SturdyFinance: Sustainable stablecoin yields, 0% interest rate lending, and protocol risks
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SturdyFinance: Sustainable stablecoin yields, 0% interest rate lending, and protocol risks
Although liquidity in the DeFi sector continues to dry up, SturdyFinance has been delivering sustainable stablecoin yields or interest-free loans for us.
Navigating Web3 tides with focused insights
By 0xbread, TechFlow
While liquidity in the DeFi space continues to dry up, SturdyFinance has consistently delivered sustainable stablecoin yields or zero-interest loans.
How does it do that?
As a lender, you can select the token you wish to earn yield on within the platform. Currently, SturdyFinance offers lenders two available options:
1. Deposit stablecoins such as DAI, USDC, or USDT to earn approximately 6% APY.
2. Deposit LP tokens, such as FRAX/USDC, to earn around 1% APY. Additionally, you can borrow DAI, USDC, and USDT at 0% interest rate using these LP tokens as collateral. You may then deposit the borrowed stablecoins into stablecoin yield pools to earn additional returns, with a maximum LTV (Loan-to-Value) ratio of up to 90%.
At first glance, SturdyFinance appears similar to other lending protocols on the market. However, upon closer inspection, we find that the yield strategy employed by SturdyFinance is vastly different from other lending protocols.
In existing lending protocols, lenders earn interest paid by borrowers. Therefore, for lenders to earn higher income, borrowers must pay higher fees.
Sturdy uses a different model where yields are generated from borrowers' collateral. When borrowers provide tokens as collateral, Sturdy automatically deploys them via protocols like Yearn or Lido to convert them into interest-bearing tokens (ibTokens). Over time, these ibTokens accrue yield, which is then distributed proportionally back to lenders.
Let’s illustrate this with an example:
A lender deposits 100 USDC into the protocol to earn yield. A borrower pledges 0.05 stETH as collateral and borrows the 100 USDC deposited by the lender. The Sturdy contract automatically stakes the stETH in Lido to generate yield. Over time, the 0.05 stETH grows to 0.06 stETH. Sturdy then converts the 0.01 stETH gain into 40 USDC and increases the lender's balance to 140 USDC.
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For lenders, this stablecoin yield is sustainable compared to other lending protocols because it originates from major yield-generating protocols. Distributing these yields does not negatively impact Sturdy itself.
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For borrowers, existing lending protocols typically require borrowers to pay variable and often high interest rates. In contrast, Sturdy charges 0% interest, except in atypical cases when reserve utilization exceeds 80%. According to the protocol, once utilization reaches 80%, each additional 1% increase raises the interest rate by 3%. If utilization hits 100%, borrowers would face a 60% interest rate.
Admittedly, a few other protocols also offer low-interest loans, but they usually charge opening or closing fees. Sturdy charges no fees whatsoever—borrowers only need to pay gas costs. Many protocols issue their own native stablecoins, introducing potential depegging risks. In contrast, Sturdy exclusively uses established stablecoins like USDC, USDT, or DAI, eliminating such depegging risk.
Additionally, there is another source of yield for stablecoin lenders.
The protocol further stakes deposited Curve LP tokens in third-party platforms such as Convex. Of the yield generated from this activity, 75% goes directly to the Curve LP providers, while the remaining 25% is distributed to stablecoin lenders.
Although Sturdy’s internal risk is extremely low, it introduces a new type of risk not commonly found in traditional lending protocols—the risk associated with third-party protocols. If any of these external protocols are compromised or fail for other reasons, borrowers could lose their collateral.
To mitigate this, Sturdy ensures that third-party protocols are as mature and well-backed as possible. Nevertheless, such risks cannot be entirely eliminated, especially in the volatile world of DeFi.
Regardless, Sturdy has come up with a clever solution to address the challenge of achieving sustainable stablecoin yields during bear markets.
While maintaining a secure risk profile, Sturdy is worth watching—and participating in.
Reference: https://twitter.com/ThorHartvigsen/status/1582691971407130624
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