Explainer 1: Rock Solid Farming Strategies
In the previous post, we explained how we are aiming to build an anti-fragile design in terms of technical, governance, and operations to make yield farming fun again and evolve with the DeFi robustly and resiliently. We also explained how we aim to focus on the Sharpe ratio, which is the average return earned in excess of the risk-free rate per unit of volatility or total risk. It allows us to design strategies balancing risks and returns for the community.
In this post, we will explain what farming strategies we are adopting in order to achieve Rock Solid Yield. We will cover our strategies for maximizing the Sharpe ratio for stable coins, while introducing a new concept called Liquid Proof of Staking (POS) Yield Farming.
Stable Coin Strategies
Stable coins consist of a large portion of funds in yield farming, hence setting up a secure strategy for it is the first crucial step for Stone. The current Defi Market looks at three venues to create yield, and each platform poses different levels of risks depending on their track record and technical capabilities:
- Interest generated from lending protocols
- Transaction Fees Sharing from being a Liquidity Provider (“LP”)
- Yields generated from the gains of governance tokens or platform tokens
Stone proposes to start with a set of stable coin yield farming strategies based on lending protocols. This is due to the fact that there is an active lending market around stable coins for traders to take leverages, and the loan to value ratio is high enough to withstand most market volatilities (liquidation mechanism has been improved economically and technically since the March crash). In addition, the interest rate has been decent and stable for stable coins with a number of platforms, such as Compound, Aave, dForce, Cream, etc.
Stone will launch vaults for single assets with multiple strategies. The technical platform restrains funds can only be deployed to the whitelisted lending protocols, hence users’ funds won’t be moved out of the designated venues. Users will be rewarded with the interest from lending protocol (Stone will switch between different strategies to harness the highest yield) plus STN tokens.
Transaction fee is another source of yield, however, impermanent loss has been a major obstacle for users, and making profit/loss unpredictable. Given that Stone aims to provide rock solid yield, Stone will observe new AMM mechanisms to mitigate impermanent loss to protect user’s funds.
Liquid Proof of Stake (”POS“) Yield Farming
DeFi has successfully incentivized users to create large liquidity pools for DEXs and lending protocols for ERC20 tokens, hence making user experience as smooth as a centralized platform.
We could extend the same line of thinking into another type of yield generating assets, blockchain rewards provided by Proof of Staking (PoS) blockchains. The staking reward is usually a fixed percentage in terms of the number of tokens staked. This creates a stable yield for token holders, and an appreciation opportunity when token price rises.
Currently a number of projects are working on Liquid PoS to bring staked assets onto Ethereum such as Ramp.DeFi and StaFi, it helps users to:
- By enabling the illiquid staked tokens to be transferable, ensures sufficient token in circulation and efficient price discovery on DEX
- Users can trade the staked tokens to secure their profit on the spot, avoiding the 7–28 days unbounding process (this however is due to on-chain security consideration against long-range attack)
As we see a number of PoS blockchains are being more accepted in the market, Ethereum, the second largest PoW blockchain has launched its PoS beacon chain, marking its shift to PoS. Other blockchains such as Polkadot, Oasis, Solana also create constant double digit returns.
PoS is a larger market (total market cap of POS at 108 billion USD, with 20 billion staked) than the current DeFi industry (TVL at 14 billion USD) as of 10 December 2020. We see PoS staking as a great opportunity to provide Rock Solid Yield to users.
Therefore, Stone sees liquid PoS Yield Farming as an attractive strategy to bring onto the platform, including Ethereum 2.0, Polkadot, Solana, Oasis, Terra, etc. The first strategy that will be put into execution will be Ethereum 2.0.
Stone has thoroughly reviewed the whole defi space and identified/ created new farming strategies tapping into POS farming. This means stone users are exposed to a yield world doubling the size of current defi space. And it is built in a rock solid manner to make things easy for everyone. In our next post, we will provide more details about how Stone can technically and economically bring POS farming to the users.