Product: Basic income + Variable income
Time frame: 1 year
Protocols: Benqi.fi and Yeti.finance
Avalanche is an open source platform, ideal for launching decentralized finance applications that is creating an interoperable and highly scalable ecosystem. Avalanche’s network confirms transactions in less than 1 second, supports the entire Ethereum development kit and allows millions of independent validators to participate in a balanced and equitable manner due to its architecture.
Avalanche has two consensus engines, one optimized for high-performance DAG and Snowman, a fully ordered consensus protocol for smart contracts. Amidst its entire ecosystem we have AVAX , Avalanche’s native token which is used for peer-to-peer (P2P) value transfer, re-purposing and securing the network as a monetary asset in the payment of transactions, and for the creation of new blockchains and subnetworks.
All this composite has made it possible for avalanche to be a great reference in the sector to present a solid network and for finance to be enhanced by its technical virtues. Now the work of the whole avalanche team is focused on empowering Metavers, NFT, games and even bitcoin (thanks to a browser wallet with a bitcoin bridge), thus facilitating the user’s web 3 experience. I will focus on the defi part of avalanche for this article, specifically on 2 protocols, a currency and a bearish scenario such as the current one, with the intention of polishing our stables.
The protocols are Benqi.fi (@BenqiFinance) and Yeti.Finance (@YetiFinance). Little to say about Benqi.fi, known by all active users of the avalanche network, but we can define it as an improved lending protocol like Aave or Compound. Where I want to emphasize a little more is in the second protocol, Yeti Finance. Thanks to it, this strategy is possible by doping my stable coins, converting them into strategic assets with high profitability.
Yeti is a relatively new secured lending protocol in Avalanche, built with the best of AAVE, Beefy and Abracadabra. It is mainly based on cross-margin lending, a peculiar and innovative lending as it has a flexible basis for adding both volatile assets and stable currencies in a basket and using it as collateral, thus eliminating individual debt positions and borrowing against all assets at the same time.
On the other hand, it allows for higher leverage, up to 11x in core assets (LP tokens, equity assets) and 21x in stable assets. The management applied has a 0% interest rate, where only a fee is paid when depositing the assets in the basket. This protocol allows us to earn returns through borrowing (Yusd against the value of your portfolio), stake (Stake YETI to earn veYETI which can increase LP rewards, stability or reduce fees) and through a pool (19% in $YETI rewards for staking YUSD or Curve LP tokens).
STEP 1 – Borrow USDt.e on Benqi.fi, as right now it has an incentive of 5.38% APR per annum (supply APY + distribution APY).
STEP 2 – Borrow USDC, which has an applied interest per loan of -2.23%.
STEP 3 – Now deposit those USDC at benqi.fi at 3.57% APR per annum (this is where Yeti’s real strategy and potential begins) and use the immediate liquidity available to us for making that deposit in the form of the synthetic asset qiUSDC.
In summary, in these first 3 steps we are using benqi.fi as a commercial bank by deposit / loan to manage and monetize my capital.
STEP 4 – Place the qiUSDC in Yeti.Finance as collateral to borrow YUSD, its stable currency. To do this you must open a secured debt position called a treasury (the minimum amount needed to create a treasury is $2,000). Recall that by depositing the asset qiUSDC (which is a stable asset) I can leverage myself in this position X21 times (loop).
NAVIGATORS WARNING, RISKS
It is important to take into account in any financial operation, both the operating costs and the costs associated with the use of the protocol to avoid surprises. In this case, Yeti.Finance imposes a loan fee of 0.5% in YUSD and a deposit fee of 0.293% in qiUSDC.
This is not the point of the article, but I also want to make clear to you the risks inherent in lending, the most sensitive of which is settlement. If you are borrowing, liquidation is always hanging over your head (even if it is with stable currencies, never take anything for granted, everything can go wrong in 5 min), and if you are borrowing collateralized with volatile assets, the possibility of liquidation is very real and instantaneous.
Yeti.Finance has a mechanism to ensure that the entire supply of stable currencies remains fully collateralized. They close or liquidate treasuries that fall below the minimum collateral ratio of 110%. To do this Yeti has two modes of operation in liquidations, normal mode and recovery mode.
During normal mode, you can be liquidated if your treasure guarantee is below 110%.
Recovery mode is initiated if Yeti.Finance falls below 150% of the total collateral rate, at which point if your treasury is backed by assets that are not stable, they can be liquidated below 150%.
Since I am working with stable currencies (I repeat, there is a risk of delinking both USDC and YUSD, especially for the latter, since it is a very new asset within the sector), the risk of delinking is negligible. The best way to understand this crucial issue is a picture. If you like what you see in terms of parity, go ahead, if not slow down and go for another strategy, it is not worth the risk in a market as full of opportunities as the crypto market is.
Finally, it is very important and critical to verify the degree of security to which the code has been subjected, because even if we talk about protocols, hash, smart contract, custodian, etc., we are facing a financial institution, therefore you are a target for attacks. Be aware that we compromise our capital continuously while we are working with any protocol, in this case with Benqi and Yeti.
STEP 5 – The loop starts, it’s time to exchange YUSD for USDC.
I take the YUSD just received from Yeti Finance and exchange it in Curve.fi (I do it in Curve normally when I want to exchange stable currency, as I get the best price for slippage and liquidity) for USDC.
Then I take back USDC to Benqi to repeat Step 1, back to Yeti to repeat Step 4, and so on as many times as necessary until I get the target annual return I want for my strategy.
STEP 6 – Math
Total APY on Benqi: 3.37%
Yeti’s rate of return: 20%
Deposit fee: 0.293%
Lending fee: 0.5%
Yeti LTV: 95% (creating an over-collateralized treasury of 105%)
Calculation of real return per USDC deposit in Benqi:
Total APY is 2.87% in Benqi, from this yield we have to subtract Yeti’s 20% lending fee.
Real Yield = 0.8*3.57%
RR = 2.85%
Calculation of the leverage (or loops) to be performed:
If I wish to optimize my capital until I reach a 50% annual APR, I must do the same operation 18 times.
Leverage = 18*2.85 = 51%
A = 18
Deposit commission cost calculation:
CCC = 0.293 % * 18 loops
CCC = 5.28%
Calculation of Rates of Return per loan:
0.5 % deposit fee * 18 loops = 9%
A calculated yield of 51% under the USDC asset, a risk-free passive yield of 5.38% under the USDT.e asset, and calculated fees to reach that target are 14.28%.
My net return will be 42.1%, which for a stable currency is not bad at all.