Discussion Amendment Proposal YIP-003 (Liquidity Baking Token as collateral)
Dear youves community
Happy holidays!
After the youves platform has been a bit more than five months on the mainnet, there are still loads of improvements to be made. We strive for a more formal process for these kinds of changes, with the current multi-sig driven governance process and also with the pending change to a process which is fully driven by YOU token voting.
Having said that, after some brainstorming in the days before Christmas we realised that there is a possible change to be made, which would be very interesting indeed.
The change in question is using the tokens of the tez-tzBTC liquidity baking (https://tezos.gitlab.io/alpha/liquidity_baking.html) as collateral for vaults minting uUSD. The terms would be equal to using tez as collateral (300% target collateral and 200% emergency collateral level).
This would offer two immediate benefits:
- The currently unused liquidity baking tokens could be used productively on the youves platform
- Given the current high yields in liquidity baking, this would allow for trading strategies with some very interesting potential returns for people who have not been using liquidity baking so far. See the calculations below.
For these calculations, we assume a small size without impact on the market.
- notional XTZ 2,083 (=USD equiv 10,000)
- use XTZ 1,044 (=USD equiv 5,010)
- pay swap fees XTZ -2 (=USD equiv -10)
- sell XTZ 1,041.66 (=USD equiv 5,000)
- vs buy tzBTC 0.10 (=USD equiv 5,000)
- stake liquidity baking XTZ 1,041.67 (=USD equiv 5,000)
- stake liquidity baking tzBTC 0.10 (=USD equiv 5,000)
- sum staked (=USD equiv 10,000)
- staking APR 69% (=USD equiv 6,867)
- mint uUSD 3,333 (=USD equiv 3,367)
- receive YOUs p.a. for minting uUSD 249 (=USD equiv 314)
- pay uUSD minting fee 2% (=USD equiv -53)
- pay uUSD lending fee 8% (=USD equiv -258)
- stake YOUs ongoing as received
- receive YOU staking rewards 7% (=USD equiv 9)
- sell uUSD 1,662
- vs. buy wUSDC 1,675
- stake wUSDC 1,675
- stake uUSD 1,662
- farm PLENTY LP tokens 3,343
- receive PLENTY LP token farm APR 46% (=in USD 1,538)
- pay swap fees wUSDC -5.00 (=USD equiv -5)
- pay swap fees tzBTC -0.0002 (=USD equiv -10)
- sum up cash flows USD equiv 8,387
- APR 84%
Assuming no market movements and no additional slippage, this trading strategy would result in an APR of ~84%. Selling the uUSD and levering up by buying more tez and tzBTC to liquidity mine would increase this number further to over ~100%.
Using larger sizes of USD 1,000,000 equivalent or more and hence more market impact would likely decrease the APR figures. However, the profit share staking rewards would also increase. The net impact would likely be negative though.
Keep in mind that annual figures are used to have meaningful numbers, it is not implied that this opportunity will necessarily work with these numbers for a full year.
For the youves platform we see the following benefits:
- Expand to include a new collateral token which so far has a limited use case and grow the TVL.
- Create the possibility for users to engage in more sophisticated and potentially rewarding trading activities.
- Increase the fees generated on the youves platform and thereby the attractiveness of the YOU token as a means to receive platform profits.
- Add resilience to the uUSD token as we move to a choice of one of several collateral types for the vaults.
- Further down the line create a token that automates this behaviour.
This trading strategy would work for sophisticated users which are comfortable with both having exposure to tez and BTC market movements and also to the risk of impermanent losses as liquidity providers in a CPMM.
As always, this is not investment advice and also please do your own research.
We appreciate that 28 December is an unusual date to start the discussion on a proposal like that. However, we believe that this change is not controversial and it would be great to start 2022 with some new drive and some brand new opportunities on the youves platform!
Please let us know if you have any questions, we are happy to discuss.
