Risk-less stable asset mining contributes to one of the most important parts of the DeFi on-chain interactions. Curve has been claiming the throne of the TVL in all DeFi applications, largely thanks to the vigorous stable asset mining activities. Contrary to the massive volatile nature of the crypto market, it provides an alternative less risky and stable rewards for yield hunters, and diversify the risks in the crypto baskets.
Due to the Curve’s unique rewarding mechanism, the allocation of CRV rewards depends on the governance decisions, in other words, the more CRV tokens accumulated, the more possible one may decide the weight of mining rewards on the liquidity pools. Convex, built in collaboration with Curve, is currently the single largest owner of veCRV, and has the most governance power to decide where CRV incentives should be distributed. The competition for CRV and CVX became increasingly intense recently. More and more projects, like StakeDAO, FRAX, Abracadabra, Olympus, etc., have been involved in the battle.
What if we can have a DeFi model that may stand beyond the fight, but can still enjoy the boosted rewards in the stable assets mining. And to make it even sexier, what if these rewards can be leveraged?
Inspired by Defrost Finance, built on Avalanche, here comes the prototype of a leveraged stable asset mining instrument.
An Overview
Leveraged stable asset mining instrument (LSAMI) is a DeFi model that allows users to have a leveraged position on stable asset mining. It is fully compatible with other stablecoin models like Curve, Convex, StakeDao, etc. The leveraged position gives users enhanced yield, while still maintaining low risks, as leverages are created on stablecoins with lower volatility.
How does it work?
Firstly, LSAMI will apply a DeFi yield-compounding model, similar to the concept of Beefy Finance or Super Vault in Defrost Finance. After the underlying assets are deposited, it will periodically harvest the mining yields provided by other protocols and reinvest them for the underlying assets. Therefore, you will see an ever-increasing amount in these deposited positions.
Secondly, these positions will be collected and preserved by LSAMI in a Vault. The vault can give birth to an innovative DeFi instrument for leveraging your positions. Let’s call it the Leveraging Instrument Token (LIT). LIT is over-collateralized, tokenized and behaves somehow like a stable asset. But the main purpose of LIT is for the users to leverage their farming positions. Therefore, it is not necessarily maintaining a One dollar peg, but the over-collateralization makes sure its preservation of value and some levels of arbitraging opportunities.
Thirdly, A liquidity pool will be created on stable asset exchanges like Curve. The liquidity pool will facilitate the minted LIT to be exchanged for other stable assets and power up the leverages for users. LIT Liquidity contributors will be rewarded with LASMI’s platform tokens. The bigger the pool is, the fewer slippages there will be in trading LIT.
Lastly, after LIT is transacted for other stable assets, they can again be contributed into the stablecoin mining vault in LSAMI to compound the rewards periodically. And again, users can mint additional LIT and repeat the procedures above. The leverage can become quite high for the stablecoin leveraging model, but one needs to mind the possible slippages in trading LIT for other stable assets.
Some key features
- LIT is regarded as the leveraging instrument, not necessarily a stablecoin, although it shares some similar features to a stablecoin, like over-collateralization by assets in the vaults and relatively low volatility.
- The LSAMI protocol does not need to be involved in the CRV or CVX governance battle to provide a leveraged and boosted stablecoin reward for users. As it can be fully composable with Curve, Convex or other stable coin protocols. Still, it will be helpful to fight for some additional rewards for LIT.
- The Loan to Value (LTV) rate of LIT can be set to be close to 100%, as the model is for stablecoin yield harvesting, with low volatility and the collaterals are natively interest-bearing in the vault, like the Curve’s LP tokens.
- Liquidation could be excluded in the model, as the model works with stablecoin pegging. If one of the stablecoin goes below 1 USD, then it will directly have an effect on the LIT’s value. But it will not damage the model’s fundamentals, which is providing leverages, rather than maintaining a stable value. The liquidation mechanism is not a must.
- LIT is regarded as a tool for adding up leverages. In the leveraging process, LIT is actually sold for other stable assets. Therefore, it is possible that LIT’s value will be a bit lower than 1 USD, though it is fully collateralized by the yield-bearing tokens consisting of USD-pegged stablecoins. But the depreciation will be maintained at a relatively controlled and expected level, affected by the APR in the Curve or Convex protocols. The slippage will somehow perform as a kind of cost for leverages.
- The liquidity of LIT can have leveraged effect on the total TVL of the LSAMI protocol. As users are taking leveraged positions by LIT and can tolerant some LIT price slippages.
This model can be evolved into something more flexible, by providing leveraged positions for yield hunters beyond stablecoin farming. And it will be extremely powerful by integrating the flashloan mechanisms for providing over 10x leveraged with just one transaction.
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