[Strategy Paper] High-Yield Stablecoin Exotics (2/2)

In the first article of this series, we have introduced a few new platforms that can give a higher yield on your stablecoins, including Harvest Finance, Idle Finance, KeeperDao, Rari Capital. As Defi getting more momentum, there will be new ideas coming out and new projects created; and there will be more mining rewards, from our perspective.

Most of the platforms just give platform tokens directly as you provide liquidity in the form of stablecoins. This is straightforward. Some require staking, which means buying the platform token and deposit into the platform to earn the benefits. This is a bit risky as those tokens of new platforms usually do not have a clear valuation proposition, some even lack purpose. Generally, we do not think buying into a new platform because there’s 100% or more APY on its volatile platform tokens are a good idea — even for a while the tokens look promising.

However, Ethereum is composable. We have earlier discussed Cream, an innovative lending platform, where you can borrow tokens, especially those new Defi project ones. In this case, if we want to avoid the risks, we can use Cream to borrow and take. It’s not always profitable; what we need to do is just some simple calculation.

Let’s take Barn Bridge as an example.

Barn Bridge is a “fluctuations derivatives protocol for hedging yield sensitivity and market price”, per its official website. It’s platform token is Bond, which is trading at US$31 now. We do not opine on the platform itself; one can read about it on the official website or a few liners on Debank.

If we do a quick calculation, Barn Bridge is giving out 32,000 BOND per week (worth US$992k) and gives an APY of 29.7% based on the total liquidity of US$198.5m in the pool for stablecoins (USDC/DAI/sUSD) above. It’s good yield but not the top; and given it’s a new platform, you might not want to risk your stablecoins in this platform, for fear of oracle manipulation.

On the other hand, staking BOND will give a better yield, approximately 149.1%, based on 5,000 BOND per week with a total liquidity of US$8.8m (in staked BOND). Oracle manipulation usually does not affect the platform tokens, so it’s slightly saver than providing stablecoin liquidity.

And we do not wish to have a position in BOND, so we use Cream Finance to hedge it. We simply borrow the amount of BOND we stake and sell it (or stake it directy). Currently, the borrowing rate is 27.02% APY, so we have a 100%+ APY (149.1% — 27.02%) for this operation.

This strategy allows us to repeat the benefits of newly launched platforms, without taking the price volatility of its native platform token. However, as the rewards of Barn Bridge is delivered weekly, we will have to stake BOND for an entire week. The borrowing rate on Cream for BOND may vary, and it’s actually over 200% APY when it’s closer to Barn Bridge’s delivery of weekly rewards. So we have to look at the time-weighted average cost of borrowing, comparing this against the mining reward APY.

This strategy generally works when: 1) a platform provides staking of its platform tokens; 2) Cream provides borrowing of the token. If the APYs work out, a simple strategy can be formed. CEX like binance offers futures for some tokens, which can serve the same purpose of hedging.

For instance, if you are into xSushi (staking SUSHI on Sushiswap to get a cut of the trading commission, 0.05% of the 0.3%), the yield is a volume-driven one and now it’s at 13.9%. If for some reason you believe the trading volume will be up, you can borrow SUSHI from Cream at less than 10% usually or hedge SUSHI in Binance future even for a positive earning. If you short SUSHI in Binance now, you will actually have a 0.0258% gain for the 8 hour (approximately 28% APR). But funding rates do fluctuate as well; usually it’s 0.01% per 8 hour, as the benchmark rate. Putting these two together, you will get a synthetic yield of close to 20% to 40% APY, and are not exposed to market volatility of SUSHI price.

We believe that everyone is creative enough to make use of this strategy and capture market opportunities. Have a good Christmas!

(Serenity Team, 21 Dec 2020)