Liquity V2 (and its forks) Stability Pool Compounder
Title: MAX LRT Type / Strategy Name
1. Select Your MAX LRT Category:
Selected Category:ynUSDx
Strategy Description:
Liquity V2, just like its previous version, allows users to deposit stablecoin (BOLD for V2, LUSD for V1) into a stability pool (SP) and earn LQTY and collateral for minting stablecoin. Whenever there is a liquidation, the SP funds are used to repay the debt on behalf of the minter, and in exchange, the SP receives collateral with around a 5% discount. By regularly checking our position in SP and swapping tokens other than stablecoin into stablecoin, we can earn a (almost) risk-free yield in USD.
Protocol Risks:
Smart Contract Risks: Stablecoin contracts and SP vulnerabilities may affect the strategy. Liquity V2 is undergoing a major update due to potential contract risk. However, there was no problem with their previous version, so I believe the new SP for V2 will be safe.
Market Risks: A Drastic drop in collateral price may result in loss of funds since a 5% discount may not be enough.
Operational Risks: We should monitor any potential updates to system parameters, such as the discount rate.
Protocol’s Liquidity History:
For V1 (LUSD), around 47M LUSD has been minted, 22M LUSD has been deposited in SP, and around 110k ETH (~ 200M USD) is backing LUSD.
SP depositors historically did not experience loss if they compounded appropriately. Sometimes, not compounding as soon as receiving collateral results in more profitable action; whenever they receive collateral, it’s usually buying the dip, which means the price is undershot so that they can benefit from price recovery of collateral asset.
There is no liquidity disruption, at least for LUSD.
Redemption Flows:
Detailed Flow:
User request for redemption.
Vault checks whether its SP position has tokens other than stablecoin.
2.1. If so, swap them through DEXs, with the benchmark price as 30-minute TWAP at most liquid DEX pools, such as Uniswap or Curve.
Update the exchange rate and return the fund to the user.
Potential Issues:
If the volatility of receiving tokens is too significant, the swap may revert. To mitigate it is recommended that governance regularly do a swap or make it permissionless by rewarding the searcher who triggered the swap by sharing the portion of tokens.
Best-case Scenario: No other token is left, so the swap is skipped, and the user receives the token immediately.
Worst-case scenario: If volatility is too high, the swap will be reverted, and the whole transaction will be reverted.
Conclusion - Why Add This Strategy:
Buying the dip is one of the most profitable and steady strategies in almost any market. For instance, many derivative exchanges make vast amounts of money from liquidations. This strategy also earns the most money when the market is bad. So, if combined with other strategies that work well in a good market, ynUSDx can deliver steady and robust revenue to users.
This is a great strategy, and I personally really like the concept—especially the “buy the dip” mechanism and the permissionless design.
It’s unfortunate that Liquity V2’s Stability Pool is currently paused due to smart contract issue.
They are working on an audit and expects to relaunch it sometime in Q2.
Additional Risks to Consider:
Swap Execution Failure:
In edge cases with high MEV or gas spikes, the swap can revert and fail the whole transaction.
How steady of a return? Is there a way to make it circular, like at some point in the process purchase more Bold or other coin and deposit into the SP.. like maybe a buy dip sell the crest type set up.. just need to identify another coin that fluctuates on a somewhat routine basis to buy/sell, maybe another stablecoin - buy/sell each time it corrects itself back to stable position, each sell of the fluctuating coin is used to buy Bold and then deposited into SP.
I wonder if there’s a way to play the stablecoins off eachother.. utilizing the way they stabilize themselves.. maybe buy and sell in a specific order that triggers their mechanics in a reversed loop, the algorithm triggering as each coin reaches optimal conditions.
If done right it shouldn’t cause any noticeable fluctuations in the market trackers.
I believe the return could increase when the market is volatile, assuming current conditions persist. However, if the market becomes more stable, returns might decrease.
After the SP receives collateral, we can sell it to BOLD to further compound the rewards.
Buying and selling stablecoins for arbitrage is also a viable strategy, but many bots are already doing this. The profit margin may be low, and the performance might not meet expectations, especially if we need to arbitrage a large amount of funds.
And cool to see a similar stratergy on Yearn.
The cool idea about YieldNest is that we can easly stack them in diffrent ways and even play with durations and tranche risks.
Would love to see somw work with our full stack.
See here as an example the ynBNBx upgrade to understand these dynamics.
