Yield Strategy Discussion

AIM

To discover, analyse and implement the best stablecoin yield strategies for Gro Protocol.

  • Consider Stablecoin strategies optimised for stability and safety, not just the highest possible yields.
  • USDC, DAI and or USDT based strategies on ETH Mainnet will generally be easier to implement. Remarkable yield opportunities on Layer 2 or alternative networks shouldn’t be excluded but consider engineering challenges and limitations.
  • Lets also explore and discuss the best methodologies and processes for strategy analysis and Gro Protocol strategy whitelisting

Context

Gro protocol is a stablecoin yield aggregator that tranches risk and yield. The first two products built on it are the PWRD stablecoin with deposit protection and yield, and Vault with leveraged stablecoin yields.

Gro Protocol aims to deliver the best DeFi yields by continuously optimising a range of market neutral yield strategies, including lending income, trading fees from Automated Market Makers and protocol incentive farming. What makes it unique is the Gro Risk Balancer, a novel risk tranching module that distributes smart contract and stablecoin risk in a targeted way.

Gro Risk Balancer integrates with Gro protocol’s deposit and withdrawal mechanisms to enable decentralised and user driven portfolio rebalancing. This allows the protocol to autonomously maintain a balanced exposure, spreading risk between tried-and-tested stablecoins and protocols.

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Does adding another stablecoin asset on ETH Mainnet add a lot of complexity? If we’re looking to optimize more for stability and safety, I think adding another stablecoin(s) could reduce systemic risk despite it being a riskier asset when measured on its own. I’m most familiar with Fei and Frax but there are a handful of others (e.g. MIM, alUSD) to potentially look into.

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My understanding is that it’d be difficult to accept stablecoins other than USDC/USDT/DAI for deposit, but it should be manageable to gain exposure in other stablecoin assets you’ve mentioned. Which stablecoins do you think would be preferrable from safety & diversification perspectives?

New yield strategy proposal: Use Orion.Money to generate 15% yields on USDT/USDC/DAI stablecoins.

Firstly, see the yields available to be accrued on Orion here.

Orion Money is a partner protocol to Anchor Protocol. Anchor, which exists in the Terra ecosystem (LUNA) provides 19.5% yields on their native stablecoin UST deposits.

Orion Money merely accepts USDT/USDC/DAI deposits on the Ethereum network, converts them to UST on the backend and then deposits them into Anchor Protocol.

Security: Anchor Protocol has never been hacked. This is partly due to lack of interconnectivity with the Ethereum ecosystem. Orion, which will be our intermediary, has had 3 audits done.

Pros:

  1. Fixed yields at 15%. This makes it predictable and reliable
  2. Security. Anchor, launched this March has not been hacked so far. And Orion has had 3 audits done.
  3. Accepts USDC, USDT and DAI

It is desired that usage of Orion will eventually lead to more familiarization and connectivity to the Terra ecosystem. UST, the native stablecoin on Terra exists both in ERC-20 and Terra forms and can be a desirable addition to our stablecoin portfolio. This is because UST is an algorithmic stablecoin that has repeatedly recovered from depeg events, in times of high LUNA volatility.

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Thanks @CryptoLoki! A couple of quick questions to better understand how the yield strategy works:

  • Will the yields earned be converted back to USDC / USDT / DAI on ETH mainnet (or UST on ETH mainnet) at every harvest?

  • I’m trying to better understand Orion’s role in the transactions. For withdrawal (based on the illustration below), would Orion pay out ETH mainnet USDC / USDT / DAI for our withdrawal first and then initiate the withdrawal from Anchor on Terra? If not, how much time would it take for Gro to withdraw our funds?

  • For the APY, would the APY paid in Orion an alternative to the APY in stablecoins, or is that in addition to the APY in stablecoins (which would make a very handsome yield :eyes:)?

Many thanks :purple_heart:

I’m most familiar with Fei and would have to look into the others more closely before commenting on them at length.

Fei as a stablecoin offers diversification benefits compared to USDC and USDT because it’s decentralized and backed by ETH, not USD held by a centralized party. It also does not have the same reliance on USDC as Dai. The current collateralization ratio backing Fei is about 400% today. There is risk to extreme price movement in ETH, but I believe there are mechanisms in place now that offset some of that risk. So while risks exist, it’s a different type of risk, which might possibly reduce overall systemic risk of the Gro system.

It’s no secret Fei had its mishaps early on with their token launch but the team has since impressively turned things around. Fei has been stable since changing some of the original design mechanisms (e.g. elimination of Direct Incentives), and the team has been nailing integrations with other DeFi protocols. Current APY on Aave is 40% but this fluctuates quite a bit depending on the utilization ratio. However, it’s typically higher than what you can get for USDC / Dai.

My recommendation would be to add small allocations (5-10%) for stables outside of USDC, Dai, and USDT, but I think we can boost PWRD and VAULT returns by adding other stables while at the same time reducing overall risk to the Gro protocol.

I think @pavel is a community member of Fei. If I missed anything or inaccurate in my analysis, mind sharing your thoughts @pavel?

pinged you on discord.

Hey joyce, just want to note that orion.money is one of the possible frontends to the anchor protocol (though the only integration with Anchor protocol on the Ethereum side is orion.money). I am not sure if Gro can integrate with orion.money directly. If not, the other option is to build the integration directly to Anchor. The developer docs is here: https://docs.anchorprotocol.com/. In this way Gro will become another orion.money :slight_smile: Orion’s vision seems to be very much along the lines of Gro, becoming a bank-like protocol with access to DeFi construct. Partnership would always be welcomed though and may enhance development time, but a bit of competition is also healthy right :wink: The team and community at large can have more of a say

With regards to the yield payments, I believe it should be in common stablecoins, USDT/USDC/DAI, The APY in ORION tokens is not an add-on, it is a replacement of the stablecoin yields. It seems it is also possible to increase the yield for stablecoins to a lesser degree by staking ORION. Their litepaper can be found here: Orion Money Litepaper Release. Building the Cross-Chain Stablecoin… | by Orion Money | Medium

My ginal thoughts on Orion and Anchor is that the yields are very effective! But also it is also coming from heavy subsidization (as of now). Generally it is true that a lot of DeFi protocols have some form of incentivizates and/or subsidization programs. But it’s still good I think to go over how sustainable is the program actually going to be and whether it would result to excessive yield chasing instead of time and effort put down into good product growth

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In terms of stablecoins that I’d like to be added it would be FRAX! Their peg has been quite stable, and I also think they are gaining traction, and being dubbed as part of the so-called DeFi 2.0 is pretty cool to associate with. In terms of yield generation, I only know the Curve and Convex pools as being the sure go-to. There are a number of staking opportunities for FRAX for various LP pools, though am not sure if the protocol is actually doing that currently

The rest of my post is quite long so if you skip I understand LOL :joy: :joy:

On building a systematic approach to yield strategizing

Now I’ll get to the more over-arching discussion regarding strategy.

I think it’s clear (at least for me) that there is a need to diversify the various strategies whether it’s stablecoins or protocol exposure. We can always try to yield chase i.e look for the highest yield, but in traditional finance that tends to:

  1. Poor decision due to an unsystematic approach
  2. Taking risk beyond capacity. Returns may be higher, but risk may be much higher making the returns adjusted for risk worse
  3. Tendency to concentrate strategy which exacerbates risk
  4. “Overpaying”, whether in actual fees, but also in valued resources such as time by not pursuing what are true value adds

While I think the framework of risk in DeFi is still more-or-less non-existent and not as robust as traditional finance, I think the above points are universally true about any investment vehicle, TradFi or DeFi.

I’m really big on systematic approaches and here’s my attempt at one (as an example and possible ideas):

I notice that in DeFi (it happens in TradFi too but not as much for most investors) diversification needs to come in two different dimensions: breadth and depth

Breadth is about the usual number of protocols/cryptocurrencies we want to expose ourselves to. Depth is the degree to which we want to expose ourselves to each of them. Gro already has this notion via the allocations and exposure infograpgics but as a community we would need to further iterate on this. For example, Compound is often sitting at 50 ~ 60% exposure.

This is probably to some degree due to the nature of DeFi in Ethereum as of today, but it is also troubling. Particularly the DeFi space of today runs on composability of assets, and particularly composability of collaterals. I would say without this composability, over-collateralization would have been harder to market in the DeFi space. But we know that wrapping collateral and debt over one another can quickly unravel in very unsavoury ways e.g 2007-2008 financial crisis. I don’t exactly know how Gro currently tracks exposure, and I’m sure the team is doing a great job on it (maybe something that can be further clarified in the docs), but there is always that scare with composable collateral systems.

At the same time, I think there are arguably more straightforward and consequently safer yield generating DeFi protocols such as for example LP pools and farming incentives. The returns can be even more variable than lending/borrowing but for the current DeFi space and there is impermanent loss looming :eyes:. But I think their use for asset composability is not yet as common as single tokens for leverage. So you can say in some ways LP pools and farming incentive tokens are not as risky or prone to market shocks

The general takeaway idea is to consider different exposure targets for different yield generating strategy classifications. I don’t know yet how fine-grained we can categorize yield generation strategies, but whatever it is the team and community can come together to assess their risk and reward payoff. Possibly with the addition of assigning “Community/Protocol Trust” to strategies/protocols/stablecoins. And even better if it can be derived objectively!

This way of thinking will also better help the community as a whole consider novel and even high-risk integrations that would hopefully be agreeable by the community at large and also not being overexposed to them

We all know (or most hopefully), that wherever you look, risks in DeFi is always going to be there in ways we’ll never quite anticipate. Potential losses are unfortunately part of the equation, but unfortunately risk is also what enables returns to exist. Hopefully going forward we can aim not just for the highest yield, but also the highest yield adjusted for risk (whatever that definition of risk in crypto and Gro’s community will be)

Hey @Haywired nice to meet you!

I’m Théo, core contributor at mStable (mstable.org).

Thanks to everyone for their analysis. Joining the conversation here after chatting with @joyce about Gro yield strategy evolution :slight_smile:

As you probably know, mStable is a Decentralised Stablecoin Ecosystem composed of a capital-efficient AMM and a high-yielding savings account product.

The latter could make sense in this discussion as mStable yield strategy is one of the healthiest & most secured in Defi at the moment.

Indeed, if we break down Save APY (23% as of today), 75% of it is coming from lending interest revenues on Aave & Compound, 15% from our AMM swap fees & the remaining 5% from LP Tokens rewards liquidation.

Historically, Save APY has always been outperforming the market, see picture below.

This Dune Dashboard (Dune Analytics ) can help and will give some historical data, as well as comparing mUSD & Save APY since Savers actually benefit from the outstanding supply of mUSD.

We really believe Gro could use Save a source of yield to 1) diversify its capital allocation 2) Derive a substantial APY directly empowering Gro DAO & users

Happy to further discuss the ideas explored here.

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I think gaining treasury exposure to some in the ‘decentralized’ basket (MiM, Ust, Frax etc) Would appeal to a large segment of DeFi users who are wary of increasing regulatory attention on the major stables. It has the added bonus of there being some attractive APYs that would boost TVL in the short term as well. Maybe Anchor could be used as baseline yield and then higher yield strategies could be utilized on top? Sandclock was doing something like this.

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Putting my vote up again for FRAX. It’s really made to stay stable through internal multi-pronged protocol mechanisms. And yes! I agree that decentralizing the stable options is also a good marketing material. FRAX team is trying to create a decentralization score for FRAX. We can also try to adopt a similar metric in the future