uLABS Notes: Borrow USDC with your ETH for FREE
UMA’s Yield Dollar trades with a negative yield
What?!?
The Yield Dollar token expiring on March 31st, 2021 (YD-ETH-MAR21) created with UMA’s EMP currently trades above par which implies a negative interest rate. This means users can effectively deposit their ETH as collateral to borrow USDC and get paid to do it. As shown below, 1 YD-ETH-MAR21 currently trades for 1.0278 USDC. A simple yield calculation puts the annualized yield at -15.5%. That’s right — you borrow USDC with your ETH and earn 15.5%!
This is in stark contrast to other DeFi protocols such as Compound and Aave that currently have a variable or stable rate to borrow USDC costing you anywhere from 6.5% to 9%.
But, how!?
How or why is this happening? Short answer is UMA is subsidizing this borrowing rate. UMA is paying developer mining rewards which in turn is being paid as liquidity mining to users who pool YD-ETH-MAR21 or YD-BTC-MAR21 with USDC. OpenDAO’s dApp estimates this APY to be over 50% right now. Since UMA’s launch of this token last year, the yield dollar token (previously uUSD) has consistently traded with a premium. What’s surprising is very few people have taken advantage of this lucrative opportunity.
Cool stuff, but what do I do with this?
ETH holders can do a simple comparison of what they can earn with their ETH. One could simply deposit their ETH in Compound or Aave and earn a traditional old school bank account return of 0.14% to 0.30% 🥱. Or one can take advantage of the negative yield on UMA’s Yield Dollar and earn 22.36% — mint YD-ETH-MAR21 with your ETH, sell it above par for USDC to earn 15.5%, and then deposit the USDC in Aave to earn an additional 6.86%!
You of course can get much more creative and use the USDC to purchase other tokens and join the latest hot farming craze out there. Be conservative and sell only half of the YD-ETH-MAR21 you mint and pool the rest with the USDC to earn UMA rewards (50.5% APY). Or buy WBTC and Digg to LP on Sushiswap to earn an 800% APY. And you can do this all the while keeping your ETH collateral. The possibilities are endless! The main point to highlight here is ETH bulls can effectively keep their ETH and borrow any token they want for free (and even get paid a bonus yield of 15.5% right now!). No other DeFi project can offer an opportunity like this to leverage your ETH and provide this much flexibility. It’s a DeFi degen’s dream!
What’s the catch?
There really is no catch, but there are some intricacies and extra steps on how you borrow with UMA’s Yield Dollar compared to other protocols. Taking time to learn these details is well worth the reward.
With Compound and Aave it appears relatively easy to borrow — you deposit your collateral you want to contribute, you select the token you want to borrow and you pay a variable rate as your balances update on your UI. With the Yield Dollar token you use your ETH collateral to mint YD tokens. You then sell these YD tokens on a DEX to effectively borrow USDC and lock in your borrow rate till expiry. You can easily repay your debt any time by buying back your YD tokens and redeeming them for your collateral. However, you are subject to market fluctuations on the price of the token whereas at expiry each YD token settles for 1 USDC.
Finally, if you do not repay your debt before expiry a portion of your ETH collateral will be used to repay it for you and the remaining amount will be available for you to redeem. The ETH/USD price used for repayment is marked exactly at expiry and voted for by UMA token holders. If you want to keep your ETH collateral you can either repay your USDC debt before expiry (via buying back your YD tokens and redeeming them) or be exposed to some short term ETH price risk (you can use the USDC you had borrowed to buy back the ETH collateral you loss).
In broad general terms we can think of protocols like Compound and Aave as banks with algorithms that determine their variable borrow and lend rates whereas the Yield Dollar is similar to a bond that uses market forces to determine the borrow and lend rates.
Get me involved!
If you would like to learn more please refer to some resources below and also join us on the UMA Discord.
Yield Dollar dApp Mining Program
YD-ETH-MAR21 / USDC pool on Balancer
Why does this still exist??
I don’t have the answers to everything! Maybe UMA has under marketed the Yield Dollar or maybe it’s not fully understood by the marketplace. The opportunity is available now and uLABS plans to continue creating quarterly YD tokens for both ETH and BTC collateral. We believe the Yield Dollar market will grow and become more efficient as DeFi users become more familiar with its mechanics.
