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I have been reading recently about the DeFi space. I have noticed (admittedly, pretty late) quite a bit of buzz regarding WBTC and its applications in Ethereum. I have read about the Compound dapp and how it allows users to put assets like WBTC into a liquidity pool and earn extremely high interest rates (>5%!). Is this legit? I currently have $X in a US money market account, but given the federal interest rate, this MM account is yielding <1%. As a result, it seems to make financial sense for me to move $X to buy Y amount of BTC, transfer that Y amount of BTC to Y amount of WBTC (via something like CoinList), and then put this Y WBTC into the liquidity pool on Compound and earn >5% annual interest. While complex (at least in comparison to what I as a 'classic' investor might normally do), it seems relatively easy to do. But it just seems... I don't know, too good to be true? I just convert my FIAT->BTC->WBTC and earn >5x what I am earning in the highest yield MM I can find? Am I misunderstanding some part of the process? Is there some hidden tax or fee structure that makes the return dramatically lower? I guess there is risk of depreciation of the WBTC while it is sitting in the liquidity pool, and that would lower my absolute return. Is that the only negative? 5% just seems fantastical as a guaranteed rate.

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As I see it there are a lot more risks in this kind of LP investment:

  1. There may be bugs in the contract code

  2. There is no backup system giving you your money back if something goes wrong

  3. The risk of the underlying asset changing price (WBTC)

  4. The risk of BTC changing price

  5. The risk of someone hacking the centralized exchange which you use for the fiat ramup/rampdown (when you enter fiat and take it out of the exchange)

  6. You making a mistake during some part of the chain

  7. Some banks don't like crypto investments, so they may block fiat transfers to/from exchanges

So, as with all investments, higher risk gives higher rewards. Also you need to consider what this kind of investments does to your tax reports - how you should report it, what kind of bookkeeping is required etc

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