Posts

Exploring Ecosystems 03 - Minting Stablecoins by Leveraging Interest-bearing Assets

avatar of @phul
25
Phil
@phul
·
·
0 views
·
4 min read

Introduction

Traditionally, stablecoins exist in three different forms:

  • Backed 1:1 by whatever the stablecoin represents, such as USDC.
  • Overcollateralized by assets deposited into a protocol, such as DAI.
  • Algorithmically stable, with its value backed by another asset, such as UST.

The main risk of stablecoins is depegging, and the first two forms of stablecoins have shown to be fairly resilient when it comes to maintaining peg. Algorithmically stable coins can be hit or miss, which can depend on how exactly the algorithm is designed to maintain peg. UST has been incredibly successful with maintaining the peg to the dollar, while other examples like IRON have failed.

For now, we will be taking a look at stablecoins that are minted by providing assets to a protocol. There are a long list of coins that exist like this today: DAI, MIM, MAI, and others. These protocols function by possessing assets that are worth more than the amount of stablecoins that exist on the marketplace.

The benefit to the user is significant: they can continue to hold their cryptocurrency, while being able to produce a stablecoin that can then be used however they see fit. The risk to the user is also significant: a decline in value of the underlying assets can cause a user to be liquidated. This results in their assets being sold to cover their debt. This happens frequently when the market takes a nose dive, usually during a flash crash.

While the risk is there, generally, liquidation can be avoided through responsible borrowing, and keeping a close eye on your asset and borrowing balances.

Interest-bearing Assets

I'll be describing an interest-bearing asset as an asset that grows in value as time goes on, outside of price speculation. Some examples of such assets could be:

  1. A position within a liquidity pool, which grows as swaps are made, and fees are paid out to the liquidity pool providers.
    For example, if we deposited $1000 into the CUB-BUSD LP on CubFinance, we would be given LP tokens that represent that $1000. Even if the price of CUB is the same one year later, the swaps made within the pool would have made our position grow.
  2. A deposit into a vault, which grows as those assets are deployed in other protocols.
    For example, we could deposit $1000 into the CAKE-USDT LP on PancakeSwap, and then take those LP tokens and deposit them on Beefy. Beefy would then provide you with mooCakeV2CAKE-USDT tokens, which represents your share of the Beefy vault. Since Beefy automatically compounds yield in the vault, your share of the vault will become more valuable as time goes on.

Coming Together

Now, we've covered two important pieces of information:

  • Stablecoins can be minted, and reliably hold peg by overcollateralizing those stablecoins with assets.
  • Assests exist that appreciate in value, outside of speculation.

The result is that more sophisticated protocols, like abracadabra, and QiDao, are allowing users to mint stablecoins (MIM, and MAI), by depositing interest-bearing assets into the protocol.

This completely changes the value proposition of overcollateralizing your assets. Previously, you'd have to miss out on potential yield by providing your assets to a protocol. Now, you can continue to generate yield on the underlying assets, while being able to mint stablecoins as well.

An Example

Let's pretend that you are very bullish on Fantom (FTM), but would like to borrow some stablecoins against your Fantom to do something else with.

You can take your FTM, and wrap it into WFTM. You can then take your WFTM, and deposit it into the yearn.finance vault. Vaults represent strategies that yearn has created that deploy your assets in various ways. When you deposit into a yearn vault, yearn provides you with tokens that represent your deposit. In this case, you would be issued yvWFTM. These tokens hold value, as you can take your yvWFTM back to yearn, and exchange them for your deposited WFTM.

The most recent APR for yvWFTM sits at a cozy 85%.

Now, abracadabra allows you to mint MIM by providing your yvWFTM as collateral on the protocol.

We deposit yvWFTM on abracadabra, and borrow 50% of our deposit (to minimize liquidation risk) in MIM. abracadabra charges a 2% annual interest rate on loans.

We can then take our MIM, and do anything we want with it. If we wanted to minimize risk, we could swap half for another stable coin, and then deposit it on something like Beefy. Currently, Beefy even has a single asset vault for MIM, which pays out a 62% APR.

To shorten that up:

  1. Deposit WFTM onto yearn and earn 85% APR.

  2. Borrow MIM against our yvWFTM, and pay 2% APR.

  3. Deposit MIM onto Beefy, and earn 62% APR.

Summary

Using vault deposits to mint stablecoins means you are getting paid to borrow many times over, and being cautious means you can benefit while minimizing liquidation risk.

While abracadabra was the first application I found that allowed for this strategy, Qi Dao plans to introduce the ability to borrow against Beefy deposits on Polygon, Fantom, and Harmony soon:

I am sure DeFi will continue to introduce more and more fascinating ways to generate yield as time goes on.

As always, be sure to manage your risk properly.

Posted Using LeoFinance Beta