Strategies on Nolus Protocol
With all cylinders firing on Nolus Protocol, we cover some of the basic and more complex strategies that users of the Protocol can use to generate yield.
Strategy 1: Opening a Leveraged Long Position
This strategy involves the user opening a DeFi Lease to borrow a specific asset they believe has the potential to increase in value. An increase in the value of the underlying asset will enable the user to make a greater profit compared to simply holding their asset.
For example, if Alice holds $2,000 in $ATOM and is convinced that the price will increase, she could open a DeFi Lease to borrow up to $3,000 in $ATOM with her $ATOM as collateral.
If the price of $ATOM was to increase by 10%, Alice would have made a profit of $200 by simply holding her $ATOM. By using a DeFi Lease, Alice’s profit increases to $500 less any interest costs.
Furthermore, users can make this strategy more efficient by utilising liquid staked derivatives such as $stATOM or $stOSMO as their collateral to earn staking rewards while they are exercising their leveraged long position.
The staking rewards that are earned can be used to repay the interest of the facility (and if the rewards are high enough, partially pay down the DeFi Lease as well).
Strategy 2: Depositing to the Liquidity Providers’ Pool
This is a neutral strategy that does not rely on the market to move in a specific direction. Users can deposit $axlUSDC to the Liquidity Providers’ Pool and earn passive income in the form of interest paid by borrowers and $NLS incentives.
These $NLS incentives, in turn, can be staked on the Network to improve the security of Nolus Protocol and earn further rewards!
Strategy 3: Adding Value to a Short Position
The “traditional” mechanism for creating a short on lending protocols can be amplified by combining it with Nolus Protocol. [Deposit $USDC > Borrow $ATOM > Sell $ATOM for $USDC. Leveraging increases risk]
For example, if Bob holds $2,000 in $axlUSDC and is convinced that the price of $ATOM will decrease, he could leverage Mars Protocol to borrow $ATOM (which is then sold for $axlUSDC) by using his $axlUSDC as collateral.
If the price of $ATOM was to decrease by 10%, Bob would have gone from having no exposure to the price movement of $ATOM to making a profit of $120 (assuming an LTV of 60%).
Note that you are able to use your borrowed $axlUSDC for many different purposes. While most people will be aware of the following two:
- Re-deposit on Mars Protocol to borrow more $ATOM (increasing your leverage and risk);
- Re-deposit on Mars Protocol, but do not borrow more $ATOM (reduce your LTV but increase your maximum liquidatable assets);
It is worth knowing that borrowers can also separate their borrowings in the following way:
- Deposit the $USDC on Nolus Protocol to earn incentives interest paid by borrowers and $NLS incentives. As opposed to re-depositing on Mars Protocol, this separation reduces the maximum liquidatable assets from the borrowing (at the expense of a slightly higher LTV for the loan).
Strategy 4: The “Power Hedgooor”
This strategy aims to combine volatile assets and their liquid staking derivative counterparts to create a delta-neutral strategy.
This is done through the following steps:
- Deposit $USDC on a traditional money market such as Mars Protocol or Umee.
- Borrow $ATOM on the same money market (at a prudent LTV).
- Sell this $ATOM for $USDC and hold it (similar to Strategy 3, you could also deposit this asset into Nolus Protocol’s Liquidity Providers’ Pool for extra yield).
- Deposit $stATOM (this is a separately held balance, do not purchase $stATOM with the $USDC that you are now holding from step 3) into a DeFi Lease on Nolus Protocol to gain additional price exposure to $stATOM
The net profit/(loss) of the strategy is equal to the sum of staking income and deposit income less interest costs. Users will have to bear an additional interest cost in Strategy 4 as they will have to pay interest costs on Nolus Protocol. In exchange, their delta-neutral strategy is 29% larger in size, meaning they will be able to earn that much greater staking rewards with minimal exposure to price risk!
Note that users will need to manage their LTVs on both protocols to ensure they are not liquidated.
Strategy 5: The “Power Leveragooor”
This strategy is an extension of Strategy 1 which looks to increase exposure to an asset.
This can be further grown by depositing the asset (e.g., $ATOM) in a money market (e.g., Umee or Mars Protocol), borrowing a stablecoin, and then purchasing $ATOM with the stablecoins to open a DeFi Lease.
As can be seen in the chart above, if the user is able to borrow at an LTV greater than 60.0% from a traditional money market, they will be able to increase their total exposure to an asset through this strategy compared to Strategy 1.
As an example, the $ATOM lending pool on Umee has a maximum LTV of 76% and a liquidation threshold of 80%. Opening a loan on Umee with a 70% LTV to maintain a degree of safety would result in 9.1% greater exposure to $ATOM under Strategy 5.
If the price of $ATOM significantly declines, this strategy has some additional downside as the full deposit on Umee would be liquidated while the deposit on Nolus Protocol would only be partially liquidated (till it reverts to a “healthy” status).
Closing Thoughts
Nolus Protocol aims to provide something for everyone! From those that are risk-averse all the way to those who stand on the edge of the precipice.
We hope to continue growing the flexibility of the Nolus Protocol to make it home to many more strategies!
#GetToNolus better! 👇
