Levered USD & ETH Carry

Overview

By taking advantage of stablecoin inherent neutrality (i.e. all stablecoins are designed to maintain a peg), you can earn interest differentials between USD lending markets and ETH borrow markets.

ETH borrows can be hedged by holding ETH which is then swapped for rETH to earn additional ETH yields. This rETH portion can be sold at anytime to cover any potential ETH debt.

Strategy

The strategy consists of 2 positions:

• Leveraged short USD/ETH: By looping ETH borrows against USD supply, you can earn the difference between USD supply interest and ETH borrow interest.

• Leveraged long rETH/ETH: By looping ETH borrows against rETH suply, you can earn the difference between rETHliquid staking yields and ETHborrows.

By combining the two positions above, there is minimal exchange risks as the ETHdebt is always covered by the rETHportion.

Protocol Parameters

Aave

• Max LTV for USD: 75%

• Average USD supply interest: 6-9%

• ETH borrow interest: 2.3%

Compound

• Max LTV for rETH on ETH market: 90%

• ETH borrow interest: 2.14%

• COMP reward on ETH borrow: 0.51%

Rocket Pool

• Liquid staking APR: 2.6%

For ease of reference, the example below assumes a starting capital of $100 USD and an even split between the 2 positions.

Create a 2x leveraged short USD/ETH position

Steps

1. Flash loan $50 USD amount from Balancer

2. Lend $100 USD on Aave

3. Borrow $50 ETH

Results

Balances

• Collateral: $100 USD lent

• Debt: $50 ETH borrowed (50% LTV)

• Net Collateral: $50 USD

Interest

• Net on starting capital: 7.85% USD

• Net on borrowed amount: 6.7% USD (9% USD supply - 2.3% ETH borrow)

Create a 5.3x leveraged long rETH/ETH position

Steps

1. Swap $50 USD for rETH

2. Flash loan $215 rETH (5.3x max lev with 10% buffer) from Balancer

3. Lend $265 rETH on Compound

4. Borrow $215 ETH

5. Swap ETH for rETH to repay flash loan

Results

Balances

• Collateral: $265 rETH lent

• Debt: $215 ETH borrowed (81% LTV)

• Net collateral: $50 rETH

Interest

• Net on starting capital:

  • 2.29% ETH

  • 1.35% COMP

Final result

The net yields for this strategy are as follows:

• 7.85% USD

• 2.29% ETH

• 1.35% COMP

This is a blended ~11.5% yield which is an additional 2.5% yield as compared to just a pure USD lending strategy (i.e. a 24% yield improvement).