⍺ DeFi Alpha: Earn 20% YTM with a Shapeshift Bond on Arbor Finance

Yields: Up to 26% APY on Stablecoins, 5-39% APY on ETH and BTC

DeFi Alpha is a weekly newsletter published for our premium subscribers every Friday, contributed by Defiant Advisor and DeFi investor at 4RC, DeFi Dad, and our Degen in Chief yyctrader. It aims to educate traders, investors, and newcomers about investment opportunities in decentralized finance, as well as provide primers and guides about its emerging platforms.

Motivation

Two years ago, DeFi investors could easily name every yield farming opportunity without much effort. It was a simpler time, when only a handful of teams had launched with any liquidity to trade, lend, borrow, provide liquidity, or even demonstrate new primitives such as no-loss savings by PoolTogether.

But times have changed! Before the current bear market took hold, DeFi liquidity had grown to hundreds of billions of dollars across Ethereum with new burgeoning DeFi economies taking shape on EVM-compatible chains such as Polygon and Avalanche and non-EVM chains such as Cosmos and Solana. Any given day, a new DeFi or NFT project is launched.

So, after writing and creating countless DeFi guides and tutorials since 2019, we at The Defiant agreed it’s time we publish a more detailed weekly guide on all you need to know to keep up with new opportunities.

This is DeFi Alpha by The Defiant.

Any information covered in DeFi Alpha should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions. Any mention of a token or protocol should not be considered a recommendation or endorsement.

Together With

DeFi Saver is an all-one management app with unique automation options for top DeFi lending protocols. The app is now available directly within the Compound app for Compound v3 users.

DeFi Alpha Call

The DeFi Alpha call is held every Monday at 2pm ET in Discord.

In case you missed it, check out the recording of this week’s call.

Yield Alpha

Each week we will provide options to earn yield on ETH, WBTC, stablecoins, and other major tokens.

ETH: 30% APY with pETH/ETH Curve LP staked in Convex via Concentrator
- This yield is accrued in aCRV + trading fees compounded in the LP.
- To participate, one must Deposit into the pETH/ETH Curve LP here (not stake).
- Then, one must stake/deposit the Curve LP under the ETH-pETH vault under aCRV Vaults on Concentrator.
- Caution: pETH is an ETH derivative minted when a user borrows against their NFT and burned when they decide to repay their loan. pETH has a risk of depegging.
BTC: 4.23% projected vAPR with the Curve HBTC+WBTC LP staked in Convex
- This yield is accrued in CRV, CVX, and trading fees.
- To participate, one must first deposit HBTC and/or WBTC into this Curve factory pool and then stake the LP here in Convex.
MATIC: 17.8% APR with the MATIC-stMATIC Elastic LP on KyberSwap
- The yield is backed by validator rewards using stMATIC liquid staking derivative + Kyber trading fees + KNC rewards + LDO rewards.
- To participate on Polygon, I can deposit in a customizable price range for MATIC-stMATIC here.
- Then, I stake the LP here on the Earn -> Farms -> Elastic Farms tab.
ATOM: 21.6% APR staking ATOM with Keplr Wallet on Cosmos Hub
- The yield earned is issued in ATOM.
- To participate, one must set up a Keplr Wallet, go to the Cosmos Hub validators on Keplr Dashboard, rank by APR, choose a validator, and click Delegate.
- Then, I specify how many ATOMs and follow the prompts to Delegate.
AVAX: 6.4% APR lending AVAX to the sAVAX/AVAX pool on Platypus via Vector
- This yield is issued in PTP, QI, and AVAX.
- To participate, one must deposit into the AVAX Stake option here on Vector.
- Depending on the pool’s coverage ratio there may be a deposit or withdrawal fee.
SOL: 7.57% APY staking SOL with stSOL by Lido
- This is backed only by Solana staking yield.
- To participate, one must deposit SOL here or buy it on a Solana DEX.
FTM: 4.7% APY staking sFTMx liquid staking derivative by Stader
- The yield is issued in FTM rewards, as sFTMX is earning FTM via validator rewards to support Fantom’s PoS network.
- To participate, one must deposit FTM to receive sFTMX here on Stader.
HBAR: 9.6% APY staking with HBARX liquid staking derivative by Stader
- The yield is issued in HBAR rewards, as HBARX is earning validator rewards.
- To participate, one must deposit HBAR to receive HBARX here on Stader.
Stablecoins (EUR): 20% APR with the jEUR/sEUR LP staked in Velodrome on Optimism
- This yield is accrued in VELO.
- To participate, one must deposit and stake in this jEUR + sEUR LP.

Please be aware we intentionally do not report the highest yield rates because often, those yields are less sustainable and in some instances, artificially elevated due to high inflation tokens or fewer LPs participating.

Starter Tutorial

Earn Up to 20.8% YTM with a Shapeshift Bond on Arbor Finance

Part of the reason I fell in love with DeFi is that it tends to strip away the complexities of traditional finance and deliver a streamlined, permissionless version of the most complex mechanisms.

Today’s tutorial on Arbor Finance is a great example of such innovation!

Arbor enables DAOs to borrow stablecoins using their tokens as collateral with fixed rates and no liquidations. In order for DAOs to grow and thrive, they need access to credit. One way to solve this is by issuing a bond. A bond is a fixed-income instrument that represents a loan made by an investor to a borrower. A bond could be thought of as an IOU between the lender and borrower that includes the details of the loan and its payments.

More specifically, a zero-coupon bond does not pay interest and instead trades at a deep discount, rendering a profit at the maturity date, when the bond is redeemed for its full face value.

Arbor enables DAOs to auction such bonds at a discount, which will then be paid back in full in the future, resulting in lenders enjoying fixed yields and token price upside through lending and options. Here’s a quick example based on the current Shapeshift DAO convertible bond auction.

Shapeshift DAO wants to raise USDC funds by issuing a 1 year convertible bond.

They’re willing to issue a maximum of 600k bonds which will be redeemable for 1 USDC at the 1 year maturity date.

They auction off ShapeShift bonds at a discount and are willing to sell discounted bonds at a minimum price of 0.828 USDC, meaning lenders earn a maximum of ~0.17 USDC in yield in 1 year (20.8% return).

Before auctioning their bonds, it’s known that Shapeshift deposited 77.819 FOX per bond as collateral (~$2.19 as of this writing) meaning that in a worst case scenario, if they defaulted on their repayment, lenders have $2.19 of FOX claimable for every bond issued. However, if Shapeshift were to default, it’s likely the price of FOX would have plummeted and that collateral will likely be worth less than the $1 expected for each bond at maturity.

To date, Arbor has issued a convertible bond for Ribbon Finance, which raised Ribbon 4.226M USDC selling 3.103M bonds at a price of 0.967 USDC, which matured over 6 months between June and December 2022, netting bond holders a total 7.1% bond YTM (yield to maturity), which was the maximum YTM Ribbon was willing to pay. I’m happy to report Ribbon successfully paid back the USDC so that their bond holders could redeem bonds for 1 USDC starting on December 4, 2022! A pretty remarkable accomplishment for both Arbor and Ribbon given the collapse of Terra, Celsius, FTX and more during this same timeframe!

Of course, it’s not all roses. DAOs can default on their promises! In regard to this new bond offering and future ones by Arbor Finance, a DAO’s creditworthiness could change over time, leading to a drop in the price of their bond on the secondary market. A trading market might not even develop for Arbor-issued bonds like this new Shapeshift bond. There’s risk the price of DAO-deposited collateral tokens backing issued bonds could fall below the value of $1 expected at bond maturity. And as always, there’s smart contract risk due to the nature of this being all on-chain and relying on smart contracts to issue, claim, and redeem bonds.

With all that in mind, Arbor Finance does present a great example of how DeFi enables new, permissionless opportunities automated by smart contracts, but carrying a tremendous amount of risk for being so experimental.

Today, I’ll show how I can potentially earn up to a 20.8% yield buying a Shapeshift DAO bond on Arbor Finance!

Before we get started, please be aware of these risks.

Smart contract risk in Arbor Finance smart contracts

Front-end spoof attack on the Arbor website

Exploits in economic design of Arbor Finance

Centralization risk, given Arbor Finance has yet to launch a token and decentralize the governance of the protocol.

Default risk because there’s no real guarantee Shapeshift (and other DAOs) won’t default on their payment

Price risk and slippage in FOX collateral tokens backing each bond, meaning there’s no guarantee that the FOX token won’t continue falling in price.

Price risk in the bond, purchasing bonds may lead to complete or partial loss of funds. Any buyer of these bonds should conduct their own due diligence.

Step 1: First, I go to the Arbor Finance Ongoing Auction for the Shapeshift DAO Convertible Bond Auction here. Given how risky buying a bond is, I can first learn more about the bond issuer here given the following analysis provided by Arbor Finance:

An in-house analysis by Arbor Finance here

A credit report/analysis here by Credora on Shapeshift DAO

A credit rating for Shapeshift by Prime Rating, a new “permissionless framework for quantifying quality and risk of open finance protocols”

The ShapeShift DAO website

The ongoing auction started on December 7th will end on December 21, 2022, with 1 year until the convertible bonds mature on December 21, 2023.

Each bond auctioned off will be redeemable for 1 USDC at maturity

Shapeshift is willing to pay a maximum bond YTM (yield to maturity) of 20.8%, which derives from the fact that each bond will be redeemable for 1 USDC at 1 year maturity, Whatever final price lenders buy bonds at, (currently 0.828 USDC), they’ll see a return assuming Shapeshift pays back all their debt in full.

Currently, that return for lenders in 1 year would be the maximum bond YTM that Shapeshift is willing to pay. In other words, the auction price of this bond cannot go any lower. Also, Shapeshift did not require any minimum funding threshold be reached, so if 25k USDC were bid at 0.828 USDC, Shapeshift would issue only 30,193 convertible bonds (=25,000/0.828) instead of a total supply of 600,000 bonds.

The bonds are currently overcollateralized by 219% given the price of 77.819 FOX tokens backing each bond as collateral.

Each bond is convertible into 6.25 FOX ($0.18) up until the maturity date.

The call strike price = 0.16 USDC/FOX, meaning the price where the convertible tokens for a bond are equal to its face value.

Below is the current status of the ongoing auction, showing that Shapeshift DAO has raised just under 25k USDC with a current bond price of $0.828.

Step 2: Let’s assume I am willing to lend 1,000 USDC by buying Shapeshift DAO convertible bonds which will not mature until December 21, 2023. I am willing to lock up that money until then, knowing the bonds are only backed by a 219% collateralization ratio (backed by 77.819 FOX tokens) which has dropped from 250% when the auction started on December 7, 2022.

I can go to the Shapeshift DAO Convertible Bond Auction on Arbor Finance here before it ends on December 21, 2022 at 6 pm EST and do the following.

Connect my Ethereum Mainnet wallet

I can bid a minimum of 500 USDC or more so for this example, I bid 1000 USDC

I click the Min Price because I’m personally hoping to pay the least amount to lend my money with this bond offering, which is ~0.828 USDC.

I click Review Order and follow the prompts to Approve USDC and lastly to Place Order (2 transactions).

Once the order is placed, I have until 5 pm EST on December 21, 2022 to cancel if I change my mind but I probably won’t execute this order unless I’m confident I will not back out.

Step 3: Assuming I place an order, after the auction ends on December 21, 2022 at 6 pm EST, I can return to the Arbor Finance app to claim my bonds and hold them until maturity in 1 year to redeem for 1 USDC.

Degen Tutorial

Swap Multiple Tokens With Zero Slippage Using Bebop

Bebop is a relatively new entrant to the decentralized exchange (DEX) space that launched in June with a closed launch for whitelisted users.

Incubated by Wintermute, the crypto trading firm, Bebop offers some interesting features that aim to improve the DeFi trading experience:

Zero slippage trades – The price you are quoted is what you get

Multi-token swaps – Swap one token to many or vice versa in a single transaction

Network transaction fees are built into quotes

Bebop started out on Ethereum and expanded to Polygon last month.

Wintermute CEO Evgeny Gaevoy has said that Bebop will be fully decentralized, which makes it likely to issue a token in the future.

In this tutorial, we’re going to swap some tokens on Bebop in the hopes of qualifying for a future retroactive airdrop.

You can use Bebop on Ethereum or Polygon but please note that an ‘Uncommon Swapper’ NFT can only be claimed by mainnet users for now.

Step 1: Connect your Metamask wallet to Bebop

https://bebop.xyz/trade

Ensure that you’re connected to the correct network (ETH or Polygon).

Step 2: Swap Tokens

You’re able to do one-to-one, many-to-one, and one-to many swaps

We’re going to swap some WETH and USDC for MATIC.

Continue with the swap and you’ll be asked to approve spending your tokens.

Once approved, confirm the swap.

Final note: Protocols are becoming increasingly careful about airdrop allocations, so it’s always better to use a protocol a few times to stay on the safe side.

🪂Airdrop Alpha

In each DeFi Alpha guide, we update a list of DeFi protocols that have yet to announce and/or launch a token.

Blur Airdrop 3

Blur has announced that its third airdrop round will be geared towards users to place bids on the marketplace. You can find our step-by-step tutorial from last month here.

ACX Airdrop

Cross-chain bridge Across Protocol has launched its ACX token.

If you followed our guide and participated in the referral and bridging program, you can claim your tokens here.

Arbitrum Odyssey

Layer-2 rollup Arbitrum kicked off a months-long program on June 21.

Participants will be able to claim NFTs based on completing various tasks.

Week 1 was Bridge Week and we walked you through it in a previous issue of DeFi Alpha.

In a previous Degen Tutorial, we covered a series of on-chain quests.

We’ll be watching for the Odyssey to resume, now that Nitro is live.

Optimism Airdrop

Congratulations if you followed our guide betting on a hunch that Optimism would release a token!

In a previous DeFi Alpha, we covered a series of on-chain quests that could make you eligible for the next round of $OP airdrops.

$OP is Live! Claim guide here.

Arch Finance – a protocol for comprehensive indices that provide access to differentiated sources of market risk.

Aztec – an open source L2 bringing scalability and privacy to Ethereum, with zkSNARK proofs, having launched a private DeFi yield aggregator zk.money.

DeFi Saver – a one-stop dashboard for creating, managing and tracking DeFi positions across Aave, Compound, Maker, Liquity, and Reflexer

Francium – leveraged yield farming similar to Alpha Homora but on Solana, one can choose to simply lend single assets or hold leveraged LPs to potentially earn an airdrop here

Jupiter – The leading DEX aggregator by trading volume on Solana

Lens Protocol – A decentralized composable social graph, underpinning an emerging landscape of Web3 social media dApps including Lenster, Lenstube, and Orb

LI.FI – A cross-chain bridge and DEX aggregator protocol

Liquality – A cross-chain, non-custodial browser extension wallet, similar to MetaMask but with more integrations for swapping cross-chain.

Magic Eden – The leading NFT marketplace by trading volume on Solana

Nested – a crypto social trading platform built on Ethereum and other chains

Opyn – one of the OG decentralized options protocols on Ethereum, with major investors that signal a token has to be in their future. Buy/sell puts or call options to earn a possible future airdrop.

Polymarket – one of the strongest players in the DeFi prediction market vertical, bet on an outcome related to crypto, politics, sports and more or add liquidity

Polynomial – A newer DeFi derivatives vault creator, built on Optimism

Sense Protocol – A decentralized fixed-income protocol on Ethereum, allowing users to manage risk through fixed rates and future yield trading on existing yield bearing-assets

Set Protocol – one of the earliest DeFi protocols yet to launch a token for DeFi asset management, popular for TokenSets and known for powering IndexCoop indexes

Socket (formerly Movr) – their bridge aggregator Bungee moves assets between chains, finding the cheapest, fastest route

StarkNet mainnet is live! Bridge and swap some tokens for a potential airdrop. Guide here.

SudoSwap has released details about its SUDO token and airdrop.If you followed our guide from August 12 and created some trading pools, you should be eligible!

Volmex – Volmex is a tokenized volatility protocol, similar to the VIX but ETHV

Wormhole – a cross-chain messaging protocol known for bridging between Solana, Terra, Polygon, BSC, Avalanche, Fantom, and Oasis

Yield Protocol – a newer protocol for fixed-term, fixed-rate lending in DeFi, backed by Paradigm, one might earn a future airdrop by lending DAI or USDC

Zapper – participate in Zapper trading, lending, providing liquidity, or yield farming; given the Zapper Quests and NFT Rewards program, it can be surmised that if Zapper ever releases a token, this is one way they might do a retro airdrop

Zerion – same can be said speculated about Zerion; if they ever release a token, they’re likely to reward those who interacted with their smart contracts swapping, lending, providing liquidity, or borrowing

ZigZag – a DEX on zkSync that’s announced an upcoming airdrop.

zkSync is a Layer 2 scaling solution for Ethereum that uses zero-knowledge proofs to enable scalable low-cost payments. Bridge some assets and do some swaps for a potential airdrop. Guide here.

The information contained in this newsletter is not intended as, and shall not be understood or construed as, financial advice. The authors are not financial advisors and the information contained here is not a substitute for financial advice from a professional who is aware of the facts and circumstances of your individual situation. We have done our best to ensure that the information provided is accurate but neither The Defiant nor any of its contributors shall be held liable or responsible for any errors or omissions or for any damage readers may suffer as a result of failing to seek financial advice from a professional.