Who doesn’t love the opportunity to earn high yields on stablecoins?
With the introduction of Edge Protocol, it is now possible to earn higher than the typical 19–20% APY on UST through Anchor Protocol.
What is Edge Protocol?
Edge Protocol is a money-market-as-a-service (MMaaS) provider on the Terra ecosystem.
This means that Edge offers both:
- A community-based, pool-creation platform.
- A portal giving retail users access to various lending pools.
However, Edge Protocol is new to the scene and currently is in beta mode.
With their beta launch, Edge is at present only offering the following options:
- Collateralize assets to borrow.
- Leverage on long positions.
- Open short position.
Assets in the Genesis Pool are UST, aUST, LUNA, LunaX, bLUNA, ANC, MIR.
For the purpose of this tutorial, we are going to focus on UST and aUST.
How to earn 67% annual percentage yield (APY) on UST;
Step 1) Supply UST to Anchor Protocol in order to receive aUST in return. This can be done in the Terra Station wallet directly by selecting “Earn”.
Step 2) Head to Edge Protocol and select “Go To Beta Launch” in the top right and connect your wallet.
Step 3) Look for aUST in the supply market and click “Supply”.
Enter the amount and click “Supply” when you are ready to submit the transaction. Then, you will be asked to confirm the transaction in your wallet.
Keep in mind that once you supply the aUST it will no longer show in your wallet because it has been deposited into Edge Protocol.
Step 4) Scroll down to the “Borrow” section and select to borrow UST.
Next, you will have to enter the amount you want to borrow. You can enter the amount directly into the text field or drag the slider to your targeted risk ratio. Be aware that the higher your LTV (loan-to-value ratio) is, the risker your position will be. This opens the door to potentially being liquidated.
Step 5) Take the UST you borrowed and deposit it back into Anchor and repeat these steps as many times as you would like.
How To determine APR
There are a few factors at play that determine how much % annual percentage rate (APR) you are able to earn with this strategy.
First, each asset has a “collateral factor”. In the case of aUST, the collateral factor is 90%.
This means if I deposit $1,000 of aUST, my maximum borrowing power is $900.
($1,000 x 90% = $900)
There is also a “borrowing factor” for each asset. aUST has a factor of 95% as well as a 10% fee reserved for the Fund Insurance fee.
If I wanted to borrow the maximum amount available to me, I could borrow up to $769.5 in UST.
($900 x 90% x 95% = $769.5).
So, in this example, if I started with $1,000 and borrowed a total of $769.5 to deposit back into Anchor Protocol earning ~19.5% APY, I would be earning about $345/year, or 34.5% APY:
($1,000 + $769.5 = $1,769.5)
($1,769.5 * 19.5% = $345)
If I repeated this process 5 times, I would end up with a total of $3,437 in Anchor Protocol earning ~19.5%.
This works out to an APR of 67% on the original $1,000 investment.
One important caveat to add is that Edge Protocol offers interest on supplied assets, and charges interest on borrowed assets. The interest rates fluctuate depending on the utilization rate.
The supply interest on aUST is currently 2.16% while the borrow interest rate on UST is currently at 16.44% netting a total interest rate of 14.28% on the borrowed UST.
So, in our $1,000 example, the total APR you would be earning after 5 loops would be around 55%.
Your results will vary depending on your LTV, current supply and borrow interest rates, and on how many times you decide to loop this strategy.
Risks involved
It is always important to understand the risks involved with an investing strategy before deploying your capital.
For this particular strategy, there are three main categories of risk:
Protocol risk
Anytime you are dealing with a DeFi protocol, smart contract risk is involved.
The Z Institute has officially audited Edge Protocol, but there’s always the possibility of a bug or vulnerability which compromises participants’ funds.
Lender risk
In this strategy, you will be lending your aUST to Edge Protocol. There is a possibility of a “bank run” or a panic-inducing event that could cause all lenders to withdraw their deposit from the pool simultaneously.
Edge Protocol would have to pause the operation since they cannot give all the capital out simultaneously and your lent assets would be illiquid.
Borrower risk
In this strategy you will also be borrowing UST from Edge Protocol. This strategy involves leverage.
There is the possibility that the borrower doesn’t repay or doesn’t supply more assets in time before reaching liquidation.
The liquidation risk means that borrowers will lose some of their collateral and liquidity incentives to the liquidators.
Conclusion
Although Edge Protocol is just in beta, it offers an intriguing Terra-native strategy to maximize UST returns.
If you give this strategy a try, be sure to start with a small amount before working your way up.
Thank you for reading!
Contributed by Jacob Van
Medium: @jacobavan
Twitter: @jacobavan_
