Low-risk Matic yield farming strategy

Yield farming is mostly a reward for the risks early adopters take and L2 technologies like plasma are still new but there are multiple reasons that I am comfortable farming on Matic + Aave :

• The Matic team has been very prolific and matic-chain’s mainnet has been live since 2019. It already hosts many prominent games and NFT platforms.
• Aave’s reputation and commitment to this project are seen by how prominently it has been added to their dapp and aggressive public endorsement.

• The ETH community hates the rise of BSC because it is just 12 computers running an Ethereum clone, i.e. totally centralized. Optimism and zkSync are at least half a year away to be truly ready (both of which are technically ambitious). Curve is already on board, bridges are functional, gas is 6250x cheaper and migration is trivial. We can expect many dapps and users moving to Matic very quickly (especially from BSC).

Set-up

Both borrowing and lending on Aave are incentivised by rewards in MATIC tokens. An equal amount of rewards are allocated to both actions for every asset. Aave can not be borrowed. USDT can be deposited and borrowed, but cannot be used as collateral.

Matic is sponsoring this program with 1% of its tokens and runs for a year ( 5x rewards 14Apr-14june, 1x till 14Apr 22 ). This is kind of what Compound did last year.

aave-polygon market

Basic strategy

Aave lets you deposit one asset and borrow another against it. You receive interest in the asset you deposited according to the current “Deposit APY” and the borrowed amount (your debt) rises according to the current “Borrow APR”. For a specific asset, how much you can withdraw against it depends on its maximum LTV ( loan to value ratio )

For BTC 70% max LTV means for every 100$ worth you deposit, you can borrow 70$ worth of any other asset against it. If prices change such that what you borrowed is worth more than 75% ( Liquidation threshold ) of the deposit, you will get liquidated, i.e. lose your deposit.

So, The strategy is to borrow 70$ of BTC for every 100$ of BTC deposited so you can earn MATIC reward for both depositing and borrowing. Plus, because you borrowed and deposited the same asset your LTV is not subject to price fluctuations (hence risk-free).

ensure that : borrowed/ balance < max LTV for that asset

Also, you only need 30$ to set up this strategy ( 100 -70 ) but you will earn deposit rewards on 100$ and borrow rewards on 70$. here is how an overall APY would be calculated:

100/30 ( aave-deposit-apy + matic-deposit-apy)
+ 70/30 ( matic-borrow-apy — aave-borrow-apr)

How can you deposit 100$ and borrow 70$ with an original 30$?
1. deposit 30$ BTC
2. borrow 21$ BTC against it
3. deposit 21$ BTC
4. borrow 14.7$ BTC against it
….

If you keep doing this eventually you will get close to 100$ deposited and 70$ borrowed but I would not go all the way because you will need some leeway when you need to untangle this and get your 30$ back.

Untangling would look like :
1. Withdraw whatever you can from your deposit.
2. Repay loan with withdrawn amt.
3. Withdraw again …

Stablecoin strategy

You can obviously do the aforementioned strategy with stablecoins too except with USDT because it cannot be used as collateral. This means rewards on USDT are much higher as activity is much lower. We can use this to our advantage by using the following setup.

Deposit 100 USDC ( has 80% LTV ) and borrow 80 USDT and get the higher rewards on that.

The process with the original 20$ would look a bit different:
1. deposit 30 USDC
2. borrow 21 USDT
3. swap it for 21 USDC on Curve
3. deposit 21 USDC
4. borrow 14.7$ USDT
….

the swapping on Curve will introduce an additional cost of 0.16% +- slippage ( swap 80 USDT for every original 20 USDC at 0.04% swap fee) both when you enter and exit this strategy.

Caveats

• the borrowed debt is always increasing faster than interest on your deposit so over time your LTV will increase. Make sure to keep an eye on this and rebalance things when needed
• For the first reason and the fact that you need to be able to withdraw something to untangle the position keep a 5% margin between your LTV and maximum LTV
• The price of Matic and hence the rewards apy will be subject to market fluctuations. Ensure Matic rewards for borrowing are higher borrow APR
• keep an eye out for slippage when swapping USDT and USDC on Curve

Resources

• Original announcement
• Curve on polygon
• Paraswap (1inch like aggregator)

How to get assets on Matic:

• Use the Matic bridge (will involve expensive ETH L1 transaction)
• from bitmax.io exchange
  get MATIC (min withd.. 140, fee 1)
  get USDC (min withd.. 40, fee 0.2)
• bridge USDC, USDT or DAI from BinanceSmartChain/xDai to Matic using xpollinate