The Terra ORIGAMI Strategy —How to multiply your money with Terra, by DrCle4n
There’s an old saying that you cannot fold a piece of paper more than 7 times — and apparently, if you fold it 103 times, it would be bigger than the known universe. Unfortunately someone tried doing this with a hydraulic press, and the results were explosive.
That brings me to the question: How many times can you fold your investment capital before it explodes? Or in other words, what is the maximum yield can you squeeze out of a given amount of capital on Terra?
This led me to develop my ultimate Terra strategy that I’ve been thinking of ever since my first conversation with Danku_r, who put up a challenge for anyone to come up with a better strategy on Mirror V2.
Of course, this is not financial advice and you should DYOR, and overall let me outline the most important things to take note:
- This strategy employs the use of crypto-loans, as such your position can be at risk of liquidation (although we will be managing this risk).
- This strategy employs a short, meaning if the shorted asset price climbs more than a reasonable amount, you can be “short squeezed” or liquidated.
- This strategy may be adapted to other chains, but for now it is only tested on Terra by myself.
In each step, I will break down the components of the strategy, including:
- Assets exposed — What asset prices will you be exposed to. These are the prices you need to watch.
- You earn — What yield can you get, and where it is coming from.
- Play it safe —Tips on how to minimize your risk (of liquidation) at this step.
- Degen tips—Ways to maximize your potential reward at this step, with reasonable increased risk. You are responsible for your own actions.
- Example — I will give an example with $ amounts to make it easier to follow.
Alright! Let’s get started.
The First Fold
In our first step, we will be depositing the entirety of our starting capital in Anchor as collateral. This allows us to borrow against it to create yield via a negative interest loan on Anchor. It also has the effect of adding a 1.5x multiplier to our capital (if we borrow up to 50% LTV).
Protip: At times, it is more advantageous to buy bETH and bLUNA from Terraswap rather than bridging and bonding the assets yourself. bLUNA has a lower trading value than LUNA, but provides the same collateral value 1:1.
This increases the efficiency of your collateral by whatever % that bLUNA is cheaper. Price checker.
Assets exposed: ETH, LUNA, UST
You earn: ANC tokens. At time of writing, the rate is 37.75% APR. These are tokens minted by Anchor protocol to incentivize borrowing. This is of course halved (as you can only borrow up to half of your capital), so the real APR is around 18–19% compared to your whole capital. Still pretty good.
Play it safe: Many people recommend keeping your LTV at 30% or below in case of market crashes. I highly recommend doing so if you are not experienced.
Degen tips: Liquidation only occurs when LTV is 60%, so there’s actually a bit of headroom even if you borrow the maximum 50%. Also, at the time of writing, Anchor liquidation fee has been set at 5% due to offset a potential conflict of interest due to centralized price feeds.
Example: e.g. Starting capital of $10,000 — deposit $5,000 of bETH and $5,000 of bLUNA into Anchor protocol. I borrow 50% of my value, which gives me an additional $5000 in UST.
Although my portfolio value is still $10,000 (with debt), my ‘effective portfolio’ value is now $15,000:
- $5,000 of price exposure to ETH.
- $5,000 of price exposure to LUNA.
- $5,000 of UST that I can do whatever I want with.
You will need to repay this $5000 of UST at some point, but there’s no due date. There will be an interest rate charged (our repayable amount will grow), but this is compensated by the rewards we will be getting later.
So in order to optimize this strategy, we need a way to generate interest and yield that is greater than our payable loan interest. The interest rate to beat currently is 25.45%. But with our anchor yield of 37.75%, we come up to a net of +12.29% positive APR.
The Second Fold
In our second step, we will now deposit our loaned UST into Anchor (leaving just a few $ to pay fees). This effectively stretches our borrowed capital by 20% (Anchor guarantees close to 20% yield per year).
Protip: After depositing UST, you will get aUST. You may notice that your aUST balance is less than the UST you put in (e.g. I put in $1000 UST, I get 918 aUST). Don’t panic because this is normal — aUST is worth 1.089 times UST (this number will grow over time).
That’s simply how yield bearing tokens work. Interested in this topic? Chat with me on Twitter.
Assets exposed: UST
You earn: UST. At time of writing, the rate is 19.57% APR. These are paid out from Anchor’s stablecoin treasury and compound automatically. They are not minted by Anchor, and are pegged to the dollar via Terra LUNA’s currency mechanism.
Play it safe: You can insurance on UST peg, as well as on Anchor smart contracts via various providers on Ethereum mainnet. You will need some ETH to purchase insurance and pay the gas fees. Insurance premium can be around 2%-4% annually on the high end, or below 1% for a more reasonable fee. Do take this into account as it does affect your yield projection.
Degen tips: Anchor has a decent track record. If you wanna skimp on the cost of insurance, you can. But honestly I would rather hedge my bets and get it anyway. Better to have some than none.
Example: e.g. I deposit my $5,000 of borrowed UST into Anchor Earn and watch it grow based on the interest paid by Anchor.
If you’re still following, we are now earning:
- +12.29% due to negative interest on our Anchor loan
- +19.57% from Anchor Earn (paid in auto-compounding UST)
That puts our total return at 31.85% of $5000. This means that on a daily basis, we are earning $4.36, or $30.55 a week, or $122.20 a month.
Our effective capital is still $15,000:
- $5000 in ETH exposure
- $5000 in LUNA exposure
- $5000 in aUST, which grows at a fixed rate close to 20% a year
But I’m to do something a little different. Since we can insure our aUST position (against depeg and against smart contract failure), and the yield is a fixed yield that is guaranteed by Anchor (paid from treasury, and not minted rewards). I will now count aUST’s own yield as its principal.
If this is too confusing, just think about this:
When ETH price goes up 10%, your $5000 in ETH will be worth $5500.
When LUNA price goes up 10%, your $5000 in LUNA will be worth $5500.
We know aUST price will go up, because of how Anchor Earn works, and we know we are insured against the loss of its value and exploits thanks to various insurers.
This is regardless of how well or badly the market performs, which makes it an independent store of value. Whether BTC is $50,000 or $25,000 tomorrow, it doesn’t affect the aUST yield benchmark of 20%. This is super important.
Having this guarantee means that we can count aUST as a capital multiplier (assuming we never withdraw for 1 year). This is basically the idea behind tokenized yield, here’s an article I wrote about it if you’d like to read more.
And so, by taking aUST’s fixed yield into account, here is our new effective capital:
Our effective capital is now $16,000, which is 1.6x our initial investment of $10,000:
- $5000 in ETH exposure
- $5000 in LUNA exposure
- $6000 in aUST (with 1yr fixed capital appreciation)
The Third Fold
In our third step, we will now be borrowing against our aforementioned aUST. Thanks to Mirror V2, this opens up a critical pathway for value extraction.
Remember our discussion earlier that aUST is an extremely powerful and overlooked store of value. By comparison, most stable deposits on CeFi apps (Celsius, Nexus, BlockFi) pay around 8–12% interest on stablecoins. Anchor’s aUST pays up to 20%.
You could deposit your stables onto Uniswap for about 12–15% APR. But you’d need to pay gas fees, which eat away from your profit. Decentralized lending platforms like AAVE can pay you up to 6–11%, variable interest based on market demand for their services. There really is nothing comparable to Anchor on Terra.
Terra started with just a few dapps:
Terra Station — the wallet and validator delegation protocol.
Anchor — the savings protocol.
Mirror — the stocks trading protocol.
Terraswap — a behind-the-scenes token exchange protocol.
Over time, they evolved very closely and developed a close symbiotic relationship:
Mirror stocks bring demand to the Terra ecosystem, which earns more fees for Terra Station validator nodes and delegated LUNA, which brings income to Anchor Earn depositors, and encourages more bonding of LUNA, protecting its value. Terraswap powers all of the trades behind-the-scenes as the primary decentralized exchange.
Knowing this relationship critical for our third fold. Now that Mirror V2 has opened up the possibility of using aUST to borrow stocks, you can effectively borrow against future yield.
If this sounds confusing, do take a look at my aforementioned article about tokenized yield.
Now to execute our third fold — we must deposit aUST into Mirror to borrow an mAsset (mirrored asset). mAssets can be in the form of stocks (Tesla, Amazon, Microsoft) or tokens (ETH, BTC, DOT). But we’ll want to stay away from anything that’s volatile (it is a loan after all).
My first pick is mIAU (iShares Gold Trust). This is an asset which tracks the price performance of gold. Essentially, purely as an investment, it is equal to buying, or owning, physical gold.
I have my reasons for choosing gold as an asset to short. Mainly, it is that the asset price appreciation is less than 20% per year. (Historically, it is +35% over 5 years, and -7.58% based on the past year). You can pick any asset that you think will perform less than 20% per year for this step, but unless you are well versed, I would recommend taking gold.
The steps are simple:
- Head on over to Mirror Farms
- Click on mIAU ‘short’
- Select aUST as your collateral. Add the maximum amount.
- Ensure your collateralization ratio is 200% or higher.
- Confirm! (you can only do this during market hours)
Assets exposed: mIAU (or the mAsset of your choice)
You earn: MIR tokens. At time of writing, the rate is 52.45% APR. These are tokens minted by Mirror protocol to incentivize liquidity and price pegging. I wrote a tweet some time ago explaining how this works:
In addition to MIR tokens, you will receive the UST amount of the asset you shorted, but it can only be claimed after 2 weeks. There’s several things you can do with this UST:
- Deposit into Anchor.
- Withdraw to an exchange and sell it for cash money that you can use in your real life.
- Buy more LUNA or ETH, or your other favorite tokens.
- Repay some of your loan on Anchor.
- Swap half to mIAU and provide liquidity for a long farm on Mirror.
- Swap half for MINE and farm up to 200% APR on Pylon.
- The list goes on and on….
Play it safe: Keep your collateralization value high. I like to put 230–250% when dealing with a volatile asset like mVIXY. With gold, you could probably safely get away with 200%.
An important note:
Liquidation on Mirror is based on oracle price (tracked price of the real world asset), not mAsset price. This means that if the price of the mAsset surges on Mirror, but not in the real world, you won’t be liquidated.
However, to repay your short debt, you will still need to buy mAssets from the Mirror market, which means you’ll pay the mirror market price. In other words, as long as there is still a price gap (mIAU price > real IAU price), you’ll want to continue short farming rather than close your position.
This also means that you can perform a profitable arbitrage by short farming or borrowing mAssets whenever there is a price premium between the mAsset and real world price, with higher capital efficiency, and relatively lower liquidation risk.
Your efficiency increases equal to the price premium (5% premium = +5% efficiency).
Degen tips: Instead of short farming, you can directly borrow which means you don’t have to wait 2 weeks for the UST. Do this if you would rather do trades with the UST or cash it out immediately than waiting for it to unlock. You will not get MIR tokens if you do this though.
I have $5000 worth of aUST. I deposit this as collateral on Mirror, and borrow $2500 worth of mIAU (worth $2625 if premium is 5%).
- if I used short farm — I will wait 2 weeks to collect $2625 UST. In the meantime, I will be gaining MIR Rewards indefinitely (this is variable based on the price premium). Higher premium = more APR.
- if I used borrow — I will get $2625 UST immediately, which I can then use to increase my yield further, or repay a loan, or withdraw it for cash on an exchange, etc.
Assuming that you have waited 2 weeks to collect your UST, or you have used borrow to collect it immediately, here is the value of your overall portfolio now:
$5000 in ETH
$5000 in LUNA
$6000 in aUST (including fixed capital appreciation over 1yr)
For a total of $18,625, which is 1.86 times your original capital of $10,000.
In other words, your capital is working 186% harder than when you started without this strategy.
1st fold — borrowing against collateral of bETH or bLUNA (~ 150% efficiency) + ANC yield
2nd fold — depositing UST loan (~ 160% efficiency) + UST yield
3rd fold — borrowing against your aUST (~186% efficiency) + MIR yield
4th fold — optional, you can farm an LP like MINE-UST or bLUNA-LUNA. Check Terraswap returns here.
- Anchor loan (paid in ANC) ~37%, or ~18.5% overall
- Anchor Earn (paid in UST) ~ 20%
- Short farm yield (paid in MIR) ~variable
- bLUNA and bETH appreciation
- Gold depreciation
- (optional) farm UST in any LP (paid in reward token) ~ 45–200%
After testing this out myself, there are some additional considerations to take:
- This strategy works best for long term. If you’re looking for instantaneous gains, this strat is not for you. It is recommended to use this strategy in terms of 1-year or longer.
- There will be a closing fee charged for repaying your short which amounts to 1.5%. I’ve also found that market buying your asset on Mirror tends to have a markup due to the market premium, and this ended up to be another 0.5% of cost for me.
- It is important that you keep your collateralization ratios in check. Gold rarely exceeds single digit growth, but it is still best to hedge yourself against possible market events (presidential elections, economic downturns, market mania) that causes volatile rise in gold prices.
For more info about the asset, read here.
- Your gold short will only generate revenue as long as the market price is above oracle price. Market price means the price of the mAsset in Mirror. Oracle price means the real world price of the mimicked asset.
Consequently, remember these rules of thumb for shorting:
- When it’s good to close, it’s bad to farm, it’s bad to short. (market price is at or lower than oracle price)
- When it’s good to farm, it’s good to short, it’s bad to close. (market price is above oracle price, asset trades at a premium)
That’s all! This is quite a complicated strategy, but your overall gains should be immense due to the effects of capital ‘folding’.
Without adding a single dollar of additional capital, we’ve added multiple sources of yield and profit to your position.
If you have any questions at all, please feel free to hit me up. I’m still in the process of simplifying this, but I’m happy to say that I have tested it on Terra mainnet and seen some good results.
Personally, for the finishing touch, I like to split the UST gained at the last step ($2625). Half of it, I withdraw as cash, which I used to buy my brother a new phone (he has been using the same broken Oppo for 5 years), and to stack a bit of spending cash in my bank.
The other half, I leave it as a MINE-UST LP to gain MINE tokens. You can also deposit it in Anchor, or into Pylon to farm additional tokens. Or use it to trade some tokens on your preferred exchange. That is the beauty of the last step of ORIGAMI strategy, you can customize it to your own preference.
If you’d like to kick me a referral reward, use this link when staking your ETH in Lido (6% APR)!
That’s it for now! Do talk to me, reach out on Twitter for help if you need and I’ll be happy to spare some time to answer. Peace!