A Deep Dive Into Sturdy Finance
Leveraging Yield Bearing Assets While Borrowing Without Fees? Yes, it is possible
Sturdy Finance is a leverage yield farming DeFi protocol. With a total value locked (TVL) of $15M, it has been live in Ethereum since June 2022, and in Fantom since March 2022. So far it has been backed by Pantera, YC, SoftBank, Kucoin and Mgnr among others. Sturdy presumes to be the only leverage farming protocol that does not charge borrowing fees (most of the time) nor have given away their own token as part of their incentives, at least yet. This is the landing page of their app:
Protocol Mechanics
Sturdy has designed a system that allows to match accordingly both risk averse stablecoin lenders with risk seeking borrowers. These borrowers can access to leverage in order to amplify their yields. Traditionally in lending protocols, lenders are rewarded thanks to the fees paid by borrowers. Sturdy works differently, the collateral deposited by borrowers is converted to yield-bearing tokens via third party protocols such as Curve, Yearn or Lido. The yield from these tokens is paid directly to lenders in the form of the same token deposited (usually stablecoins). It is easier to grasp it with the practical example shown in the next diagram:
Lenders provide the stablecoins that borrowers will use to leverage (if needed), while the yield earned by the lenders is the yield of the interest bearing tokens that borrowers initially deposited as collateral. From the borrower’s point of view, they do not totally earn the yield of their collateral, but they borrow with leverage from lenders and convert their stablecoins to interest bearing tokens. The borrowers will earn yield from this amount. Recent adjustments to the protocol have been made so 75% of CRV rewards from Convex staking goes to borrowers, while lenders receive 25% and all CVX rewards.
The historical APYs that lenders have been earning averages close to 10%. The spikes seen in the image below correspond to moments where usage ratios go over 80% and borrowers have to start to pay a borrowing fee. This happens until either more capital is lent on the protocol or some borrowers unwind their positions due to high costs. It is a good sign that usage ratios have been historically oscillating around this 80% (as we will see next, the tipping point). This equilibrium point denotes that there is a high demand to borrow that is being met accordingly. Lending more funds would decrease this usage ratio and would allow make room for more borrowing activity without spiking rates.
Main Use Cases
Loans remain interest free as long as utilization rates stay below 80%. In the first image of the article it can be seen how borrowing rates are not 0%, this is due to utilization rates being at that moment slightly higher than 80%, after that they ramp up quite fast. In the next image can be see the DAI market, and how an utilization rate slightly over 80% (80.50%) enables a borrow APY of 1.51%.
We have seen that usually there is a high borrowing interest, so utilization rates for the three stablecoins listed (USDC, USDT, DAI) tend to stay close to the kink rate at 80%. The byproduct of this is that the existing rates for lenders are currently above the average ones seen in other protocols. The rates that borrowers can receive depend greatly from the leverage chosen. In the image below can be seen the APYs offered by Sturdy in the interest bearing tokens from Curve with Convex:
Since borrowing fees are usually zero,a simple estimation for the final rates would be multiplying the base APY times the leverage chosen:
For demonstration purposes, maxing out the leverage up to 8.50x allows an APY over 40% on Curve’s sUSD LP. At a loan to value (LTV) ratio of 0.9 this loan could likely be liquidated in the unfortunate case that any of the stablecoins in the sUSD pool would lose its peg. Something that has to be kept into account is that the risk of depegging scenario depends greatly on the stablecoin chosen. As we have seen in the past, it is often that many stablecoins and pegged assets in crypto lose their peg momentarily. Nevertheless a more moderate leverage amount can be safer and still yield an attractive return.
Other Leverage Yield Farming Protocols
The most prominent leverage yield farming projects are Alpha Homora v2 ($53M TVL, live on Ethereum, Avalanche, Optimism, BSC, Phantom) and Gearbox ($95M, live on Ethereum). The Alpha Homora v2 system is a more traditional lending and borrowing mechanic, where lenders yield comes from the fees that borrowers pay. The chains and protocol integrations that they offer are wider, with pretty much all the prominent DEXs on each of the chains that they support. The pools that they offer are not only stablecoins (which allows other fancy stuff like short leveraged farming), so they have impermanent loss. The maximum leverage offered is usually a tad lower than Sturdy. Their lending side is also highly incentivizing to deposit stablecoins, since their stablecoin utilization rates are also very high.
Gearbox with its recent v2 launch is probably the more similar protocol to Sturdy. It also offers up to x10 leverage, and similar protocol integrations with Convex Yearn and Lido. Although for the time being the usage of the borrowing side is capped and individual access has to be requested for it. Gearbox works with credit accounts based on the assets that are borrowed, but the mechanics are like Alpha Homora v2, borrowers pay a fee based on asset utilization to those lenders supplying the asset.
Upcoming Plans For Sturdy
The next Sturdy release (1.0) is coming soon, with an UI redesign and adding collateral types such as Aura’s wstETH and Convex’s stETH, which are a staple nowadays for yield bearing strategies in DeFi. This upcoming release brings a new third audit from Quantstamp, which has been released already. Soon after there are plans to deploy Sturdy to Arbitrum.
Leverage yield farming is an activity in DeFi that has not been as much regarded as it deserves. Its usage can vary from high risk high leverage loans to very moderate simple lending with stablecoins. Its success depends greatly on that ability to match correctly those two profiles. Increasing investors’ confidence in them will require the test of time, where we will witness edge cases scenarios that could trigger lartge series of liquidations. These will be a fire test to check its resiliency, and if passed, could increase their usage by orders of magnitude.
