🛌🏾 How to earn passive income on your Bitcoin holdings while you sleep
Use the Harmony blockchain and the Tranquil money market app to earn yield on your Bitcoin.
The Problem with Bitcoin
This guide is for those that got caught up in the excitement of the recent crypto bull-runs which took place in the midst of the global pandemic. Maybe you bought some Bitcoin or Ethereum over the past 2 years and watched your holdings grow rapidly, only for the price to recently come back down to earth.
Many people own Bitcoin, but very few of us are aware of how easy it is to earn interest on this asset. You don’t have to leave it dormant on a central crypto exchange making nothing!
This week I will be looking at the Harmony blockchain which is one of the cheapest and easiest ways to earn interest on your crypto assets. And you won’t need a PhD in Blockchain technology to figure it out!
The Harmony Blockchain
Harmony is one of the smaller and less well known blockchains among the group of so-called “Ethereum killers” which provide much cheaper and faster transactions for DeFi and NFT-based applications. You can look at my previous article on stablecoins to see a quick overview of these other blockchains.
According to reports, Harmony is able to achieve rates of 2,000 transactions per second (similar to the Visa network), and the fees are extremely low, typically costing fractions of a cent per transaction.
At a very high level, Harmony is able to achieve this performance through two main technologies: Proof of Stake and Sharding. (Note: variations of these technologies have also been used in other blockchains, so this is not 100% unique to Harmony).
Proof of Stake is a mechanism for validating and securing blockchain transactions via the coins which users “stake”. Staking is a bit like locking up your coins in a bank deposit which cannot be withdrawn immediately or without incurring a fee. The proof of stake verification process is more complex but does not require as much computational power and energy resources as traditional “proof of work” solutions like Bitcoin.
Sharding means that the blockchain network is split up into smaller partitions or sections. On Harmony multiple shards are able to process transactions simultaneously or “in parallel” which also improves the blockchain’s speed and efficiency.
As shown in the screenshot below, Harmony is currently ranked 15th by total value locked or TVL with a total of $767.84m worth of assets deposited in the ecosystem. While this figure sounds impressive, it pales in comparison to the top 5 blockchains with Ethereum at the top with over $100 billion in assets, to Solana at almost $7 billion.
If we dive deeper and look at which apps on the Harmony blockchain have attracted the most capital, we see that the DeFi Kingdoms, a play-to-earn GameFi app is by far the most dominant with just over $320 million in TVL. I will be covering GameFi and DeFi Kingdoms in later weeks to explain the risks and opportunities of this new subsector within crypto.
But ranked at number 2 (and circled in red) is Tranquil Finance, a lending and borrowing money market app with almost $223 million in TVL. This is where we can deposit and lend out Bitcoin, and earn just over 9% (at the time of writing). Let’s go through exactly how to do this in the next section.
How to use Tranquil Finance
Step 1: Convert your Bitcoin (BTC) to Harmony’s ONE token.
The first step is to temporarily convert Bitcoin to Harmony’s native ONE token. While this is not the most elegant solution, there is currently no way to simply transfer from a centralised exchange to a decentralised web3 wallet in one step.
Last month Harmony launched a special direct BTC “bridge” which allows you to transfer Bitcoin directly if you hold it in a non-custodial wallet (not on an exchange). But this bridge solution is still in beta. I have never used it myself so if you decide to try it, make sure you test it first with a small trial amount.
Step 2: Setup Harmony Web3 Wallet with Metamask
Metamask is the most trusted and widely used web3 wallet across a number of blockchains including Ethereum, Polygon, Avalance, BSC and others. It is also the main wallet used in the Harmony ecosystem.
The exact details on how to install and setup Metamask for Harmony can be found in the Harmony official documentation and in this comprehensive guide from a Harmony community member.
Step 3: Transfer the ONE token from your central exchange account to your Metamask wallet.
Step 4: Swap ONE back to BTC
Go to the Sushi Swap decentralised exchange (DEX), making sure you are on the Harmony version as this DEX is available on a number of blockchains.
Here you should choose 1BTC as this is the tokenised (derivative) form of Bitcoin which is used on Harmony and tracks the price of the actual Bitcoin asset.
(Important: as always, make sure you leave a small amount of ONE in your wallet to cover transaction fees. Usually ensuring you have 20 ONE is more than enough, which is worth just under $2.5 at the current prices).
Step 5: “Supply” funds on Tranquil Finance.
Go to the “Markets” tab in the Tranquil Finance web app and then select the asset you want to “supply” or lend out to the market. In our case we want to select 1BTC. Do not select the option to supply 1WBTC which stands for “wrapped” Bitcoin which was an earlier tokenised form of the cryptocurrency. (Also the interest rate for 1WBTC is currently less desirable!)
As you can see in the screenshot below, if you hover over 1BTC, as part of the 9% APY you will receive 5.37% of this yield from the “market”, meaning in the same 1BTC asset, 2.48% in TRANQ which is the governance token for Tranquil Finance and 1.22% in ONE.
Next, clicking on 1BTC brings up the modal window below - simply enter the amount you want to use and click the deposit button:
Step 6: Borrow Markets
NB: If you are not interested in borrowing, you can skip this section.
If you want to use Tranquil to borrow, the app also allows you to do that. First you will need to complete the Supply step outlined above and then enable your asset as collateral.
It is important to note that borrowing works very differently in DeFi than in traditional finance. Because everyone is supposed to be operating in an anonymous and trustless way, there are no background credit checks. This means that you cannot borrow more than the value of your collateral. In fact the loan has to be very “over-collateralised” to ensure that the lender is always protected and the DeFi app remains solvent.
In the specific case of Tranquil, they advise that the “safe max” to borrow is 80% of the borrow limit set by the app. If you hit 100% of the borrow limit your collateral will get liquidated and you will lose all your capital. While you are borrowing your collateral is locked and cannot be withdrawn from the app until you have paid back the loan.
Also you don’t have to borrow the same asset as the one you have setup as collateral. For example, you could supply 1BTC as collateral and borrow 1ETH, 1USDC (dollar pegged stablecoin) or any of the other assets offered by Tranquil. But this comes with extra risk. If the price of Bitcoin falls sharply overnight against the dollar for example you could quickly reach your borrow limit and be in danger of liquidation. So to manage this risk correctly you must have a good understanding of the volatility of your chosen asset pair.
In my experience I kept things very simple and just borrowed Bitcoin, using Bitcoin as collateral. I found the recommended 80% safe max level to indeed be quite safe in this specific situation. I monitored Tranquil’s dashboard occasionally to see my borrow level only gradually increasing to 81% over a 2 month period. (Not to be taken as financial advice, the APY rates change all the time, so make sure you always do you own research and understand all the risks).
Full disclosure: currently I am not using Tranquil to borrow as it does not make sense for my personal asset allocation, but I am using the supply side of the app to earn the 9% yield on my 1BTC position.
Risks associated with Tranquil Finance
Smart contract risk
As always with crypto and DeFi, there is inherent risk when using these products given that DeFi apps use complex smart contract code which could be vulnerable to hacks and exploits.
But for Tranquil Finance in practice this risk is probably quite low given the app is a “fork” or cloned version of Compound Finance - a very reputable and “battle-tested” money market app on Ethereum.
Having said that, the risk of a smart contract hack is difficult to quantify and very few people are qualified to assess the integrity of DeFi code, so always proceed with caution. Tranquil has received security audits from third party firms but this does not provide a 100% guarantee that your funds will be safe.
Tranquil’s new Defira GameFi App
The recent launch of Tranquil’s “Defira” GameFi app is not really a risk as such but more like a minor red flag for me personally. Defira appears to be an almost direct copy of DeFi Kingdoms (DFK) which I mentioned earlier in this report and is the most successful app on Harmony measured by TVL.
Defira copies a number of features of DFK from the retro pixelated style of the game design, right down to the exact terminology for the NFTs used in the game called “heroes”. This probably won’t have any major impact for those of us depositing funds in Tranquil’s money markets but for me it does raise question marks over the integrity of the Tranquil team.
Having said that copying good ideas is part and parcel of any competitive business landscape and certainly the crypto world is no exception!
What stock or crypto asset should I cover next? You can contact me by email: hellorobostox@gmail.com or feel free to leave your response in the comments. You can also follow me on Twitter: @daneasterman.
What did I miss? - These reports are a learning process for me and I’m very open to constructive feedback and suggestions.
Disclaimer: I am not a financial advisor, none of this report should be taken as financial advice. Instead this should be viewed as starting point to conduct your own research. I am long Bitcoin at the time of writing and as mentioned I have deposited funds using the supply side of Tranquil Finance.