A couple of days ago I went down the rabbit hole of recursive lending and extreme liquidity farming on Polygon. My step-by-step article generated some interesting discussion on r/defi, and a few folks asked me for an update.

Before diving in, I have to give a caveat that I didn’t take careful notes the first time I did this, so the numbers below are from a second experiment I made where I isolated everything and took care to keep the numbers clean. I also skipped the lower-yield interest stacking strategies here, so we can focus on the spectacle of a 10,000% APY gamble.

To be clear, this is not investing. These are risky new coins, trading on risky new DEXs. The chance of getting liquidated from volatility, impermanent loss, or exit scams is very high here. This is pure gambling!

The Setup

The unbelievably high APY number is coming from Iron.finance’s partnership with Quickswap. Iron’s tokenomics model is allocating $44,000 per day to reward liquidity providers; there is also $18,000 mentioned as daily fees from the borrowers, although it’s unclear if this number is part of the 44k or gravy on top. Quickswap has added another incentive of 65 QUICK tokens. Some VCs out there are throwing a lot of money around to get these projects to snowball.

To set things up, I moved $10,000 USDC into a clean wallet and swapped half for TITAN and half for ETH. Next, I staked these into LP tokens, and finally I deposited those into the Quickswap pool. Here are the starting numbers:

• $10,027 USDC ➔ 1565 TITAN + 1.91 ETH ➔ 53.88 LP tokens
• APY 16,730%
• Expected payout of 0.1829 QUICK per day
• Expected payout of $53.45 per day from fees
• 0.28% stake of $3,564,534 total pool size
• TITAN trading at $3.21
• PoS-WETH trading at $2,727
• QUICK trading at $676.09
• Down $0.000615 in gas costs so far (this is how they get you /s)

24 Hours Later

Now for the fun part. I kicked back, watched the 1999 cinematic masterpiece Wing Commander, and obsessively refreshed the price charts for TITAN and ETH. After 24 hours, I converted everything back out to USDC to see how we did.

The liquidity pool page showed that my 53.88 LP tokens were now worth $11,521, and I had an extra 0.1786 in QUICK coming my way.

As people bought TITAN, the pool rebalances and each LP token represents more ETH and less TITAN. Luckily the value of TITAN went up by more than the value of ETH went down.

• 53.88 LP ➔ 1402.7 TITAN + 2.14202 ETH
• 0.1786 QUICK harvested
• TITAN price rose 27% from $3.21 to $4.09
• PoS-WETH price fell 2% from $2,727 to $2,675
• QUICK price fell 9% from $676.09 to $622.60
• 1402.7 TITAN ➔ $5799
• 2.14202 ETH ➔ $5732
• 0.1786 QUICK ➔ $111
• Total value $10,027 ➔ $11,653
• ROI 16% yield overall
• Ignoring the price action of the two currencies, the LP farming contributed somewhere between $-45 to $112, plus the $111 QUICK rewards.
• Total gas costs $0.0017061 😫

So that’s a net gain of $1,626 in a day, which is pretty wild! However the entire pool expanded by $800,000 and the rewards have dropped from 16,322% APY down to a paltry 5,268%, which really highlights how fast things are moving right now. Since I started this experiment yesterday, I’ve seen two new pools show up at the top of the APY leaderboards claiming even higher APYs.

Since APY is meant to compound over time, it is quickly overwhelmed by the short term volatility in the two prices. Running this experiment for longer with compounding and re-investment would improve the math, but we’re looking at the flattest part of the interest curve here.

So, What Have I Learned?

First of all, take good notes! There are so many moving pieces and layers of abstraction that it can be difficult to tell if you’ve made a loss or a gain at all. It’s also vitally important to record all the steps you’ve gone through and keep track of the URLs you’ll need to get back out. I actually don’t know how you navigate to the page where you can burn your LP tokens to release your component currencies, so I had to access it by going into the add liquidity page and changing the url to say “remove” instead of “add.” Not ideal. When in doubt, https://vfat.tools/polygon/ can be a life saver.

Second, this is not safe and it’s not set-it-and-forget-it stuff. During the 24 hours I was playing with this, I saw a new DEX called GoldenBull launching with a liquidity pool paying almost 30,000% APR. Sadly it appears the investors/founders were using the hype of the launch to dump their pre-launch coins on the early speculators. In a day the APR has crashed down to 4,000% and the price of the coin went from around $100 to $5. I could have very easily bought into that mess and liquidated $9,000. Beware pools that have lock-up periods!

Finally, take profits when they come. I’m still learning to be a better investor, and I’m also learning to be more patient and responsible as a person, so this is an opportunity to count my blessings and put this windfall somewhere good rather than doubling down. To start, I’ve cashed out $550 in order to dedicate a commemorative brick at my local animal shelter, the Greenhill Humane Society. Here’s a preview: