Riskless 2000% APY on TON
Whether you had economics during high school, or at university, I think most of you remember the famous “law of supply and demand” and your tutor telling you that it’s the most important thing in economics. However, I for once, never really quite understood where they were coming from. Let’s see it with an unusual real world example.
NOT launchpool on OKX/Bybit/Binance
It all starts with NOT coin launchpool on OKX or Bybit(The one on Binance is a bit different, since you can stake stablecoins there instead of TON). You had to stake TON and would get a juicy 2092% APR on OKX(200% on Bybit) in NOT rewards, it was riskless in a sense that you would get your staked TON back the moment you want it.
If you were a holder of TON — you were lucky, you could finally put your TON to some good use.
But for those of us — EVM degens, who don’t hold any TON, but still want to get the juicy 2000% APY in 3 days — what do you do?
The first and the simplest option is just buying some TON on OKX or your favorite CEX. However, unless you plan to hold TON in the long-term, this didn’t make much sense. Buying it on spot exposes you to the price of TON. So how do you get TON without being exposed to its price? This is where “hedging” comes into play
How can hedging help up
Hedging is a strategy that tries to limit risks in financial assets. It uses financial instruments or market strategies to offset the risk of any adverse price movements. Put another way, investors hedge one investment by making a trade in another.
This can especially be useful in commodities(silver, oil, steel, wheat, etc.). Say you are holding 100 tonns of steel in July, but will only be able to sell it in August(maybe your clients only need it in August). You bought steel for 800$ per metric ton, but you don’t want to risk steel price going down in August. You can open a short position on steel for the same amount, and have a completely riskless asset.
Price goes up — you don’t gain anything, since you had a short open, but price goes down — you don’t loose anything either. This is called delta neutral hedging.
There are two parts to “delta neutral”
- Coming back to your school days, remember that the Math class has (probably) taught you that delta means “change”, or how much something has changed.
- Neutral in this case means 0.
So we want to setup our hedge in such a way, that the change in our overall position would be 0 regardless of the price movement.
Purchasing a spot token and opening a short for it at the same time for the same amount is an example of delta neutral hedging.
That’s actually what Ethena does to get it’s 40% APY during the bull market — it holds spot ETH and stakes it for 7%, then opens a short for the same amount and gets as much as ~30% from funding fees. During a bull market, people who long have to pay a funding fee to people who short to keep the future contract price close to spot. You can read more on funding fees here And here’s a good article on how Ethena works
Getting back to our topic: we can buy TON in spot and open a short for it. So from 10k$ worth of stablecoins you’d be able to get a juicy APY on 5k$ of spot TON in launchpool, and would have a 5k$ worth of short(you can also use leverage, but that’s a different topic).
However short positions can also come with a number of issues
- Funding fee payments(if the price goes down)
- CEX fees
What if I just borrow TON against USDT
Borrowing is a much simpler form of hedging which can be done anywhere(even peer to peer). Borrowing APY is autoregulated so it increases based on supply(how much TON is being lended) and demand(how much TON is being borrowed). Keep the supply and demand in mind, as we’ll need it later.
But because borrowing is as simple as one click of a button — you’re not the only person who wants to borrow against USDT/USDC so at some point during the launchpool, borrow APY on TON reached 270%. Yes, it’s still about 7x lower than the APY you’d get from the launchpool, but we can do better than this. Where the demand would be less than on a CEX?
Introducing EVAA Finance(not an ad btw) — a decentralized lending/borrowing protocol. Since way less people use it compared to OKX(or other CEX) you could borrow TON for a nice 3% APY at first. Couple of hours later it almost caught up with OKX — at an 170% borrow APY. Plus you need to pay a flat 0.3% borrow origination fee
So hedging is hard and has commissions, borrowing has a high APY — how do I make money? Well… Let’s forget about it and remember what Liquid Staking is for a second
What is liquid staking?
Liquid staking provides the benefits of traditional staking while unlocking the value of staked assets for use as collateral.
In other words, instead of locking your tokens it gives you a wrapped liquid version of your token. For example, when you liquid stake TON on bemo you get stTON and you can unstake it any moment you want for quite a small flat fee.
Do you already get where I’m coming to?
Borrowing TON at 6.89% APY
You can borrow stTON instead of TON, unstake it and put your TON to the launchpool. While the APY on TON was 170%, after 1–2 hours of launchpool’s start, APY on stTON stayed at 3% for 12 hours or more. However, your real borrow APY would be 3%(EVAA borrow) + 3.89%(Liquid staking APY, which you are loosing out on by converting it to TON) = 6.89%. Better than 170 or 320% huh?
What are the downsides of this? Let’s remember high school economics and substitute goods.
Economics lesson
In the case with a launchpool, stTON can be considered a substitute good for TON, as it allows you to do the same thing, allbeit with one intermediary step(unstaking stTON). And TON can be called the “main good”(that’s not a proper naming, but whatever). Let’s first think what happends to the market of TON, since an external factor (i.e. anything except a change in price) appeared — Launchpool for NOT?
The demand curve for TON shifted to the right.
People want to buy more TON for the same price, as it allows them to get a juicy launchpool APY.
Demand shifted, so the new Equilibrium price (and quantity) will be higher than the original one. The price curve didn’t shift, but the price increased.
How will this influence the market of stTON, for which TON is the substitute good?
Due to the increased price of TON, people turn to stTON for lower APY, subsequently the demand curve for stTON shifts to the right as well(thought not immediately of course). On a long enough timeline it’ll reach the same APY on TON, which happened on EVAA about ~24 hours after the start of the launchpool — the borrow APY on TON and stTON was roughly equal at approx. 30%.
Also don’t forget that less demand leads generally to less supply, so since EVAA has less supply of TON compared to OKX, even with smaller demand — the borrow APY might be similar. The same goes for stTON, or any other token, really.
So, while borrowing stTON proved to be significantly better in the short run, it also isn’t ideal.
Capital effiency and risk tolerance
A CEX doesn’t need to have vastly overcollaterized loans and it liquidates your loan at ~98% LTV(Loan to Value ratio). For example, if I put up 500$ as collateral to borrow 100 TON at 4$/TON, and then it grew to 5$/TON I would be liquidated.
With a decentralized lending/borrowing protocol(also referred to as “money market”) loans have to be more overcollateralized, with collateral usually being 150% of your loan.
Also, the liquidation threshhold is much lower — currently 75% for TON on EVAA Finance. Meaning that to achieve the same level of risk tolerance on EVAA — you should borrow less TON with the same amount of collateral, compared to a CEX.
Conclusion
So what’s the ideal solution then? Actually, there isn’t one. As with everything in Finance it’s a balancing act.
Nothing is fully sustainable and risk-free in traditional finance either.
Remember all major economic collapses, like the US housing market crash of 2008? This serves as enough evidence that even TradFi can’t make money out of thin air.
Bad news is that there’s no fool-proof risk-free way to make an astonishing APY on your stables. Good news is that you can almost get there by properly hedging your position. However, calculating the most profitable method considering risk, capital efficiency, sustainability, APY, etc. — still takes a very intelligent investor. However, even by reading this article you probably got a bit ahead of the curve :)
The most important lesson you have to learn from this article — is that money can’t appear out of the nowhere, and anything that promises you an sky-high return without any risk is probably a scam. Also, if anything seems to good to be true, like borrowing stTON for 3% APY while everyone is borrowing TON for 170% APY, it probably is.
Stay safe and dilligent, and what is more important — don’t forget to think before you APE. Also remember that nothing in this article constitutes financial advice :)
P.S I write even more weird finance stuff on twitter if you’re into that https://x.com/shortusdlongeth
P.P.S I really wanted to name this “High school economics which we learn from lending/borrowing protocols” but decided to go for the more clickbait title. Apologies
