrowed capital, you frequently can exert noticeable market power on many thinly-traded cryptos. Push the price higher, consistently, wait till Reddit & Telegram pick up on the coin, then dump it on a greater fool at vastly inflated prices and use a portion of the proceeds to pay back the loan. Works great until there are no greater fools and the proceeds (which are often some stablecoin, or BTC/ETH) end up worthless too.

Before people shake their heads at how horrific crypto is, note that a good many leveraged buyouts operate on the same principle. Capitalist takes out a large loan at high interest rates, uses it to buy a company, company assumes the debt. Stripe mines company of assets & goodwill to goose the stock price. When the price is high, cash out and wait for shell of the company to implode under debt load, helped along by all the operational shortcuts that were taken to goose earnings.

Except that there are real tangible assets involved in a leveraged buyout.

I think that's a PG version of "The Horrors of Crypto" movie. There's an NC-17 version that includes rug pulls, fraud, and CSAM extortion.

>Before people shake their heads at how horrific crypto is, note that a good many leveraged buyouts operate on the same principle.

Oh so it's ok then, nothing to see here.

Risk parity isn't the issue here. The issue is that is yield isn't coming from investing the funds in productive endeavors, it's being printed out of thin air, which is unsustainable.

>> 20% is risk parity for keeping your money in smart contracts

That is an insane sentence.

How much would you want to keep some of your money in smart contracts?

The point isn’t how much would you want — it’s what could they possibly be doing on the other side of that debt instrument to yield more than that.

Flash loans is one thing that I have no idea how I could get as a typical retail tradition finance customer, but are readily available on crypto. In the ideal (impossible) case they are riskless. Executing just 200 of them yields ~20%.

What could possibly go wrong.

I could pay 40% for keeping your cash near a roaring fire, doesn’t mean I can sustain that forever.

More than any legitimate enterprise in that space could possibly provide.

20% per annum isn't close to enough, as today's market demonstrates. I'd have needed probably 20% per month, if not per week.

But why would anyone be willing to pay it?

>20% is risk parity for keeping your money in smart contracts

I'm curious how you justify this statement. To the crypto-skeptic, such a statement is absurd on its face as a 20% APR is utterly unrealistic in the traditional finance/investment world. To the crypto-bull, 20% is far, far less than is offered to keep your money in various Defi protocols.