Sturdy Finance Deep Dive

Contents

1. Introduction
2. Flaws of Current Lending Platforms
3. What exactly is Sturdy Finance?
4. Participants in Sturdy Finance
5. Mechanisms of Sturdy Finance — How it Works
6. A typical example
7. Yield Strategies to Maximize Earnings on Sturdy
8. Sturdy 1.0
9. Closing Thoughts

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Introduction

Have you heard the expression “Rubbing one’s Peter to pay one’s Paul”? Well, that’s the principle that most DeFi lending platforms operate on. The interests paid by loan borrowers serve as the primary source of yield for most lending platforms in the DeFi market, if not all of them. Even though this arrangement is secure, decentralized, and peer-to-peer, eliminating the involvement of third parties, it can be quite harsh and unfavourable to borrowers who take out these loans. Some of these loans occasionally have interest rates as high as 20 to 25%. While some borrowers struggle to meet up with the high rates, they nevertheless choose to use them, especially when they have an urgent need for liquid assets. But for lenders, the higher the interest rates, the better.

According to DefiLlama, the TVL for the entire FeFi market is approximately $41.8 billion. The lending markets represent a significant portion of that value, which also provides lenders with attractive yields. Consider the amount of yield created by the borrowers’ interest rates for Aave V2, which has a TVL of more than $5.04B and over $1.5B borrowed. You’re starting to get the picture, right? Although they may appear insignificant when viewed individually, the total is enormous.

Top 15 lending platforms on Ethereum by TVL

Even with their attractive yields, the current mechanisms of existing lending platforms are flawed in so many ways relating to the yields of lenders and the interest rates to borrowers. We’re going to look into them briefly before taking a deep dive into what Sturdy Finance is and how it works.

Flaws of Current Lending Platforms

1. Non-interest-free loans: Borrowers on existing lending platforms typically pay fluctuating and often hefty interest rates. The “utilization rate,” which is the percentage of deposited funds that are borrowed, determines the interest rate. This means that borrowers pay lenders’ interest. So, for lenders to earn more, borrowers must pay more, establishing a zero-sum game in which lenders can only gain more if borrowers pay more.
2. High protocol fees: A few additional protocols provide low-interest loans but charge fees to start or close a borrowing position. These costs are sometimes excessive, but they are required since the platform must find a way to earn substantial yields for its lenders. This still brings us back to where we started.
3. Considerably low yield for lenders: Most of the time, lending protocols lower the interest rates that borrowers must pay to attract additional borrowers. Because lenders profit from borrowers’ interests, this has a negative impact on their yield. Lenders in modern and recent times seek greater yields from APYs normally reserved for risky assets without bearing on the risk of holding them. This is precisely what Sturdy provides.
4. Collateral Lending: Commonly used lending protocols allow for the loaning of collateral to other borrowers. This is undesirable for two reasons: first, the collateralized assets that are most frequently employed have a relatively low yield. Second, suppose collateral needs to be liquidated but is being lent out. In that case, the liquidation can’t take place, and the protocol might not be able to repay depositors, rendering the protocol insolvent and thus posing a systemic risk.
5. Risk of de-peg: Many lending protocols mint their own stablecoins, introducing peg risk. A stablecoin deviating from its intended peg is referred to as de-pegging, and it is a frequent occurrence among the various stablecoin types currently present in DeFi. For example, a USD-pegged stablecoin losing value below $1 adds additional risk to platform users. By contrast, Sturdy enables users to borrow well-established stablecoins like USDC, USDT, or DAI.

These issues are not crucial to endanger the safety or health of lending platforms. Still, they are vital to fostering a better experience, a higher yield on investment, and greater competitiveness with the TradFi counterparts of DeFi.

There aren’t many protocols that dare to offer a realistic approach to solving these existing challenges because the solutions are relatively complicated. Well, one, of course, is an exception. In the following section, we’ll delve deep into this platform.

What exactly is Sturdy Finance?

Sturdy is a revolutionary DeFi lending platform that allows users to earn large stablecoin returns and obtain interest-free loans. Borrowers benefit from interest-free loans, while lenders benefit from high yields. Lenders deposit assets they want to earn a return on, while borrowers offer collateral and borrow against the assets deposited by lenders. Rather than charging borrowers interest, Sturdy stakes their collateral and passes the yield to lenders.

With the help of this model, in contrast to other lending platforms, Sturdy becomes the first positive-sum lending protocol, altering the relationship between borrowers and lenders. How does Sturdy generate yields for lenders if borrowers don’t pay interest? We’ll discuss that in a moment.

Currently, Sturdy is available on the Ethereum and Fantom mainnet. It has a market valuation of $379.6K on the Fantom mainnet and around $22.9M on Ethereum. The interest received on collateral drives yields on Sturdy. On the Ethereum mainnet, ETH yields are currently about 5% (from Li) APY, while WFTM is currently yielding around 6.37% APY on Fantom (from Yearn).

NOTE: The APY yields above are single rewards from lending on Sturdy and can be doubled (or even tripled) with the help of some yield farming strategies, which I will cover at the tail end of this article to help you maximize your rewards.

Stats of the Ethereum market on Sturdy

Leading investors, including Pantera, Y Combinator, SoftBank’s Opportunity Fund, KuCoin Ventures, One Block, Dialectic, and others, have backed Sturdy. The company received $3.9M in seed and strategic rounds to provide extensive experience in DeFi and traditional financial services.

Sturdy Finance backers

Participants in Sturdy Finance

Users can interact and participate in Sturdy Finance in two ways: as lenders and as borrowers. A Single user can fulfil both positions.

Borrowers

These individuals provide assets like ETH, Curve LP tokens, etc., as collateral to borrow stablecoins like USDC, USDT, etc. There are no interest, withdrawal, or deposit fees for borrowers. Instead, their collateral is staked, and the earnings from that staked collateral are used to provide interest to lenders.

Borrowing from Sturdy has multiple benefits that are not available elsewhere. Here are some examples.

1. Loans on Sturdy are interest-free unless, in rare circumstances, when the reserve’s utilization exceeds 80%. For example, if $5 million ETH is deposited into the system and $4.9 million is borrowed, the utilization rate is 90%. Interest rates rise by 3% for every percentage point above 80% utilization, so at 100% utilization, borrowers pay 60% APR.
2. On Sturdy, LP tokens of prominent yield-bearing platforms such as Curve and Frax are available as collateral for borrowers to use. Borrowers can earn the rewards associated with these tokens on various platforms before using them as collaterals on Sturdy.

Lenders

These are depositors who supply USDC and other stablecoin assets to Sturdy in return for high and consistent yields. Yields accrue every 24 hours but are not paid out daily because they are derived from collateral staking. Here are some of the advantages of being a lender on Sturdy Finance:

1. Sturdy provides better yields. Lenders can obtain APYs, usually only available for risky assets, without taking on the risk of holding them.
2. Due to the over-collateralization of the loans on Sturdy, the staked collateral exceeds the actual value of the borrowed loans, thereby boosting lender yields even higher.
3. Because yields are derived from staking incentives, they are more steady and reliable than interest interests paid by borrowers.

Now, let’s talk about Sturdy’s mechanisms. How does Sturdy manage to do all of this? Which techniques do they employ?

Mechanisms of Sturdy Finance — How it Works

You’ve probably been curious about how this particular approach works, so it’s about time you found out.

Sturdy functions in some ways similar to other lending protocols. For instance, many contracts for the loan pools and user balance accounting are taken directly from Aave V2. However, Sturdy employs a different model for returns for lenders and interest rates on borrowers, in which yield is derived from the borrowers’ collateral. The three main instances where these new mechanics are used are depositing collateral, withdrawing collateral, and collecting yield.

For Borrowers

Depositing collateral

When a borrower deposits a token as collateral, Sturdy converts it into an interest-bearing token (ibToken). Tokens that bear interest have an exchange rate that is fixed to the value of the underlying asset and have a balance that changes over time owing to interest accrual.

Sturdy obtains these ibTokens by staking the borrower’s collateral in a different protocol, such as Yearn or Lido. After that, ibToken is locked in Sturdy’s lending pool smart contracts, where it gradually accumulates interest and starts to earn yield with time. The yields from these tokens are then distributed to lenders in the same token they deposited.

On Fantom

All collaterals on the Fantom market of Sturdy are staked on Yearn Finance. For example, if a borrower deposits WFTM as collateral, Sturdy will stake it in Yearn. The interest earned by the tokens is converted to stablecoins and distributed to lenders. And when borrowers seek to retrieve their collateral, Sturdy converts it automatically back to WFTM.

On Ethereum

Depending on the exchange rate, ETH can be converted to stETH by either staking directly in Lido or trading in Curve Finance. When a user withdraws their collateral as ETH, it is exchanged through the same pool at the current exchange rate.

Additionally, Sturdy recently launched a new feature that allows users to keep a portion of the profits from Convex staking when they deposit Curve LP tokens as collateral. Borrowers can benefit from Convex staking by earning the Base Curve APR and a portion of the CRV vAPR on the Frax3crv, ib3crv, susd3crv, and tusdfraxbp contracts that are staked. Borrowers can leverage up to 11x and earn more than 20% APY with an LTV of 90% and interest-free loans! More information about this will follow.

Some tokens that can be deposited as collateral on the Sturdy Ethereum market

Withdrawing collateral

Sturdy transfers the token originally offered as collateral back to the borrower when collateral is withdrawn by unstaking the ibToken. The borrower will be able to withdraw exactly the same number of collateral tokens they committed, regardless of whether the ibToken generates interest.

A borrower may forfeit some or all of their collateral when a liquidator liquidates some or all of their loan, which can happen when the borrower’s collateral loses value relative to the loan value or when the borrowed asset gains value relative to the value of the Collateral. Keep the health factor of your loan above 1 to avoid liquidation. You can achieve this by making partial payments on your loan or depositing more collateral. Please visit this page for comprehensive information on the risk parameters for Sturdy pools.

For Lenders

Lenders on Ethereum and Fantom Markets on Sturdy only have to deposit stablecoin to receive and accrue rewards. The stablecoins currently accepted are USDC, DAI, and USDT (fUSDT on Fantom).

Lenders receive a periodic harvest (or payment) of the yields on the ibTokens used as collateral. The value of locked ibTokens and the value of the collateral due to borrowers are compared to determine the ibToken yield. The surplus ibTokens are converted to stablecoins, swapped, and distributed to lenders after being unstaked. All stablecoins have the same annual percentage yield (APY) based on the proportional deposit of lenders.

A Typical Example

Let’s look at an illustration of the mechanisms described above to understand it better.

Michael invests 100 DAI as a lender into the protocol, and Adam offers 0.16 ETH as collateral (corresponding to 200 DAI) to withdraw the 100 DAI that Michael has deposited as a loan. Based on the workings of Sturdy, Adam’s debt remains constant over time, whereas Michael’s balance increases.

What happens behind the scenes during these periods is as follows:

When Adam offers his ETH as collateral, Sturdy stakes it using Lido and converts it to 0.15 stETH (the yield-bearing version of ETH). The lido dynamics allow stETH to rebase to a new balance of 0.19stETH over time, accumulating incentives for Michael (the lender).

Sturdy then swaps the yield of .03 stETH to 40 DAI and increases Michael’s balance to 140 DAI. Sturdy employs other protocols depending on the collateral, but the principle remains the same.

Sturdy replicates the same procedure in reverse by unstaking the stETH through the same pool at the current exchange rate when Adam pays back his loan and withdraws his ETH collateral, enabling Him to withdraw successfully.

I hope Sturdy Finance has sparked your interest and inspired you to test it immediately. However, I still have more for you. You may recall that I promised several yield-farming techniques you could use on Sturdy to increase your yield as a lender or even a borrower. Therefore, let’s begin. REMEMBER, IT’S NOT FINANCIAL ADVICE!!!

Yield Strategies to Maximize Earnings on Sturdy

These methods will largely employ the Curve LPs, which were recently added as collateral for borrowers, allowing both borrowers and lenders to leverage up to 11x and earn more than 20% APY.

1) Diamond Looping

Borrowers can earn the full base Curve APR by supplying liquidity on Curve using the Curve-FRAX BasePool LP tokens (FBP). This is the first reward. After providing liquidity on Curve, users can deposit the FBP LPs as collateral to borrow zero-interest loans in the form of USDC, USDT, or DAI, earning 75% of all CRV rewards from Convex staking (at the back end), resulting in a +2.5% yield.

Borrowers can also utilize FRAX-3CRV LP tokens, which currently yield 1.51% APY, as collateral for their loans to maximize their returns. Borrowers can obtain loans on Sturdy (interest-free) with the LP token, then return to Curve Finance or Frax Finance and provide liquidity again to receive the FBP LP tokens or the Frax-CRV LP. This can be accomplished by converting the borrowed stable from Sturdy into the necessary pool tokens on Frax/Curve.

Along with the first and second yields you are now earning from Sturdy and Frax/Curve, you will also receive a third yield if you stake or supply liquidity once more. Then, to increase your income even higher and receive more incentives, borrow even more stable (DAI, USDC, etc.) using the LP tokens from this round on Sturdy Finance. This process can be done repeatedly until you achieve the desired APY.

Since these pools deal with stables (both the collateral and borrowed assets are stablecoins), there’s minimal risk of loss, but you have to pay attention to the de-pegging of the stables and monitor your LTV ratio on Sturdy.

2) Super Stable

Here is another strategy you can use to increase yields on Sturdy. The borrowed tokens (USDC, USDT, or DAI) may be lent to other lending protocols as well as on Sturdy after being obtained by the borrower together with the yield on the FBP LP tokens (and depositing them on Sturdy as collateral and borrowing against them at zero interest, of course). Using Sturdy Finance as an example, users with a borrow position can lend the tokens borrowed back to Sturdy Finance and receive returns and rewards.

Sturdy is only one of many protocols that accept stables as a lender deposit token. Cream finance offers up to 2.69% for lending USDC on BSC and 2.46% on Arbitrum. Venus, Aave, Notional, and more are protocols that also offer stable lending. This strategy could be used in conjunction with the looping diamond when you’ve recycled for a considerable amount of time before lending out the borrowed stable.

3) DEX Lord

Let’s examine one more strategy. Here, we’re going to consider the scenario where you have deposited an FBP or a Frax-CRV LP token as collateral and borrowed USDC from Sturdy Finance. We know that using a stablecoin to provide liquidity in DEXes typically offers lower yields than any altcoin. This is because these altcoins have higher volatility and greater risks, which leads to higher profits.

After borrowing USDC, you can use it as security to borrow a more volatile altcoin with a greater yield, which you can then utilize in yield farms on DEXes like Uniswap, Curve, Sushiswap, etc. As an illustration, deposit USDC on Aave to borrow any available altcoin and use that to establish a single staking pool on Balancer or the standard double-token liquidity provision.

Sturdy 1.0

To make Sturdy even more user-friendly with a modern appearance, Sturdy wants to completely redesign the user interface (UI) and add new functionalities to their website. The redesigned version is known as “Sturdy 1.0.” Funny, yes? even though they are already in the game, it’s still referred to as Sturdy 1.0.

Among other features, Study 1.0 will have the following features: 1) a redesigned user interface, 2) a new stablecoin asset for lending and LP tokens for collateral, and 3) Improved security.

In addition, Sturdy is organizing a celebration to honor the launch and other achievements made since the launch. There will be several festivities, a surprise announcement to the community, and possibly, even an airdrop.

Closing Thoughts

Nearly all significant DeFi money markets follow the fundamental paradigm of borrowers paying interest to lenders. Sturdy is designed to fill this deficiency. Sturdy stakes borrowers’ collateral and distributes the yield to lenders rather than requiring them to pay interest. As a result, stablecoin lenders earn interest rates normally designated for more volatile assets, while borrowers get interest-free loans.

With a TVL of over $23 million, Sturdy has succeeded in becoming the largest lending protocol on Ethereum without a token. This is a revolutionary technique for solving one of the most crucial challenges of DeFi lending, providing a more sustainable and stable form of lending.

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Disclaimer:

The contents of this article are for informational and educational purposes only and do not constitute financial, accounting, or legal advice. I’m not a certified financial planner/advisor, a certified financial analyst, an economist, a CPA, an accountant, or a lawyer.