Lendle and Perp DEXes
In the ever-evolving world of decentralized finance (DeFi), yield generation has become a coveted pursuit for crypto enthusiasts. In previous articles, we explored lending and borrowing use cases, particularly in the context of pseudo delta neutral farming strategies for margin trading.
However, today, we delve into a sophisticated DeFi strategy that combines lending and borrowing on our platform with the usage of third-party Perpetual Decentralized Exchanges (Perp DEXes).
The GMX Model: Pioneering Perpetual Trading in DeFi
GMX, a trailblazer in the world of decentralized finance, introduced perpetual trading to DeFi. At the heart of GMX’s functionality lies the GLP pool, comprising assets like Bitcoin, Ethereum, and USDC. Users can contribute their assets to this pool, either single-sided or multi-sided, to acquire a share of the pool’s total value locked (TVL). Notably, these assets are not provided in isolation; they are combined into the pool, creating a dynamic basket of currencies.
Exiting the pool allows users to choose the asset they want to retrieve, and conversely users are given rewards for providing underutilized assets. The goal is to maintain a target weight distribution within the pool, preventing overexposure to any one asset. Positive slippage rewards those who withdraw overrepresented assets, while negative slippage balances the pool for new liquidity providers.
Liquidity providers, through their asset contributions, serve as counterparties for perpetual traders. This role is pivotal as it influences their yields over time. When traders take long or short positions, they can borrow assets from the GLP pool, incurring trading and borrowing fees. This mechanism mirrors the “funding fee” in traditional perpetual contracts, creating a tight relationship between liquidity providers and traders.
The Gains Model: A Synthetic Approach
In contrast to GMX, Gains employs a fully synthetic approach. Liquidity providers contribute DAI to a single vault, the DAI vault, while traders use this collateral to speculate against price feeds. Profits and losses are settled within the Gains vault, offering traders exposure to a synthetic price feed.
Historically, however, traders tend to lose money, which means that liquidity providers reap profits from the traders’ negative Profit and Loss (PNL). With this in mind, over the long run, providing liquidity as a counterparty on Perp DEXes should provide a positive yield, bearing in mind that this does expose a liquidity provider to the assets in the basket.
In the realm of perpetual trading on Perp DEXes, the dynamics can be distilled into a somewhat binary outcome. As a liquidity provider, your role is clear-cut: if traders incur losses, you emerge victorious, but if they prosper, you bear the brunt.
However, this simplicity masks a certain amount of complexity, where three pivotal factors steer the dollar-denominated yield:
- Asset Price Movements: The first determinant is the trajectory of assets within the pool. If these assets appreciate, you stand to profit; conversely, a decline in their value translates to losses.
- Trader Profitability: The second factor hinges on the traders themselves. If they execute successful trades and yield profits, you’ll witness a dip in your returns. In contrast, when traders face losses, your gains amplify.
- Fees and Borrowing Costs: The third component encompasses the fees levied on traders and the borrowing costs they incur. If a flurry of trading activity persists and traders struggle to maintain profitability over time, it can potentially yield an attractive Annual Percentage Rate (APR) or a lucrative source of yield, primarily sourced from the fees that traders contribute to the system.
In essence, this dynamic interplay between asset prices, trader performance, and transaction fees orchestrates the multifaceted financial landscape of perpetual trading in the DeFi sphere.
Navigating the Lendle Opportunity
Now, let’s introduce Lendle into this intricate landscape. Suppose you desire to take advantage of the potential yield offered by a GMX-style Perp DEX on Mantle Network, and that this platform contains Bitcoin, Ethereum, Mantle, USDT, and USDC, five coins. Assume also that you are hesitant about exposure to the basket of assets. In that case, Lendle provides an elegant solution.
Imagine you have 1,000 USDT; you can supply this asset on Lendle and borrow Bitcoin, Ethereum, and Mantle.
With these borrowed assets, you can become a liquidity provider on said perpetual DEX. Naturally, you’ll need to add USDC and USDT to the pool, as well. The beauty of this strategy lies in its pseudo delta neutral position. Since the volatile assets provided to the pool are borrowed from Lendle, price fluctuations matter less. Instead, you earn fees from the traders, contributing to a positive yield.
In this context, supplying assets on Lendle becomes a source of positive yield, reflected in the supply Annual Percentage Yield (APY), as well as an additional source of profits in the form of $LEND rewards. While there is a negative yield on the assets you’ve borrowed from Lendle, this is usually offset by the positive incentive Annual Percentage Rate (APR) you earn in $LEND on those same assets.
Moreover, your engagement with the Perpetual DEX’s pool adds another layer of income. Here you stand to earn a Profit and Loss (PNL), which can be either positive or negative, depending on the trading outcomes. Additionally, the trading fees accrued contribute positively to your overall returns.
It’s worth stating again that the volatility and price movements of assets in the pool are effectively hedged. This hedge is made possible because the assets within the pool are sourced through borrowing from Lendle. This aspect of the strategy not only mitigates risk but also enhances the stability of your financial position.
Lendle: a flexible DeFi tool
In the world of DeFi, complex strategies can offer remarkable opportunities for yield generation. Lendle, built on the innovative Mantle Network blockchain, opens doors for those seeking to optimize their returns from providing liquidity to Perp DEXes without bearing the full brunt of asset exposure. By intelligently combining lending and borrowing, users can find a delicate balance in their quest for financial gains. Lendle exemplifies the ever-expanding possibilities within the DeFi ecosystem, providing a glimpse into the future of decentralized finance.