Transcript: Aaron Lammer on Yield Farming, DeFi, and Ethereum

On this episode of Odd Lots, we speak with Aaron Lammer, the host of the Exit Scam podcast and an avid DeFi trader. He talks about his trading on Uniswap, the concept of yield farming, and much more. Transcripts have been lightly edited for clarity.

Joe Weisenthal:  Hello, and welcome to another episode of the Odd Lots podcast. I’m Joe Weisenthal.

Tracy Alloway:  And I’m Tracy Alloway.

Joe: You know, there’s probably like, let’s be honest: There’s probably some connection between the fact that we’ve been doing a bunch of crypto episodes lately and the big selloff that we have in crypto today. That’s just always how it works. It’s like you get to something and by the time you start talking about it, a bunch, it’s probably the top.

Tracy: You think it was our fault and not Elon Musk’s?

Joe: No, I don’t think it’s like our fault per se, but maybe it’s just like, you know, it’s just how timing works. By the time the mainstream media is focused on something, the mainstream media, like the Odd Lots podcast, it’s the final chapter.

Tracy:  This is the curse of the magazine cover, right? Like as soon as it hits the cover of Barron’s or the Economist or whatever, um, it’s time to sell and get out.

Joe: Well, we are recording this May 13th ad last night, Elon Musk tweeted that due to the electricity consumption of Bitcoin, they would no longer use it. They’re going to still hold it, but they’re not going to be involved in transacting it at any more. I don’t really know what the real reason is. I mean, that’s what he says. And he, you know, all the coins are falling, but you know, there’s volatility at this space, but all the coins are falling today. Even the ones that aren’t mined with lots of electricity, so we have a mini crypto bear market

Tracy: Yeah. They are definitely falling and Bitcoin and other cryptocurrencies have always been volatile. That’s true. But I do think, you know, people talk about crypto as this decentralized ideas, something that works as an inflation hedge, something that’s sort of beyond the ability of governments and central bankers to manipulate. And so it’s kind of ironic that one tweet from a CEO can cause this kind of mayhem in the market.

Joe: Yeah, totally. Right. And you know, I have to say like earlier in my career, I would have said something like, “Oh, this is the top, the bubble burst or whatever.”  But I no longer think that. I mean, I don’t know, like cycles come and go. Elon could tweet whatever he wants. It’s clearly not going away any, uh, any time soon as a phenomenon — a part of the world and maybe a part of the finance world.

Tracy:  Yeah. I agree. Uh, we’ve learned our lesson about calling bubbles in Bitcoin. We’re not going to do that anymore, but what we are going to do is talk about some of the things that are helping crypto, I guess, become more widely adopted or are more entrenched. One of the reasons why it’s not going away.

Joe: Yeah. So listeners may recall a couple weeks ago, we did an episode on decentralized exchanges. So, you know, a centralized exchange like Coinbase, you send them fiat currency, and then you can trade cryptocurrency like Bitcoin or Ethereum. On decentralized exchanges, they don’t hold your money. Uh, you don’t even need to start an account or anything like that. In fact, you can’t start an account and all the trading is done on the blockchain itself. We talked to Hayden Adams, the developer of the Uniswap protocol, which is behind the exchange Uniswap and talk about automated market-making and so forth. And it was super fascinating, but like, I still need to learn more. I’m only like maybe like twenty-five percent of the way there in terms of like getting how this all works. Maybe just 10%.

Tracy: Same here. And for those of our listeners who actually listen to the very end of that podcast, you might’ve heard us say that we wanted to record an episode on yield farming, which is this phenomenon that has come about because of DeFi. So the DeFi ecosystem has basically allowed this to happen. I know absolutely nothing about the space, other than it’s a way to earn money or interest on your cryptocurrency. So I’m very, very interested in learning more.

Joe: Right? So, and again, people should probably listen to that episode, but the premise of these automated market-making model is yes, you can trade one coin versus another like any exchange, but you can also stake your coins. You could put coins that you hold into a liquidity pool. As you have your coin stake there, you can earn interest yield, you can farm yield. There’s all kinds of crazy stuff you could do. So we’re going to learn more about how this all works from the perspective of an actual trader slash yield farmer. We’re going to have a farmer on the episode today.

Tracy: We have had actual farmers on the episode before, but we have yet to have a yield farmer. So let’s do it.

Joe: Yeah, exactly. Right. We’ve had corn and other stuff like that and a cattle farmer and stuff like that, cows, but now, uh, someone who farms yield. So I’m very excited about our guest today. Uh, actually long time friend of mine, acquaintance, at least we’re going to be speaking with, uh, Aaron Lammer who himself also has a podcast. So he is the host of the Exit Scam podcast, brand new podcast out, which chronicles the collapse of the Canadian crypto exchange Quadriga. Absolutely fascinating story. He is also the host of a very popular Longform podcast. And I’ve been talking to him for years as he is dived deeper and deeper into the crypto rabbit hole. And one time, a few, uh, several months ago, I think it was last summer. He DMd me and he says, Joe, I’m DeFi-pilling, all of the suburban dads of Long Island. So he’s, he himself has been hooked. He is hooking other people into DeFi yield farming. And he’s going to explain his descent into madness or maybe how he’s made a bunch of money. So, uh, I’m very excited. Aaron Lamer is on the podcast. Aaron, thank you very much for joining us.

Aaron Lammer:  Hi Joe. Hi Tracy. Thanks for having me.

Joe: You’re fully DeFi pilled, huh?

Aaron: 100%. When you were saying that the market had crashed, I was thinking not really for me, because I don’t have any Bitcoin and I’m deep into the Ethereum world. Ethereum appears to be where it was at an all time high earlier this week. So I’m not worried. I’m just saying I’m not worried.

Joe: Okay, good to establish that.

Tracy:  Are we going to become yield farmers by the end of this episode? Are you going to convert us?

Aaron: I mean, the reason I DMd Joe in the first place was to test whether he was open to farming a little bit with me and I still, I think I’m going to, I think I’m going to flip him eventually.

Joe: You should’ve just said, “Joe, I’ve got this huge money making opportunity drive over to my house on long Island right now. I’m going to make you a bunch of money.” And if I had listened, like I think that was like, I dunno, that was several months ago. I probably would have made a bunch of money.

Aaron: Absolutely

Tracy:  Can we start with the very, very basic question, which is what is yield farming?

Aaron: Yeah, I mean, I think we sorta have to like rewind through a Ethereum history a little bit. I didn’t start off wanting to become a farmer. And I should say that my farming is like when someone moves from Brooklyn to Vermont and has like a few chickens and maybe one cow. I’m not, I’m not doing this on an industrial scale. There are people you can actually look at other people’s wallets and Ethereum, because it’s all open. So like I’m looking, there’s a really big farmer named, uh, ox0xb1 and he’s farming hundreds of millions of dollars in his wallet. You can just watch him farming. So if you’re interested in like farming, uh, visuals, you can actually add them to your own wallet. I’m a small farmer and I kind of backed my way into it. Um, I was interested in Bitcoin, interested in Ethereum.

I’ve always believed that to really understand this stuff, you actually have to do it. Like you have to try the products with like real coins and play live. So I’ve always like tried all of the weird Ethereum world, things that existed. Like I used to make markets on this thing called Auger, which was a decentralized prediction market. I think that was the first Ethereum product that I actually used. And all of these Ethereum products, what they have in common is that you log in with a wallet. Most people may use Metamask, I think is probably the most popular one. And this is both an Ethereum wallet that holds your coins. And it’s a form of pseudonymous identity. It’s basically all, any of these services know about you as this person uses this wallet and they have access to the private keys.

So I started getting into the yield stuff when I started trading on Dexes. And a Dex is exactly what Hayden Adams, who was on the show, and he  makes the biggest, most famous one. I would say that if you’re familiar at all with a Dex it’s probably Uniswap. When I first started using it, I didn’t even really know what was so different about it than say trading on Coinbase. I understand a lot better now. But Uniswap is what’s called a automated market-maker, don’t quote me if I got that acronym wrong. And basically instead of having a central order book, it uses a big liquidity pool to create trades and it uses algorithmic arbitrage basically to figure out a price within that. So I started trading there primarily because I find centralized exchanges pretty sketchy, and I’ve had some sketchy experiences.

I didn’t lose money in Quadriga, but I used to trade coins on an exchange called Cryptopia that went down. So I’ve been burned by before by, um, sketchy exchanges. But if you like trading these tiny, small cap coins, it’s unlikely they’re going to be on somewhere like Coinbase or Gemini. So you kind of have to find a place where you can trade them. And the really incredible thing about Uniswap and other dexes is, is there’s this kind of coin called ERC 20. And I consider it like a, a varietal of Ethereum, like, uh, you know, there’s different wines that come from different regions. These are all like takes on the basic Ethereum coin and they’re all interoperable and the protocol can recognize all of them. So basically any ERC 20 can be traded on Uniswap or any dex.

This is a pretty powerful idea. It means that anyone can just come out with a project. And if people put a little liquidity into Uniswap, you can trade it. Sometimes I’ve found coins that are so small that they won’t even be recognized by Uniswap. You have to copy and paste in the smart contract and then Uniswap goes, okay. Yeah, I know what that is. Yeah. You can trade it, go ahead. It might not have a logo for it, but like the protocol recognizes it. So I was trading this way for a while and I started to see these incredible yields that you could get by, um, providing liquidity for these pairs of coins, many of which I happened to already have. So I would see, wow, this pair is paying 70, 80% APY. And when I say 70, 80% APY, that would mean if I kept my, my coins in the liquidity pool for one year. And that rate was stable through that year, which it’s unlikely to be. I would earn 70 to 80 on top of, uh, the coins I already had, which is a pretty appealing idea.

Joe:  So let’s talk about this some more. I mean, this is really the key thing. So there’s two things that a trader can do on a dex like Uniswap. You can identify a coin that you think is going to go up, which is, I guess, what most people think of as trading or speculating or whatever. You see some project that you like, it’s small. You think the number is going to go up. That’s sort of the essence of what a lot of what draws people to crypto. But then the other aspect of it is this idea that you can, if you have a coin, you can put it into this pool and earn yield. So just explain to us the mechanism there, how that works and why you get paid to put your coin into a pool.

Aaron: So this isn’t actually the only way to get yield. And I think this is one thing that’s confusing about farming. There’s actually like dairy farming and like, um, big farming. And each of them are a little different, but this kind of yield, basically you’re taking a pair of two coins. So I’m going to get, say for example, Ethereum and Dai, which is a stable coin. A lot of people are trading Dai for Ethereum all the time. So I can supply equal amounts of Ethereum and Dai into the pool. And then that will be used to facilitate trades. Each of those trades pays a fee and I get a portion of that fee relative to how much of the pool I own. So the best pools for me to be in are the pools where people are trading the most and where there’s the least liquidity relative to how much trading there is. So this is why you’re seeing things swinging wildly. In terms of these APIs,

Joe:  So the least liquidity. You mean the, the smallest pools. So there is a lot of volume of trading, but not many people have put their pairs into the pool.

Aaron: Exactly. So you can actually see in Uniswap, how much of the pool you own. So there’s a pool for, this is going to get a little complex, but there’s a pool for FF2X, a token that basically tracks the price of Ethereum with 2X leverage. So I happen to hold that a token and the Ethereum token. So I put them into that pool. I now own currently about 0.1%. So I own one 1000th of that pool. One 1000th of all the money in that pool is money I put in and therefore each fee that gets paid, I get one, 1000th of that fee. And therefore I’m looking for places where I can either own a lot of the pool or, um, there’s massive volume on the pool. And my little share, uh, is valuable. And these are swinging in real time because everyone’s out chasing this yield. So today’s yield is not tomorrow’s yield at all. I’ve got, I’ve seen the pool I’m in go from 80% APY to under 10% APY in the course of 24 hours because people are pulling their liquidity in and out.

Tracy: So can you maybe walk us through, I remember that Hayden talked about this a little bit, but walk us through the actual fees that you can earn on something like this and you know, how does it work being the biggest one in a pool versus being in a pool where there’s a lot of activity going on, which one’s more profitable and also how labor intensive is yield farming. So you just described having to sort of move from thing to thing, to thing to chase the liquidity. Um, does it take up a lot of time?

Aaron: I mean, crypto in general, I think takes up a lot of time, but that’s more of a brain disease than an actual like, need to do anything. So you could potentially just deposit into a pool and leave it there for a year. And you would just get a, you know, a rolling average of whatever the APY was over that time. The more you want to maximize yield, the more you would do. But every time you deposit into one of these pools, you pay gas. And if you’re doing this on the Ethereum network, gas is very expensive right now because it’s scaled by Ethereum being worth $3,800 per coin. So you really wouldn’t want to be moving these multiple times a day. I try to do as little as possible. Now there’s a site that you can go to and log in with your wallet called, and it tells you the lifetime value of all the fees.

You can see all the gas you’ve paid on the Ethereum network. And when I looked at mine, it like ruined like a month of my life. I mean, I’ve lost a lot of money to gas fees. So there’s certain properties about which pools are valuable that I think you can sort of see as patterns. Pools that have stable coins pay very well. And the reason is most people in crypto don’t want to hold a bunch of stable coins because they’re degen gamblers. They would rather hold Bitcoin or Ethereum or an even smaller coin that’s going up. So because not many people want to hold stablecoins, stable coins pools pay very well. There’s a thing where you can pool with other people in a sort of automated way called pool together and stablecoin pools usually pay 30 to 40% APY. This is against, I don’t know, what is a bank pay entrance a field right now, probably 0.1 at best.

Okay. So you’re holding basically a token that represents $1 and you’re getting paid 30 to 40% APY versus less than 1% of this bank. But some of this yield stuff is to, uh, infect other parts of the ecosystem. So now Coinbase and Gemini are saying, you can stake your Ethereum probably in a way that’s more safe than the way I just described for I think, 6 to 8% APY. So depending on your tolerance for risk, there are other ways to earn yield. The simplest way is to stake your Ethereum for, uh, ETH 2, which is a big update that’s coming to Ethereum and you can basically stake your Ethereum now and get paid. I’m not sure if it’s 6 or 8%. I think it depends who you do it well with, um, for the entire time until that happens. And when ether, Ethereum upgrades to ether to your tokens are unlocked and you get paid that yield for that whole period. So the kind of yield farming where you’re providing liquidity is maybe the most active and the way that you can optimize the most for your results. But there’s other ways that are far more passive, that you can more safely earn. What’s still a pretty good yield compared to like a bank.

Joe: All right. Let me ask you a question about the pool mechanics that I guess I still like don’t quite get, so there is a pool, you know, like the ETH-DAI pool or the ETH-USDC, different, both of them are stable coins. I assume some of the biggest pairs that exist on the Uniswap network, you stake both sides of the coin. What happens? How does it work? Okay. Let’s say I want to make a directional bet. I have some USD. See, I’d be like, alright, I want to trade it for Ethereum. So I go into that pool and I just buy some Ethereum in that pool. Does the ratio change inside the pool? Explain like, what does what’s happening there? Like who’s ETH am I getting exactly where does it come from?

Aaron: This is a fascinating question. And, uh, I am still not totally clear on it. So I’m going to give you what I think without being totally right. So there’s something called impermanent loss. And this has to do with the fact that the two things in the pool are not being equally drawn, right? If the Ethereum is going up and there’s more demand for Ethereum, more Ethereum is getting pulled out of the pool, then Dai. And therefore, to be in a pool like that is to actually lose some of your exposure to Ethereum you might end up getting put in equal amounts, Dai in Ethereum, but because of changes in the pricing of Ethereum relative to Dai, you might get out more Dai. So going into these liquidity pools can blunt some of your upside to holding crypto, but you’re getting paid a fee to do that.

And someone might look at ETH-DAI and say, Hey, I don’t want to be in that pool. If ETH moons, I’m going to end up with more Dai than I want. And that’s a loss for me. So in some ways we’re incentivizing people to create liquidity and their liquidity makes their trading a little bit less valuable.

Joe: Just, just to be clear here, you put in both sides of the coin in equal proportion, correct. But you’re not guaranteed to pull out the same volume of them or like explain like what are you guaranteed to be able to pull up?

Aaron: Well, this is like a tricky concept, but like, let’s just think about something that’s pegged and something that’s not pegged.  So let’s say I deposited $2,000 worth of Ethereum when ETH was $2,000 a coin and I put in 2000 Dai, but now ETH as of yesterday had doubled to $4,000, right?

So basically the whole time, the liquidity pool, as I understand it is acting as sort of a balancer, like as if it was balancing an ETF so that I have the same amount value of each. So as a Ethereum is going up in value I’m, it’s tilting towards Dai, so that they’re worth the same amount. And that when I withdraw, I’m getting more of the other thing that seems like a bad deal when crypto is going way up and you’re pegging it against a stable coin. It’s a little more complicated when you’re talking about pairs where it’s say an alt coin like Compound or Maker and Ethereum, you don’t necessarily know which direction they’re going. So I think in practice, it almost acts more sort of like a cost average, where it’s continually rebalancing these two assets that you have so that you have equal amounts of them. The pool always needs to have equal amounts of both. I see. And I’ll admit that’s confusing and I don’t totally get it.

Tracy: Well, I wanted to ask exactly on this point on the sort of like chain of ownership or chain of transaction. So all of this is enabled through Uniswap’s, automated market-maker system which we may not quite understand all the details of, but you mentioned that you became interested in yield farming because you didn’t trust, uh, traditional crypto exchanges. It sounds weird to put it like that. Um, but centralized crypto exchanges, cause you had a bad experience, what would happen to your coins if you Nisswa pour to go down suddenly? And I realized, I’m saying that and Hayden told us that it couldn’t go down suddenly because it is decentralized, but I’m just curious, like how much of this relies on uni swap functioning while and the decisions that they are making.

Aaron: I think it relies very little on decisions that are humans are making it Uniswap. And it depends deeply on how well the protocol itself works. The money is not like locked up in some office that Uniswap owns it’s locked up into the smart contracts. So all of stuff is as strong as the smart contracts that support it. The good thing is that those smart contracts are something that you can just see. You can see the money’s there. Unlike in the case of Quadrigas, which was a centralized exchange that was lying and running a fractional reserve. If unit swap didn’t have the money that it was supposed to locked into its smart contracts, we’d all know. And a lot of these protocols have gotten hacked. So there is risk. I would, I would not downplay the risk of this stuff. You have people who are often pseudonymous creating products that lock up billions of dollars in value, and there could be a catastrophe, but unlike the centralized exchange system, I think it’s more likely that catastrophe, it would happen at the code level and less likely it would happen at the human thief flies level.

And my own orientation is to sort of trust that system far more than I would trust. Um, any person who was running an exchange and those kinds of ideas. I mean, you’ve talked about DRI centralization on the show. It sort of goes beyond just safety and risk. I think it’s fundamentally, you know, who’s in control when you go to a centralized exchange, they’re choosing which coins you can trade, they’re influencing the market heavily simply by letting you buy certain things and not letting you buy other things.

Joe: What happens in both coins just tumble on dollar value. So let’s say you’re trading in some pool and it’s like ETH versus some coin. We’ve probably never heard of, you know, and one of these tiny coins and it pays some fat APY, but then someone tweets something or it’s like a bunch of stuff happens and they both go down. How do you, as a trader, think about the sort of cost benefit of yield versus price and basically finding good opportunities, such that the yield appeals to you without having to worry about downside price risk, because although, you know, cryptos and this multi-year bull market that is not guaranteed. And of course there have been many crashes in the past.

Aaron: I started as a trader and I don’t really consider myself like a hardcore farmer. So I’m mostly speculating on coins. This is a way for me to get yield on the coins I already have. And a bit more Ethereum, some crashes, and I have 1.2 times as many Ethereum as I did before and still in a better position. So I don’t really choose what I buy based on what farming I can do. I’m more using farming as a bonus. And one other thing I didn’t mention about that sort of fee that you get from Uniswap is Uniswap is this like very austere, non-scammy presentation kind of company, but they have a lot of competitors who would rather you put their liquidity with them instead of Uniswap. And those people offer incentives on top of the fees to the value of providing liquidity there.

And I think you talked about Sushiswap on there.

Joe: Yeah. The vampire attack!

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