Stablecoin Yield Farming.

Right off the bat, I’d like to confess that I’m one of those basic people that loves New Year’s resolutions. Uncertainty makes me anxious, which is why I like to have a plan and at least pretend that I have my life in order.

In 2021, we had some pretty clear-cut narratives dominating the market. Unsurprisingly (or surprisingly, if you’re Fed chairman Jerome Powell), economy-crippling lockdowns coupled with unprecedented QE and fiscal spending led to high inflation rates and an asset price bubble that fared extraordinarily well for crypto.

It was fairly easy to play this metagame, but heading into next year, I’m uncertain it’ll be the same, which makes me uneasy. We’re entering 2022 with record-high sovereign debts and central banks signaling possible tapering—two forces that don’t mix well together.

Making any high-conviction bets in this environment is becoming increasingly difficult, which means reducing some volatility exposure may not be such a bad idea moving forward.

On the other hand, the amount of cash in the pockets of institutional players is beyond imagination. Given the fact that they are entering crypto at an increasing rate, it’s reasonable to expect that high APYs will go down to more modest levels, lowering your opportunity as a stablecoin farmer.

So, how does one earn a healthy yield on stables in such an environment?

High Fixed APY with Anchor

Anchor is built on the Terra blockchain. It offers a fixed 19.5% interest on TerraUSD (UST) deposits. That’s high for a fixed APY; how does Anchor achieve it?

The platform accepts staked assets as collateral. Staking earns rewards, so borrowers’ security deposits are generating yield while being locked up on Anchor. That yield gets distributed to Anchor lenders.

For instance, instead of LUNA, borrowers on Anchor must deposit staked LUNA (bLUNA), which currently yields around 8% APY. A user borrowing $1,000 in UST would need to lock up $3,000 in bLUNA, which would generate $240 or 24% yield for the lender from the 8% APY on the collateral.

Since Anchor’s core value proposition is a fixed interest rate on UST deposits, whenever the protocol generates excess yield (more than 19.5%), it stores it in a “yield reserve.” In contrast, when it makes less than 19.5%, it draws from the reserve to make up for the yield shortfall.

While 19.5% fixed interest on stablecoin deposits is beyond awesome (for comparison, that’s Warren Buffett’s average annual return going back to 1965), let’s assume you want to take on some more risk and outsize your gains.

Leveraged Farming with Abracadabra

Abracadabra is a decentralized bank that issues loans against yield-bearing collateral in a dollar-pegged stablecoin called Magic Internet Money (MIM). You can use it to add another level of yield generation on top of Anchor.

When you deposit UST on Anchor, you receive aUST, an interest-bearing token representing your deposit. aUST can then be used on Abracadabra as collateral to borrow MIM. For example, you can use $10,000 in aUST to borrow up to $9,000 in MIM at 2% interest.

You see where this is going. You can now take the $9,000 you borrowed in MIM at 2% interest, swap it to UST, deposit on Anchor for 19.5% interest, and use Anchor’s aUST receipt token to borrow even more MIM on Abracadabra, rinse and repeat.

Luckily, you don’t have to go through all these steps—Abracadabra has this entire process automated in the background. You just choose your desired leverage, deposit UST, and farm.

To follow along, go to Abracadabra, click on the Borrow tab in the top corner, scroll down and click on the UST pool. There you will see “Degenbox Strategy.”

When you enter the “Degenbox,” deposit the amount of UST you want to invest, click on the “Change leverage” button, and use the sliding bar to adjust your desired leverage based on the liquidation price you can personally tolerate.

If you lever up to 5.7 times, you can earn roughly 100% APY on your deposit at a liquidation price of $0.93. The UST you earn automatically gets added to your collateral every week, and your position becomes safer as time goes on.

That being said, I wouldn’t bet my entire net worth on the assumption that UST can never depeg, especially after what happened to it when the market took a nosedive last year.

So if you’re going to do this—be cautious with the leverage. Think of it as adding bullets to a gun you’re playing Russian roulette with—I’d keep the barrel fairly empty.

Liquidation or de-pegging risk also isn’t the only risk you’re taking. You’re depositing money in Abracadabra’s smart contract, which then uses cross-chain bridges to deposit that money into Anchor’s smart contracts.

Smart contracts are vulnerable to hacks, bugs, or design failures, meaning there’s a lot that could go wrong here. Anchor has over $10 billion in total value locked, and Abracadabra has licensed Sushi’s thoroughly audited Bentobox technology, but I would still remain wary.

Finally, this strategy is so popular that the Degenbox or the “UST cauldron” on Abracadabra is almost always empty, meaning the MIM available for borrowing against UST gets consumed almost instantly after every refill.

If you ever wish to try out this strategy, I suggest turning notifications for and following the MIM Replenishes Twitter account to increase your chances for success. Good luck!

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Our research team at SIMETRI is also constantly sharing alpha. So feel free to follow me: Stefan Stankovic, and my colleagues: Anton Tarasov, Sergey Yakovenko, and Nivesh Rustgi.