Cle4ncuts: The Terra Degen Stablefarm Strategy

I’m sure you’re all here for the alpha.

Hello, Dr. Cle4n again here with another wild thought:

What is the best non-speculative yield strategy in DeFi?

I had recently just sold some of my NFT’s, so I had some new capital to distribute. I had grown really tired of speculation and was looking for somewhere stable to store my assets.

Speculation costs valuable time and energy, and I’d rather take a passive strategy any day over a highly volatile one. This is why I sold my NFTs: watching the price daily was driving me nuts.

That being said, my search took me to Terra. Why? Because Terra has a secret yield superweapon hidden in the form of Anchor.

Terra Degen Stablefarm strategy is originally named Anc-Lev, which stands for Anchor Leverage.

Anchor Protocol

For the uninitiated, Anchor protocol is a hybrid savings & lending + staking protocol that turns validator income and loans into stable income for depositors.

Deposits are denominated in aUST, which represents a redeemable portion of the UST stored in Anchor, plus any gains from interest or staking income.

aUST is non-speculative yield asset, and it can be instantly converted to non-yielding UST at a minimal fee, or re-deposited at any time.

It yields close to 20% APR, which is massive compared to equivalent stable opportunities in DeFi, such as Curve’s 3pool stable LP (7.45%) or deposits in CeFi wallets like Celsius, Gemini, or Nexo (9-12%).

I believe that aUST is an undervalued Super Asset™ of the Terra ecosystem. Why do I say this?

• Holding aUST produces no IL.
• Since aUST is a compounding stable asset, its value rises predictably.
• aUST successfully captures the revenue of Anchor in an efficient manner, which includes transaction value from all bondable chains (currently: ETH, Terra).
• UST peg insurance and Anchor smart contract insurance both cover aUST, further removing the risk of any downside.

I knew I had to design a super-strategy to maximize the benefits of Anchor’s aUST.

Anchor does not have leverage function for aUST on its own, but thanks to some of its synergy with another Terra protocol, Mirror, we can make our own.

Background of the Strategy

This strategy functions on four basic truths I’ve observed during my time in Terra, playing with Anchor and Mirror:

1. Anchor always pays positive yield on UST thanks to bonding/borrowing, hence aUST is an always appreciating asset. This can be further guaranteed via insurance.
2. Mirror allows interest-free loans backed by aUST. You only pay a 1.5% protocol fee.
3. There is an oversupply of farmers on Mirror, leading to a price deviation (premium) across most or all mirrored assets.
4. This discourages traders and results in low fee value captured across Mirror Protocol’s mAsset LP’s despite havingdeep liquidity.

Most of mirrored assets (especially mirrored stocks) are sitting idly in Mirror Protocol LP’s, and doesn’t see any significant trading volume. Instead, most of the yield comes purely from MIR emissions.

The situation results in stale liquidity which doesn’t provide much benefit to the protocol, only resulting in the dumping of MIR tokens for UST. Hence, the natural ratio of Liquidity > Trade volume is imbalanced in Mirror protocol marketplace, and begs for an opposing force to right the ship.

We will be that opposing force. But still, we are here to provide balance, not tip the scales. I deeply believe that for any strategy to create lasting wealth, it must enrich the environment it is dependent on.

After all, if any individual action is exploitative, unfair, or otherwise bringing more harm than good to an ecosystem, it will be rejected like a cancer cell by its stakeholders. As we’ve seen with Sushiswap…

NOTE: This is not a Delta neutral strategy. Delta neutral is about hedging risks in two different price directions to “be safe”.

Unfortunately I don’t totally agree with delta-neutral strategy as I feel it has an innate conflict of interest, i.e. you will Short an asset which you mean to Long, and you will Long an asset which you mean to Short.

I feel that this Anc-Lev strategy has much better utilization of the best characteristic of each asset, and using mechanisms for the purpose they are meant to be used.

But if you stick around, you’ll see that there’s still a way to be delta neutral near the end…

Therefore, our strategy must focus on:

1. Creating wealth for all, not just ourselves. LP holders, MIR stakers, LUNA included.
2. Bringing adoption to the Terra Ecosystem.
3. Creating balance, not imbalance, in the markets of Terra.
4. Believing that every market player has a role in keeping the capital of Terra constantly flowing.

How to execute the strategy.

First, find an mAsset that is currently trading above the oracle price.

To do this, go to the “Farms” page on Mirror and look at the ‘Premium’ column.

The higher the premium, the better it is to short. But avoid shorting meme stocks or crypto assets (mETH, mBTC, mDOT etc.).

Knowing this, we will now execute the strategy with our mAsset of choice. My preferred mAsset is gold (mIAU) as it has comparatively low historical volatility, and regularly trades above oracle price based on my observations over the last few months.

Author’s note: In my most recent view, I would recommend only making the 1st or up to 2nd borrow as short farm, whilst completing 2nd or 3rd borrow onwards as an immediate borrow + sell to avoid waiting a long time to execute, as you would miss out on the leveraged Anchor gains.

The next steps are as follows:

1. (Start Capital) We will deposit UST in Anchor (aUST).
2. (1st borrow) We will borrow or short farm our chosen mAsset against aUST, with Mirror. Remember, our goal is not to speculate the asset — The synthetic asset is above peg, and we are simply bringing the price of the synthetic asset down to peg.
3. If we choose short farming, we can earn MIR tokens in the process. We sell the MIR for UST, or keep them as we see fit. However, there will be a 2 week wait for the UST to be unlocked.
4. (Anchor deposit) If you have chosen to borrow, you may immediately sell the mAsset for UST, and deposit that into your Anchor. Remember to keep at least 10 UST to pay transaction fees!
5. (2nd borrow) We will deposit the additional aUST into Mirror Protocol to borrow or short farm again. Sell the borrowed asset for UST or wait for the UST to unlock from the short farm.
6. (2nd deposit) We will deposit the UST again into Anchor Earn. You are now 1.75x long-leveraged on aUST, but do not worry. This strategy has a designed price tolerance which we’ll explain later.
7. (3rd borrow) Again, we deposit the excess aUST into Mirror and borrow or short farm again. It is advisable to stick to just 1 asset to make it easy to calculate and monitor your strategy.
8. (3rd deposit) Again, we borrow more of the mAsset, get the UST, and deposit into Anchor Earn. You are now 1.875x leveraged. We will repeat 3 more times.
9. (4th borrow) Same as before, deposit excess aUST into Mirror, and borrow again. Your collateralization on Mirror should always be at 200% or higher. If it is any less, please ensure that you are depositing all of your aUST into Mirror, and not borrowing more than necessary.
10. (4th deposit) Same as before.
11. (5th borrow) Same steps as before. Your borrow amount at this stage should be quite small now, about 3.13% of your original capital.
12. (6th deposit) Same as before. We are getting close to the end now.
13. (6th borrow) This is the final one. Your borrow amount should only be 1.56% of your starting capital.
14. (Final deposit) Deposit the last of your UST from the final borrow/short into Anchor, and add that too to your collateral on Mirror.
15. Check that your final collateralization ratio in Mirror for your borrow/short is 201.59%. Your final leverage upon reaching this stage is 1.98x, and it is not meaningful to borrow any further.

Now at this stage, I’m sure you have questions. I will try to answer them below.

FAQ

Is it unsafe?

There is always risk in investing. However, I believe we have minimized the downside as such:

• We can insure ourselves against any smart contract exploit of Anchor as well as depeg of UST.
• Even though our current strategy is leveraged nearly 2x, it still has a price change tolerance of 34.39%*, which increase linearly to 61.27% within a year.

*based on liquidation threshold at 150% collateralization ratio (or 67% LTV) on Mirror.

**based on the linear appreciation rate of aUST as the collateral, at 20% per year vs UST. Derived via this formula:

((Liquidation LTV *(aUST Collateral Value*1.2))/Total Borrow)-1

When do we close our short?

As more and more people use this strategy, the mAsset prices go back down to peg, and they become attractive for us to close our shorts.

We buy our shorted mAsset’s back now, using UST earned from our strategy and deposited in Anchor, and take profit by closing the short.

By doing this, we also pay protocol fees to MIR governance contract, which helps buy back MIR, supporting MIR stakers in the process.

However, there is an alternative choice, particularly if you are a fan of delta-neutral.

(Bonus) Delta Neutral farming

If you wish to proceed with delta neutral, don’t close your shorts after market-buying the mAssets needed.

You may free up some more UST from Anchor to form an LP and place it in a long farm. In case the price goes below oracle peg, the long farm APR will rise up and balance this by inviting more farmers.

Once the price has returned to peg, and long APR declines, you can close your short at a profit.

Do not worry about selling your MIR because we are paying protocol fees on our short, generating revenue for them. MIR price will rise as a result, as the fee is used to buy back MIR from the market.

How does this strategy benefit the Terra ecosystem?

All of our actions above help maintain the price peg of mAssets and generate transactions which pays taxes in UST, having a cascading effect of good on the ecoystem:

It generates income for validators, creating more value for LUNA, and demand for UST, which burns LUNA. This in turn creates more value for Anchor which also holds a large amount of bonded LUNA.

If you wish to enhance your strategy, you can also convert your MIR rewards into LUNA to support decentralization, by delegating to smaller validators. This also create more rewards for yourself through LUNA staking.

By bringing premiums closer to market price, we demonstrate the ability of independent market actors to maintain a decentralized marketplace of synthetic assets with true or close-to-true market prices.

Where do we go from here?

As Mirror and Terra develops, there will be more products and opportunities to make a profit. Mirror V2 is only one stepping stone on the long term roadmap of Mirror Protocol, and we will go even further.

As early adopters of the Terra ecosystem, you are contributing to its success by becoming an intelligent investor and market participant. It goes to show that Mirror’s price pegging mechanism is driven by people, not authorities, and is a valuable part of open financial systems.

Having more responsive prices makes Mirror a better place to trade. As more mAssets are introduced, more capital is needed to keep them in check (hence the super high short APRs for newly launched mAssets). So don’t worry if you feel like you are late to the party… we are just getting started.

That’s all for now! See you around, crypto cowboy ~

Be the first to hear of new strategies, make new friends, and improve your chances of finding a job in crypto by joining one of the fastest growing networking communities in TeFi/DeFi: DeFi Desk!

Update: a couple months later, @rebel_defi has come up with this strategy or a very similar one on his own, and made a video about it! Check it out here: https://www.youtube.com/watch?v=fHqpRMccsXQ&feature=youtu.be

Update 2: You can now use my calculator to figure out your Anchor gains from using this strategy!