TLDR;
Understanding this strategy took over 10 hours of research and talking directly with the Harvest team.
You won't be disappointed.
The Single strategy on Arbitrum uses a compounded lending strategy based on the Lodestar lending protocol to generate yield for certain assets.
It does so by borrowing against collateral from deposits.
That borrowed asset, despite being a liability, is then used as a collateral to earn more.
This works when the associated protocol has awards to offset the costs of capital.
Why consider this strategy?
Back to my [[DeFi Portfolio Management]] foundation, part of figuring out what to do in DeFi depends on allocations -- not just based on asset types, but also on the strategies.
My strategy has been long ETH (we'll see how this goes with the recent dips below $3000 today, which I'm buying up in addition to the DCA).
But when markets are down and potentially going sideways as they have been, what should I be doing? Till I started to understand more and more about DeFi, particularly being a liquidity provider, it was opportunity cost.
But....it's possible to actually generate some yield while holding long term.
Enter Harvest's Lodestar strategy for wstETH on Arbitrum.
What is Lodestar?
Lodestar is another lending protocol on the Arbitrum chain. It's like [[Aave]].
A Supplier provides asset that earn interest. It's like being a private lender or bank, where you charge interest.
This is what I had thought was the way Harvest was executing on yield farming strategy.
It ended up being something quite different.
Instead, the Harvest protocol borrows.
In the same way that we put up collateral when taking out a loan, such as our home for refinancing, Harvest takes the deposited asset, in this case wstETH, and borrows.
Here's what how it would start off if you were doing this manually:
The amount available to borrow is typically the collateral that is put up OR is provided by suppliers.
In the case of Harvest, the protocol is both the suppliers (as a form of collateral), and a borrower.
To do this, I'm going to bridge my wstETH from Ethereum to Arbitrum:
Once I have wstETH on Arbitrum, if I were doing this manually, I could borrow and post collateral:
Based on the interest rates, it looks like a supplier can earn 6%; and the borrower pays 3%.
This seems backwards -- the borrower should paying more, and a percentage of those fees rewards the suppliers.
However, Arbitrum issued a grant to Lodestar to develop the lending platform.
For a lending platform to succeed, it needs supply.
As you can see from the screenshot, the supply is about 2x of the borrowing. I don't know what the typical ratio should be, but even if this is correct, the amount of borrowing is always capped by supply.
What would increase supply....increasing the earning rate.
According to the Harvest Finance community (which has been quite awesome and helpful, which is why I would encourage all DeFi newbies to visit):
Without ARB rewards borrowing would be -6.28% and lending 2.92% (edited)
The rewards create an opportunity to get higher returns lending and a lower cost of capital.
How does Harvest use this for yield farming?
Some background details on the Arbitrum grant can be found here, but the core mechanisms is called folding: it's taking loaned assets and putting them up as collateral to then take out another loan and repeat the cycle till the Value To Loan (VTL) imposes a limit.
Example:
Harvest is able to take the deposited wstETH and put it down as collateral.
So in this case, there's an LTV of 75%.
Harvest places 1 ETH as collateral which also earns as a Lender.
Harvest then borrows back out .75 ETH on which it will pay -3% (although the listed cost is much higher like -7.18% right now).
Harvest can then take that borrowed each and, at the same LTV of 75%, lending it again.
But this is lending only 75% of the .75ETH.
Harvest takes the earned ARB (remember, the incentive mechanism provided by Arbitrum to bootstrap Lodestar), and converts them into the underlying asset. So your initial deposit grows.
The '$LODE earned is harvested and enabled back to you, the depositor, as $fLODE, which is like a receipt for the value of $LODE.
That seems confusing, but the breakdown is:
Compound your initial deposit by folding (supply -> borrow -> supply) cycle
The
$ARBrewards are used to increase the underlying assets being folded$LODEis awarded for using the protocol (supplying and borrowing) and added to the harvested rewards for the depositor
Would you do this yourself?
No.
It get dizzy just thinking through the mechanics. I definitely wouldn't want to do this myself.
Harvest does it auto-magically.
What do you think?