Aptos DeFi Ecosystem. Part 1. Lending Markets.

Educational Content: How to Earn on Your Assets Using the Lending Protocols of the APTOS Ecosystem?

Aptominglet #211. Aptos NFT.

Investments in DeFi always come with risks, so be cautious! Within our topic, three main risks stand out: smart contract hacks, oracle errors, and bad debt risk.

Basic Concepts

Lending markets in the Aptos ecosystem are decentralized platforms where users can earn interest on their assets or obtain loans using their cryptocurrencies as collateral. From the network’s perspective, lending markets help increase internal liquidity and TVL (Total Value Locked).

To understand how the protocols work, it is necessary to define a couple of important terms:

1. Loan-to-Value (LTV) — This is the ratio between the loan amount and the market value of the collateral. For example, if you borrow 50% of the value of your cryptocurrency assets, your LTV will be 50%. This metric is important for assessing the risk level of the loan.
2. Health Factor — This is a metric that reflects the safety of the loan. It is calculated as the ratio between the value of the collateral and the total amount of debt. The higher the Health Factor, the safer the loan is considered. If the Health Factor drops below a certain level, for example, due to a decrease in the market value of the collateral, measures such as collateral liquidation may be taken to cover the debt.

Lending Platforms and Their Mechanisms

According to the DefiLlama service, we have the following platforms:

1. Aries Markets;
2. Echelon Market;
3. Aptin Finance.

It is important to note that you might be familiar with other protocols, such as Superposition and ABEL Finance. However, we will not consider them at this time due to their low TVL and insufficient time on the market to prove their reliability.

Mechanics of Aries Market Protocol

• You can deposit any amount of assets as collateral;
• The loan amount depends on the value of the collateral, available liquidity, and the Loan-to-Value (LTV) ratio mentioned at the beginning of the article. For example, if you have assets worth $1000 and the LTV ratio is 80%, you can borrow $800. The easiest way to find out the LTV is to click on the selected asset and find the label ‘Maximum LTV.’ Below is the formula for calculating LTV (for more advanced readers);

• It is prohibited to use the same asset as collateral and to borrow against it;
• The most important point. Pay close attention to your Health Factor; when it reaches a certain value, your collateral assets will be liquidated to cover the loan. You can also view the liquidation threshold in the same window where the LTV ratio is provided. When you borrow against correlated assets, such as APT and thAPT, the risk of liquidation decreases due to synchronous changes in the prices of these assets. However, in the case of correlated assets, your position may be liquidated if: 1) there is a deviation in asset prices from the norm (oracle issues), 2) the loan becomes too long-term (despite stable prices relative to each other, the interest accrued on the loan gradually increases the debt amount, affecting the Health Factor). The E-mode is available.

Aries Market. USDT (Layer Zero)

Echelon Market Mechanics

• You can deposit any amount of assets as collateral;
• The loan amount depends on the value of the collateral, available liquidity, and the LTV ratio. In E-mode, you can increase the percentage of borrowed funds;

Supported Assets. Echelon.

• Using the same asset as collateral and borrowing against it is allowed;
• Liquidation occurs if the borrower’s LTV exceeds the Maximum LTV.

Aptin Finance Mechanics

• You can deposit any amount of assets as collateral;
• The loan amount depends on the value of the collateral, available liquidity, and the LTV ratio;
• It is prohibited to use the same asset as collateral and to borrow against it;
• For each wallet, the Liquidation Threshold is calculated as the weighted average of the collateral assets’ Liquidation Threshold values and their respective values. If the Health Factor is < 1, your position may be liquidated.

Creatus #1652

Profit from lending protocols

In addition to the traditional lending of assets to other users, there exists a strategy known as cyclical borrowing. Cyclical borrowing strategies can be further subdivided into four sub-strategies.

1. Long: We collateralize APT tokens, borrow USDT, exchange the borrowed USDT for APT tokens, and then put those acquired APT tokens back into collateral. In case of APT token price increase, we earn interest for holding tokens as collateral and benefit from the price spread. There’s a significant risk of liquidation!
2. Neutral: We collateralize USDC tokens, borrow USDT, exchange the borrowed USDT for USDC tokens, and then put those acquired USDC tokens back into collateral. There’s a low chance of liquidation, but it still exists due to the accrued interest on loans.
3. Short: We collateralize USDT tokens, borrow APT, exchange the borrowed APT for USDT tokens, and then put those acquired USDT tokens back into collateral. In case of a decrease in APT token price, we earn interest for holding tokens as collateral and benefit from the price spread. There’s a significant risk of liquidation!
4. Cross: This strategy combines native and LP tokens, and involves using multiple protocols. For example, we start with 100 APT tokens, swap them for 100 thAPT tokens in the Thala — Liquid Staking protocol, then stake the thAPT tokens for sthAPT tokens. We collateralize the obtained sthAPT tokens in the Echelon protocol and borrow APT tokens against them. We exchange these borrowed APT tokens for thAPT tokens and again obtain sthAPT tokens through Liquid Staking. These obtained sthAPT tokens are again put into collateral in the Echelon project. In the end, we interact with multiple protocols, achieve high swap volumes, earn protocol points, and increase profitability on the base asset. According to my calculations, at the time of writing the article, your yield is 30% in APT tokens with low risk of liquidation, as the staked LP token sthAPT constantly increases in price and both assets correlate with each other.

Thala-Echelon strategy.

In conclusion, I would like to announce a series of articles dedicated to the DeFi sector of Aptos. In addition to lending protocols, we will explore liquidity pools, liquid staking, the DEX ecosystem, and much more.

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