So what if we’ve entered a bear market — How PoS assets can help bring stable yields to the masses

What do you do in a bear market?

If anyone says that they know with 100% certainty how the crypto market will move, they’re likely either lying or overconfident (otherwise please DM me the future too). But even in uncertain market conditions, opportunities still abound.

Even with a significant proportion of one’s portfolio in stablecoins, there are plenty of sources to earn (relatively) high yields on them. These can be through centralized platforms such as the exchanges that offer stablecoin deposits, or decentralized ones such as the yield aggregators. Idle Finance for instance, maximizes returns from lending protocols for you, in addition to providing governance tokens for your loyalty.

While these strategies were much less attractive in a clear bull market where BTC/ETH/altcoins were appreciating sharply and users could deploy those into their respective vaults for even higher yield, for example Badger’s BTC vaults or Alpha Homora’s ETH vaults, stablecoin vaults are perhaps a safer choice for many for now.

However, with less users leveraging and borrowing stablecoins on their crypto assets, together with the declining value of tokens gained from yield farming, even stablecoin strategies have shown to be affected by a bearish market.

DAI deposit rates on Aave v2. Source: Aavescan

Hence, there is an opportunity and need for more diversified yield streams, which can provide sustainable but still attractive yields, be it in a bull or bear market. And the answer to that might just be Proof-of-Stake (PoS) assets and the staking rewards they provide.

Could PoS be the next big opportunity for yield?

Although there has been much hype about the DeFi market and its Total Value Locked (TVL), an often-overlooked market is that of PoS assets and their respective networks, such as ETH2.0, Polkadot, Terra, Solana, etc.

The key differentiator of these PoS assets is the more stable yield they provide in the form of fixed staking rewards, which are usually lower but also a lot less volatile than “degen” yield farming in DeFi.

LUNA staking returns (based on tax, oracle, gas rewards, excluding airdrops). Source: Flipside Crypto — Terra

For the more crypto-native folks, this can serve as an avenue to diversify into more stable yield sources, but the truly large opportunity lies with the retail users instead. These are people who may not be as familiar with crypto and would be satisfied so long as they can obtain a decently higher yield than the negligible amount that their banks are currently providing.

What we will see increasingly are apps that are entirely optimized for the average retail user, with UX/UI that is superior to most DeFi protocols but effectively taps on crypto to provide higher yields, be it through DeFi lending platforms, yield aggregators, or PoS staking rewards.

The crucial factor then for these apps wouldn’t be how high of an APY it can provide to its users, but rather how safe, stable, and predictable the underlying yield is. It’s simply not possible for these funds to be funnelled into farms that offer 1000% APY one day and be rug-pulled from the next. PoS assets with their more stable yield could thus be key to unlocking this.

A stake in PoS staking

There are various ways to obtain exposure to PoS yields, each with their different pros and cons.

1. Hold PoS assets and stake them directly

This is the most straightforward of them all and needs little explanation. Less savvy users may choose to go with the centralized exchanges, many of which provide locked or flexible staking options.

But for the more crypto-native, higher yields can be obtained by staking directly with the validators themselves, though that also requires more effort in choosing and monitoring the validators. Users do have more control however, and with the availability of staking derivatives through Lido or Bifrost, liquidity of staked assets can now be unlocked too.

However, holding the PoS assets themselves also means taking on the risk (but also upside) of their price movements.

2. Protocols that generate yield via PoS assets — Anchor

There are also protocols that provide higher returns by effectively tapping on underlying PoS yield, but in more novel ways. Anchor, a savings protocol built on Terra that provides 18%-20% APY on Terra’s UST stablecoin is the prime example of this.

Source: “Terra: The DeFi Giant Reaching Mainstream Adoption” by Phang Jun Yu on Messari

There are 2 key participants in Anchor — the depositor who lends out UST for up to 20% APY as well as the borrower who puts up bLUNA (bonded LUNA) as collateral to take out a UST loan at a maximum of 50% LTV.

How it essentially works is that the staking rewards generated from bLUNA that would otherwise go to the borrowers, are now used to pay out the yield owed to depositors (in addition to the interest rate charged to borrowers too). Due to the over-collateralized loans, the total collateral value would always be at least double of the total amount borrowed, which allows for substantial PoS rewards to be earned, thus contributing to the high yield on UST deposits.

Of course, in the long run, Anchor’s guaranteed deposit APY should be expected to fall as LUNA staking rewards and also ANC rewards (which are the main incentive for borrowers currently) start declining too.

But in the meantime, for users who are simply looking for higher yield on stablecoins, without any direct exposure to crypto price fluctuations, Anchor would be an attractive vehicle that relies (mostly) on a different source of yield compared to the rest of DeFi.

3. PoS yield aggregators — Stone

Just as yield aggregators for stablecoins have emerged in DeFi, they will too for PoS assets. And rather than aggregating across say different lending protocols, they will be aggregating yield across different PoS chains instead.

This would also mitigate one of the largest risks with Anchor currently, that is its reliance on LUNA and the Terra ecosystem (though Anchor does have plans to support other PoS assets as well).

To this end, Stone is a project that’s building a cross-chain PoS yield management platform, that will draw from the staking rewards of blockchains like ETH2.0, Polkadot, Terra, Solana, etc. While Stone also offers pure stablecoin vaults currently, upcoming vaults will combine PoS staking rewards too, offering potentially higher yet more stable yield.

Source: Stone Litepaper

Imagine an optimized yield index that consists of a set of diversified PoS assets as well as stablecoins that are earning yield in different DeFi protocols. It would provide the following advantages:

  • Diversified streams of yield — from the staking rewards of PoS assets (across different blockchains) that may be more reliable in certain market conditions, as well as from providing stablecoin liquidity to DEXs or lending protocols that may provide higher returns in others.
  • Aggregation of the fragmented liquidity of staking derivatives — for example Stone could have an sETH asset that represents the various liquid staked PoS tokens of aETH (Ankr), bETH (Bifrost) and stETH (Lido), further diversifying the risk of slashing on the staking protocols.
  • Exposure to upside from crypto price appreciation through the PoS assets, which should also have lower volatility compared to other altcoins.
  • Optimal asset allocation based on factors such as users’ risk profiles or the Sharpe ratio, with the index rebalancing as needed.

Aggregators such as Stone would thus be able to provide users with more diversified yield streams, including that from PoS assets, and also further optimize according to the users’ preference.

Moving up the stack to mass adoption

When it comes to PoS yields, there lies opportunity across the entire stack, from the PoS assets themselves, to the staking derivatives that unlock liquidity, and finally to the aggregation layer where protocols provide risk-optimized, higher yields backed by the staking returns of those assets.

As the underlying components are built out and consolidated, we expect to see greater activity towards the top of the stack, which is where protocols such as Anchor and Stone play in.

Two key trends will emerge to further enable this.

Firstly, the above-mentioned optimization of frontends, which will involve easy-to-use mobile apps, sitting above the aggregation layer, and tapping on their underlying yields.

Such apps that target retail users are already live or in the works. For instance, Linen supplies funds to Compound via a more user-friendly interface, SmartDeFi adds a Risk Assessment Layer to Idle Finance, whereas Alice is building an app that offers fast payments in UST and high savings powered by Anchor Protocol.

Secondly, synergies between these yield streams and protocols that enable fixed rate or risk tokenization/tranches will become more commonplace.

Protocols that facilitate the above such as BarnBridge, Pendle, 88mph, and Tranchess will be crucial. Diversified yield streams can offer more stable yields with higher predictability but does not go as far as to guarantee a fixed interest rate.

This can potentially be done with risk tranches however, for instance a tranche that only allocates yield from PoS staking rewards to the risk-averse profiles, and another that provides exposure to the underlying assets’ upside to users who’ve indicated higher risk tolerance in their initial risk assessment.

Even if we’re licking our wounds due to extreme volatility in the crypto market, it’s important to take a step back and realize just how early all of us are. Ten years down the road, it’s unlikely that users will be using the same interfaces that we are now in DeFi.

However, the financial primitives that generate yield will be the same, and the key mechanisms that manage and allocate according to risk will be the same. When the liquidity mining incentives are phased out and the “degen” yield farms die out, we will still be left with products that offer superior opportunities and access compared to our current alternative.

Disclaimer: LongHash Ventures may hold positions in the assets mentioned and this article should not be considered as financial advice.

About LongHash Ventures

LongHash Ventures is an investment fund and accelerator focused on catalysing the growth of the native Web 3.0 economy. To enable true ownership, permissionless access, and trustless interactions, we launched a DeFi-focused fund and invested in projects such as Balancer, Acala Network, Instadapp, and Zapper. We have also partnered with Polkadot and Filecoin to accelerate more than 40 global Web 3 projects which have raised more than $100m in the past 2 years. Through such investments and venture building, we are committed to realising our vision where anyone can access a more transparent, secure, and decentralised Web.

Website | Twitter | Podcast

--

--

--

We are a Web 3 investment fund and accelerator actively collaborating with founders to navigate the crypto landscape in Asia and build their Web 3 model.

Love podcasts or audiobooks? Learn on the go with our new app.

Recommended from Medium

Started the Crypto Journey

Historic Moment: Result of the 1st WSBDApp ETP Vote

Rome Terminal: Tokenless DeFi dApp platform

Strategic Partnership: DeFly Ball x Dreamboat Capital

FUNCTION X INNOVATIVE TECHNOLOGY

m² — Weekly Round Up

Fintech Podcast — Episode 278

ZebPay launches BNB. Wait, what?

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
LongHash Ventures

LongHash Ventures

We are a Web 3 investment fund and accelerator actively collaborating with founders to navigate the crypto landscape in Asia and build their Web 3 model.

More from Medium

Dapplooker Latest Product Launches: Faster Data Syncing, Website Redesign, Amazing Community Built…

How to Swap Stable Coins like USDC, USDT to $LINK in 1 Click on Ethereum, BSC & Polygon Networks

Dog parks and Blockchain economics

Introducing Impractical Money