We will be hosting a weekly tutorial on the most compelling opportunities to consider yield farming, written by our friend DeFi Dad, an advisor to the Defiant and the Chief DeFi Officer of Zapper. The goal is to expose more Defiant readers to new DeFi applications and their associated liquidity mining programs.
Background on Protocol
Aave needs no introduction. It has been a leading decentralized lending and borrowing money market in DeFi since January 2020. Aave enables lenders to deposit 25 different types of collateral and borrow across 24 different tokens.
If Aave existed in the traditional finance world, imagine if retail investors could borrow against the net value of their aggregate wealth in stocks, bonds, savings accounts, or even home equity. In the future, we can expect DeFi will help to realize the greatest capital efficiency in history. A part of that saga is just enabling more liquidity so that any investor across the globe can permissionlessly and trustlessly lend digital assets to whoever is willing to borrow it.
Aave has seen remarkable growth the last 1.5 years topping $6-7B TVL recently across its signature Aave v2 markets on Ethereum, including $1.2B TVL in its new Aave Polygon market. In just the last day, it hit a new all-time high over $10B TVL. During that time, Aave has bucked the trend by not issuing governance token rewards to lenders and borrowers, until now!
So why kick off Aave liquidity mining now? Aave v1 still contains about 40% of the TVL in the Aave protocol. By introducing this program, lenders and borrowers will naturally migrate to Aave v2, which will allow the team to sunset Aave v1 and focus more resources on developing Aave v2.
Today, I’ll walk you through how lenders and borrowers can earn a portion of the allocated rewards through July 15, 2021 since AIP-16 is now implemented.
- Borrowers and lenders are rewarded pro-rata in stkAAVE (staked AAVE) from a pool of 2,200 stkAAVE per day.
- stkAAVE already serves as a backstop and pseudo-insurance fund the Aave Safety Module in case of an economic shortfall event (ie exploit). Thanks to this established mechanism, it requires a 10-day cooldown period before one can withdraw AAVE from stkAAVE, which should prevent mercenary yield farmers from earning stkAAVE just to dump the token.
- Borrowers and lenders will be rewarded every block with stkAAVE in these money markets:
- DAI 50% lenders / 50% borrowers
- USDC 50% lenders / 50% borrowers
- USDT 50% lenders / 50% borrowers
- GUSD 50% lenders / 50% borrowers
- WBTC 95% lenders / 5% borrowers
- ETH – 95% lenders / 5% borrowers
Opportunities: To optimize for lending and borrowing without going into some more advanced stablecoin leverage positions with Instadapp or DeFi Saver, here’s the estimated APYs to earn today as a lender and borrower in these 6 Aave markets. My goal is to optimize what stkAAVE I can earn on top of the lending interest I would normally earn in Aave. I might even borrow an asset just because the APR earned in stkAAVE could be greater than the borrowing rate I’m paying. These rates constantly change based on liquidity, utilization, and stkAAVE price.
|Market||Lender APR||Borrower APR|
Time to Complete: 10 mins if paying the recommended FAST gas price on gasnow.org
Gas + Protocol Fees: Based on the FAST gas price on gasnow.org currently between 40-65 Gwei, I would estimate paying the following gas fees.
- Approve to deposit = $5
- Deposit asset = $20-$25
- Borrowing asset = $20-$30
Risks: As always, this is not financial advice and you should do your own research.
- Smart contract risk
- Oracle failure
- Liquidity crisis
- Financial incentive failure
- Systemic risk in DeFi composability
- Estimated APRs can change with the price of stkAAVE, pool liquidity, and lending rates
- If one builds a leverage position in Aave by borrowing against deposited collateral, one can be liquidated if their Health Factor goes below 1.
- First go to the Deposit tab on Aave and I ask myself “among these 6 markets for lending, which assets do I already own that I am willing to lend?” Refer back to the chart above for the 6 markets among the 25 that are earning stkAAVE throug this program.
- Second question is: “Among those assets I’m willing to lend across these 6 markets, what are the highest rates?”
- Third question: “How much money in total am I willing to lend and hence risk in Aave?” My simple follow-up to this should be “how much cover/insurance can I buy for Aave holdings with Nexus Mutual for a minimum of 30 days to protect myself while my assets are lending on Aave?” I’d then go to Nexus Mutual to search for Aave which currently has about 410 ETH worth of cover to be purchased.
- Assuming, I’ve identified a single asset to begin lending (ie ETH), I’ll now click on the market to proceed with lending.
- Specify how much to lend and hit Continue.
- Follow the prompts to Approve spending my token (if not ETH) and then click Deposit.
- So this is where things get interesting! Let’s say I lend some ETH. I can now borrow another asset among the 6 liquidity mining markets to earn more stkAAVE, but I must be sure that I’m earning more in stkAAVE than I’m paying in borrowing interest. A good example is if I were to borrow GUSD, which currently is earning about 15.26% APR vs borrowers paying 3.35% APR, I’d be earning a lot more in stkAAVE than I’d owe for borrowing GUSD.
- But the game doesn’t stop here! Let’s assume my Health Factor is still 2.5-3, I might use that GUSD to earn an additional 2.25% APR lending + 10.16% APR in stkAAVE mining.
- I’ll end the tutorial here but just know I could continue to rinse/repeat this process borrowing more from the 6 qualifying markets and then lending it back to Aave to earn more interest + stkAAVE.
- Whenever you’re ready to claim stkAAVE, find the button in the top right corner of My Dashboard.
Oh and don’t forget to track your Aave lending and borrowing positions along with your claimed stkAAVE balance on Zapper!
About Author: DeFi Dad is a DeFi super-user, educator, and investor. You can subscribe to his YouTube channel at defidad.com. Disclosure: DeFi Dad is an AAVE token holder. This is not a recommendation or endorsement to buy AAVE.