I leased a new Tesla Model Y recently (performance package, white exterior with a white interior). It’s a fun car to play around with, but that’s not really the point of this post. If you’re following me you’ve probably seen, or been in plenty of Teslas and don’t really care.
Something unique about this particular Tesla though is how I paid for it: I paid $0 out of pocket, and will continue to pay $0 out of pocket for the whole lease. Here’s how it happened:
A few months ago I DMed a friend and told him I was thinking about getting a Tesla. We’ve both worked on crypto products and occasionally toss around ideas related to it. I brought up the idea of buying my Tesla with crypto and noted a distaste for selling Bitcoin. He responded with an interesting question: “Could you pay for a Tesla entirely with crypto yield? That way you get to keep your crypto AND the Tesla.” –– now that, I thought was an interesting question.
Up until this point none of my crypto had interacted with the “real world”– and this is a common criticism of crypto in general. So I set out to use my digital money to bring forth something physical.
If you haven’t kept a pulse on crypto and decentralized finance (DeFi) the TLDR is that an incredible number of interesting, innovative, and unique financial tools have sprung up over the last few years. Some of these tools allow you to do unexpected things with your money that you might not have been able to do before. We’ll be using some of these to figure out how to cover the two core parts of our lease payment:
- A big upfront down payment of $10K
- And a monthly lease payment of $700 per month
These both require different strategies.
The Down Payment
The down payment on the lease requires a large amount of money upfront. To pay this, we’ll be using something called a collateralized loan. These exist in the regular world, too. You usually put up something as “collateral” (like a house), and get some money you can then use. However, that thing you put up as collateral gets taken away if you don’t make your regular interest payments. There’s all sorts of variations on this in the DeFi world though: you have odd things like loans that pay themselves off, or loans that have no interest payments at all.
Liquity allows me to take out a loan using Ethereum as collateral and requires a minimum of a 110% collateral to loan ratio, so to be safe from price fluctuations we’ll put in 10 ETH, which is worth $20K at the time of writing this. We’ll then open a loan for $10K LUSD and use this to pay the downpayment.
Now, one of the cool things about Liquity is the low interest rate of 0%. There are no time limits, and no monthly payments, only a single fee of 0.5%. So, the only thing we’ll be paying here is a one time fee of $500. Once this loan is paid off, my 10 ETH will unlock, and I’ll get it back. For now, we have the $10,000 which solves one of our problems.
We’ve introduced another problem though: we need to repay the loan. Luckily we can solve that in the same way we solve the lease payment.
The Lease Payment
The lease payment is $700 per month so we’ll want to generate some regular income to cover the payment. We’re going to do this through something called staking to generate interest income.
The best way to think about staking is similar to a high yield savings account at your traditional bank. The bank borrows your money in that account, and in exchange you earn some percentage of it back as interest. Similarly in crypto, you’re locking up some token that the network uses, and in exchange you earn some percentage back as interest. The highest interest rate you’ll find at a traditional bank today is 0.5% per year, but in crypto you’re looking at rates between 3-100%+ depending on your risk tolerance.
I’m staking in a protocol called Convex (which I won’t explain here), but by locking up another token called Curve I’m regularly earning 70%+ APR. By staking $20K, I’ll be generating about $1.2K per month; $700 of which goes to the lease payment and another $500 for repaying the loan. Since the Liquity loan has no repayment date and no interest, I can tweak that second amount as needed. At $500 per month, it’ll roughly be paid off in two years.
Endgame & Risk
When it’s all said and done the loan will be repaid and my collateral will unlock– I’ll have my crypto, the car (for the duration of the lease), and I won’t pay any money out of pocket for it. Mission accomplished: but this of course has its risks.
I’ve been doing this for about two months now during a period of extreme volatility (mid-2021). In fact it’s very sensitive to the price of Ethereum and the other assets involved. The value of a particular token could plummet, these rates could dissapear, or even worse your loan could get liquidated: which is when the value of your collateral drops too low. The protocol will sell off your deposit to cover their loss, and close your loan. If the price drops. I’ll have to lock up more Ethereum to prevent this from happening.
An interesting alternative for the down payment would’ve been Alchemix, which takes your collateral and earns interest with it elsewhere, essentially making your loan self-paying. They don’t do liquidations, and it unlocks whenever it’s either paid itself off, or you pay it off manually. This was actually my original plan for the loan portion, but at the time they weren’t accepting new loans.
A lower-risk alternative for the monthly payments could be Coinbase’s new 4% APY pool for USDC. USDC holds stable at $1, so you can do the math on what you’ll need to earn $1,200 per month. If you have a large amount of money to work with, and like the convenience of Coinbase this is an attractive option. Doubly so because Coinbase makes things easy for taxes (interest is taxed as income), and it’s probably where you’ll cash out to a bank account from.
Hopefully this shows that crypto isn’t as far removed from the real world as some of its critics claim. Crypto (like the early internet) has its’ fair share of scams, joke coins, and pyramid schemes, but there’s also an incredible flourishing of new economic models, financial tools, and protocols being built. These in turn provide more access to people, and make the world more interesting.
Yes, it’s high risk. Optimize for adventure, right? But this isn’t investment advice, so if you’re going to do something like this please DYOR.