Thread by @wjvill

Is collateral borrowing the best way to get exposure to stablecoin yields? Or is there a better solution?

In bull or bear, market dynamics are different. Let's analyze, but first we'll introduce a new collateral-free method of borrowing, De-Collateralize.
bit.ly/3iIngm1

This is a way to get exposure to stablecoin yields if you are holding mostly non-stable tokens such as ETH, or a way to get exposure to non-stablecoin yields if you are sitting on a large pool of stablecoins in your portfolio.

This method has no liquidation risk, requires no collateral, less expensive, and can be more profitable in the right market. Instead, what is akin to borrowing APY is paid upfront. You get exposure to the yield position and the token of your choice.

De-Collateralize is essentially a fixed-term, fixed-rate loan backed by yield positions in the market. It thrives under bear, sideways, or downturn market conditions. You simply select your input token, yield position, and output token in order to maintain exposure.

For example, let's say I have 10 ETH and want to get exposure to Yearn's USDC vault at 8% for the next 3 months, I input 10 ETH, receive ETH minus the borrow APY immediately, and get full exposure to the USDC yield position.

This also works smoothly in the opposite direction. If I input 25000 DAI, I will receive DAI minus the borrow APY immediately and full exposure to the ETH yield position.

Bear or Bull, borrowing via collateralization is not always the best route, even more so under downturn conditions. Let's evaluate how yields in the DeFi market may shift based on a bull or bear market and how it affects borrowing.

Likely the main use case for borrowing stablecoins is to maintain exposure to a growing asset, such as ETH, while also getting the juicy yields that holding stablecoins can provide.

Of course, it comes with its tradeoffs. In a market that is downturning/trending bearish, your ETH could be liquidated. Borrowing rates may also be too high, and you lose capital efficiency due to collateralization requirements. You only get a % in stables of your input capital

So what happens to yields in a bull or bear market? In a bull market, people are overwhelmingly situated in assets like ETH or BTC due to its rise and the optimism the market presents. They want big gains.

As a result, borrowing via collateralization is a popular option. Since fewer people are sitting on stablecoins and more are holding onto core, non-stable assets, stablecoin yields typically peak. There are, of course, other factors, but outside the scope of this thread.

This means borrowing becomes a hot activity. But what happens as the market begins to cool off or trend into a downturn or bearish cycle?

Fear hits the market and people begin to hedge against a downturn. Suddenly, people begin to diversify more and convert their positions into stablecoins to wait out the uncertainty.

The market then becomes overwhelmingly positioned into stablecoins. As a result, stablecoin yield positions become saturated and APYs drop in addition to some other factors.

This, in turn, has the natural effect of decreasing borrowing activity for stablecoins and occasionally forces this behavior through means of mass liquidations. For example, the liquidation events that happened not too long ago on May 19th.

During this shift of the market's dynamic, it's entirely possible that yields on assets such as ETH and wBTC begin to rise, due to the decreased saturation, and could even result in a flip. What exactly does a "flip" indicate here?

A flip happens when yields begin to be higher for ETH and other highly liquid non-stable assets compared to their stablecoin counterparts.

So during a downturn or bearish cycle, what options do we have to maintain a strong yield position?

If the market has flipped, people are likely sitting on a stack of stablecoins and diversifying their positions with some non-stable assets. If they want to gain exposure to the higher ETH yields or non-stable yields, they will need to take on risk.

Borrowing ETH from stablecoins is not necessarily optimal to get exposure to yields and hasn’t been the route many take in the market. In general, borrowing becomes less of an option, and diversifying into non-stable pairs for yield could be risky if their values drop.

If the market is in a downturn or has cooled down and yields have not flipped, the market becomes significantly less capital efficient. It isn’t uncommon to begin over collateralizing up to a 400% ratio. This of course is not optimal.

We're excited to dive into De-Collateralize and support those who are interested in building such an alternative lending platform on the Element Protocol. Catch us at #HackMoney and reach out to us if interested in working on this.

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