Over the past few days, the hugely popular Decentralized Finance (DeFi) stablecoin TerraUSD (UST) knocked out its counterpart Binance USD (BUSD) from third place in the ranking of the largest stablecoins. Stablecoins are extremely popular, especially in sideways markets, and their market capitalization has been steadily growing for several years. Since 2020 alone, stablecoin capital has grown by more than 3,000%.
Terra’s UST is one of the fastest growing stablecoins. Over the past six months, the market capitalization of the stablecoin has increased by 547%. As a result, the UST has by far the highest growth rate among the top 10 coins pegged to the US dollar.
UST is an algorithmic stablecoin that uses its native LUNA token and arbitrage incentives to maintain its peg to the US dollar. You can read here exactly how this mechanism works.
Therefore, below is an overview of the DeFi protocols you can use to generate the maximum return with UST. Before making an investment, however, it should be considered that the use of an algorithmic stablecoin, such as UST, is associated with certain risks.
3. White whale: 20.5% APY
White Whale is a DeFi platform that also allows retail investors to benefit from the money creation process and the stability mechanism of the UST. Since TerraUSD is an algorithmic stablecoin, it has incentive mechanisms designed to balance supply and demand.
At any time on Terra, users can burn $1.00 of LUNA to mint $1.00 UST or burn $1.00 of UST to receive $1.00 of LUNA. As a result, the system relies on arbitrage traders to take advantage of any differences that arise while supporting the exchange rate peg.
However, retail investors generally lack access to sophisticated technology and capital to earn decent profits from this mechanism. This is where the White Whale Protocol comes in.
The protocol has designed something called a Vault, which manages White Whale community funds and automatically recognizes and takes advantage of arbitrage opportunities. To take advantage of these opportunities, White Whale uses community-deposited UST and automates arbitrage trading using smart contracts. The entire walkthrough can be viewed on GithHub.
Additionally, White Whale is integrated with the Anchor Protocol lending platform, giving it a stable yield of 19.5% on UST. Therefore, White Whale’s UST Vault offers 19.5% annual returns and arbitrage profits on all deposited USTs.
Currently, the DeFi protocol generates a return of around 20.5% per year with this strategy.
2. Edge Protocol: 30-40% APY
Edge Protocol is a lending protocol that bills itself as the Airbnb of banking services. In less drastic terms, this means users can use Edge to lend and lend digital assets within the Terra ecosystem.
Things get interesting when you combine Edge Protocol with Anchor for maximum stable returns. To do this, you must first convert UST to aUST using the anchor protocol. It works by dropping UST into Anchor Protocol under “EARN”.
You can then lend your AUST, which earns around 19.5% per year, to other DeFi users on Edge Protocol. In return, you get an additional 0.3-0.5% return on your AUST, a total of nearly 20%.
Then you can lend your own stablecoin position on Edge Protocol yourself under “Borrow Market” to get more UST. This can be converted back to Anchor in aUST. Then the newly obtained aUSTs are used again in Edge Protocol, loaning them out and collecting additional returns.
So, for example, if you start with 1,000 UST and borrow a total of $769.5 and deposit it in Anchor Protocol, which earns 19.5% interest per year, you will end up with around $345, i.e. 34.5% interest on its VAT.
($1,000 + $769.5 = $1,769.5)
($1,769.5 * 19.5% = $345)
However, it is important to remember that if you wish to liquidate your position, you must first repay the loan ($769.5). Moreover, there is a risk of smart contract errors and one depends not only on the UST and the anchor protocol, but also on the Edge protocol.
1. Opening Funding: 35%-43% APY
Aperture Finance is another DeFi protocol in the Terra ecosystem. Similar to Edge and White Whale, Aperture Finance also benefits from Anchor Protocol’s stable UST performance.
However, unlike the other two DeFi protocols, Aperture Finance uses aUST to apply what is known as a delta-neutral strategy. Delta neutral strategies are portfolio strategies typically used primarily by hedge funds and other institutional investors.
Basically, with such strategies, you are betting on falling and rising prices at the same time. Broadly, the strategy can generate interest in three ways: 1. Changing the implied volatility; 2. changes in the price of the underlying asset; 3. Time frame (for short options). As the chart below shows, delta neutral strategies are extremely complex.
However, Aperture Aperture Finance fully automates these strategies for investors and offers relatively high returns on UST with just a few clicks.
Overall, Aperture Finance’s delta neutral strategies currently generate an annualized UST return of between 25.29 and 42.67%. However, even Aperture Finance’s strategies are not entirely risk-free. On top of smart contract errors, reliance on a total of three or four different DeFi protocols, and volatility in the crypto market, there can be a total loss.
So far, however, there have been no technical issues with Aperture Finance. The protocol has been generating profits for its investors for almost three months now.
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