Published Educational Guides
Not Financial Advice. Just the opinion of a couple Apes.
Welcome to the Academy! The article below is the first of a two-part segment on the new Yeti Finance protocol. This section will provide an overview of the project, explain how it works and how it will unlock value for the entire Avalanche ecosystem (plenty of alpha in the conclusion).
The second part of the article will be released early next week and will cover a more detailed analysis of the company’s revenue streams, tokenomics and an early valuation.
Yeti Finance is a new decentralized borrowing protocol on Avalanche that seeks to disrupt the DeFi landscape and unlock billions of dollars of new liquidity. Unlike other borrowing / lending protocols (think Aave, Benqi, Banker Joe), Yeti offers 0% interest on all loans. Instead, Yeti earns revenue by charging one-time deposit and loan issuance fees, which incentivizes users to hold for the long-term. Why pay 8% interest every year, when you can pay a one-time 5% fee and hold the loan forever? This model creates a long-term focus that allows Yeti to build a massive asset base that collateralizes its very own stable coin ($YUSD). The new native stable coin on Avalanche is fully decentralized and fully redeemable — can exchange 1 $YUSD for $1 of collateral at any time. $YUSD provides Avalanche with a native currency for users to invest in the ecosystem and earn passive income on their holdings, while eliminating any price volatility. Stable coins are essential to onboarding new users to crypto, as the average person still isn’t comfortable with the unpredictability of the asset class (just look at the exponential growth of Anchor and UST on Terra). $YUSD can help bridge that gap for new users and usher in the next wave of growth for Avalanche.
And yet, Yeti doesn’t stop there. The revolutionary protocol allows users to borrow up to 11x against a basket of assets including base assets (i.e. ETH, AVAX, JOE), staked assets (i.e. sAVAX) and even liquidity pool tokens (i.e. WETH-WAVAX pair). You can borrow and still earn yield on your underlying assets!
Plus, you can borrow up to 21x leverage on yield-bearing stablecoins! What does this mean? In protocols like Benqi, you can lend your USDC (stable coin) and earn ~5.0% APR. In return, you receive a synthetic coin that represents your ownership of the underlying token called qiUSDC. You can redeem your qiUSDC for USDC at any time. Yeti allows you to borrow against that qiUSDC, giving you credit for the underlying asset and letting you continue to earn your 5.0% APR.
Ultimately, Yeti Finance represents an exciting opportunity for Avalanche users to unlock billions of potential capital on the blockchain. How does it work? What should you look out for? Why should you care? We covered everything you need to know about Yeti Finance in the article below.
GM and GS! (Good morning and good subnetting)!
In order to borrow, you need to deposit collateral into a Trove — a Trove is a collection of collateral (more diversified portfolio = less risk). Each asset that you deposit has a safety ratio to determine how much you can borrow against that asset (i.e. USDC is safer than ETH; therefore, you can borrow more on your USDC collateral). Simply put, the collateral value * safety ratio = risk adjusted value (also known as the virtual coin value). The cumulative risk adjusted value of your Trove sets your borrowing limit. However, there’s one more step. To protect the protocol, you must maintain a collateral ratio above 110% or else risk liquidation — collateral ratio = risk adjusted value divided by outstanding loan.
Let’s walk through an example. We’ll say MBApe Johnny has the following portfolio construction.
In the example above, MBApe Johnny has a risk adjusted value of $47,500 for his collateral. That means he can borrow up to $43,181 in $YUSD and remain above the 110% collateral ratio ($47,500/$43,181 = 110%). However, given the fluctuations in asset prices for $JOE, $ETH and the JLP, Johnny should leave a buffer or else risk possible liquidation. Borrowing $30,000 equates to a collateral ratio of 158.3% and would only risk liquidation if JOE, ETH and the JLP decreased in value by greater than 50%.
Ultimately, this results in the MBApe Johnny posting $50,000 of collateral (that can still earn rewards) and provides him with 28,250 $YUSD (net of fees). Johnny still owes Yeti Finance 30,000 $YUSD to be paid later. However, he can now trade his $YUSD for other assets, contribute to a liquidity pool or farm in the $YUSD Stability Pool and receive rewards in $YETI. If invested in a smart manner, his 28,250 $YUSD will earn more than the 5.5% fees overtime, even while invested in stablecoins with zero price volatility risk (…I hear Anchor is coming to Avalanche).
Now let’s talk about the power of leverage. It’s important to recognize that any levered investment is risky in nature. Small swings in price can make a meaningful impact to your returns and you need to do your own research before putting capital to work. Leveraging volatile assets can result in liquidation and capital loss. However, higher risk can also lead to higher reward. Leverage allows users to maximize their return and earn significant profits with minimum capital invested. Let’s look at an example.
MBApe Johnny has the same portfolio construction as example 1 but this time utilized the power of leverage. Johnny only used leverage on the qiUSDC (stable coin) given the risk profile of the other assets. Utilizing 10.0x leverage on qiUSDC, Johnny can now borrow up to $215,000! (And remain above the required 110% collateral ratio). Note: You can borrow up to 21.0x on yield-bearing stable coin.
Given the volatility of $JOE, $ETH and the JLP, MBApe Johnny decides to take a more conservative approach and only borrow $180,000, which equates to a collateral ratio of 131.4%. Even if all his other assets went to $0, Johnny would still have a collateral ratio of 116.7% ($210,000/$180,000) and would not fear liquidation. Now Johnny has 169,850 $YUSD to invest! If Johnny earns 10.0% per year on his $YUSD, he’ll return 34.0% annually on his investment — and that doesn’t even consider that his collateral is still earning rewards! (However, it’s important to remember that he owes Yeti $180,000 and therefore, he should invest his loan in a safe manner — i.e. focus on stable coin farming). VERY RISKY STRATEGY — DYOR!
Why is Yeti so exciting? Think about how much liquidity Yeti will unlock for the Avalanche network. The example above utilizes only 10x leverage on one asset in the portfolio. MBApe Johnny’s portfolio fully levered can borrow up to $665,909! This will lead to a massive influx of capital on Avalanche and benefit the entire community (should we up our $JOE target). Trader Joe will receive a wave of new liquidity, resulting in additional liquidity pools, better price stability and ultimately, more swap fees. (Note: Banker Joe will remain viable for short-term loans, but overall borrowing may decline; however, Banker Joe only accounts for ~5% of its revenue so not a big concern). Platypus Finance will thrive as the premier stable swap platform on any blockchain. Not only will users trade $YUSD for other stable coins and generate revenue for the platform, but demand for stable coin farming will skyrocket, giving PTP / vePTP incredible utility to boost stable coin farming yields — Echidna and Vector are well positioned to capitalize on this as well ($PTP Wars back on?). Additionally, Benqi will benefit from a close partnership with Yeti, by adding utility and earning potential to its platform. And the list goes on. Even protocols with no direct benefits from additional capital will welcome a wave of new users that will bridge from other blockchains to utilize the innovative protocol (…buy blue-chip NFTs while you still can http://mbapesacademy.com/). Overall, I am excited for Yeti to usher in the next stage of growth on Avalanche — what do you think of Yeti? What other projects will benefit? Comment below!
Tune in next week for Part 2!
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