EAST Strategies, Part 1: Leverage Loop

Leverage loop is an earning strategy, which involves contributing WAVES, minting EAST with it, then buying more WAVES for the EAST minted and repeating the process. As a result, you get a leveraged WAVES position — or WEST/ETH, depending on what collateral you choose.

How Leverage Loop Strategy Works

First, you deposit WAVES or other kind of collateral to mint EAST stablecoins. EAST protocol is overcollateralized, so the value of your backing is bigger than the value of the EAST minted. The backing ratio required depends on your type of collateral. Once you minted EAST, you can buy more Waves with it. Then you mint more EAST with these WAVES and repeat the cycle as many times as you want to grow leverage of your WAVES position.

Profitability and Risks

This strategy relies on the WAVES price movement. If it increases, you can sell all your WAVES for a higher price and make profit. And the bigger leverage you have, the bigger your income is. Obviously, this strategy has a number of risks. If the WAVES price decreases, the value of your collateral will do as well. As a result, if your vault’s backing ratio drops below the liquidation ratio, it may be liquidated, and you’ll lose it.

Example

1. You start with 1000 WAVES. Given the current Waves price is $2, your total collateral value is $2000.
2. With the minimal backing ratio of 200%, you can mint 1000 EAST (each is worth $1).
3. You use these 1000 EAST to buy more WAVES. At the same price, now you can buy 500 WAVES extra and a 1.5x leveraged WAVES position.
4. You can repeat steps 2 and 3 as many times as possible and grow your leverage even more.

The maximum leverage you can get now is 2x. In the future updates of EAST.Finance we’ll introduce dynamic backing ratio thresholds, enabling even greater leverage.

Now let’s count your possible income for your 1.5x leverage. If the WAVES price grows up to $4, your starting 1000 WAVES will be worth $4000, and the extra 500 WAVES will be worth $2000, giving you a total of $6000. After you repay your 1000 EAST loan and subtract your initial investment of $2000, this leaves you with a $3000 profit — 1.5x more than you would have received with your starting 1000 WAVES.

However, if the WAVES price falls, your collateral’s value will also fall. At a $1.5 WAVES price, your initial 1000 WAVES are worth $1500, and your next-round 500 WAVES are worth $750. This leaves you with a total of $2250. After you repay your 1000 EAST loan, you will have $1250, which means a $750 loss. If WAVES drops even lower, to $1, your vault backing ratio will cross the liquidation threshold, and your position will get partially liquidated. And you are the one to pay the liquidation fee! So keep an eye on your backing ratio.

The leverage loop strategy can be profitable if the price of your collateral rises, but it can also be risky if the price falls. It is essential to keep an eye on your collateral price and adjust your strategy accordingly. EAST.Finance offers three types of collateral for your experiments here — WAVES, WEST and ETH — and their number will grow in future updates!

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