Adventures of an aspiring (yield) farmer in the Terra Ecosystem

Introduction

Over the summer break, I found out about the world of decentralized finance (DeFi) while researching about crypto. Back then, I was looking up and comparing various Centralized Finance (CeFi) lending platforms trying to figure out which was the best and that’s where I stumbled upon similar lending platforms, but in the DeFi space such as Aave on Polygon and Anchor on Terra. To be honest, what caught my eye initially was the mouthwatering interest rates which were easily 2x that of CeFi platforms, even for stablecoins.

But how is this possible? DeFi refers to a system that aims to recreate whatever traditional finance is doing but without an intermediary (ie a bank) and this makes things faster, cheaper, and arguably, better. This was something I only truly understood recently. Before this, I thought that the only way from profiting from crypto was via capital appreciation. However, after discovering the world of DeFi I now know that the methods of profiting from crypto are endless 🤯. Gone are the days where HODL-ing meant keeping your crypto in your wallet to collect dust while waiting for it to moon.

This opinion piece will basically be like a journal where I share my thoughts and experience farming in the Terra ecosystem the past few months and will also highlight lessons I’ve learned throughout this time.

What I did

As you would have already guessed, one of the first DeFi ecosystems I came across was that of Terra. By now, most of us would have heard about the eye-popping 19.5% fixed yield on the Anchor protocol. Anchor is essentially a savings protocol offering low-volatile yields on Terra stablecoin (UST) deposits, which is the Terra ecosystem’s native stablecoin. Did I mention that there is principal protection on your deposits? According to Anchor, they have a liquidation process in place that liquidates a borrower’s collateral when the value of their borrowings rises above 60%. This ensures that you will always be able to withdraw your UST whenever you want to. Here is a well-written article if you want to better understand how the 19.5% yield is sustainable.

Basically, how this works is that I deposited SGD into Gemini and bought ETH before transferring it to Kucoin (as they support Terra network deposits/withdrawals) to swap for UST. From there, I just transferred the UST into my Terra station wallet and have it deposited into Anchor Earn. After that, all you have to do is sit back and watch your money grow! Below you can see the interface of how the Anchor Earn tab looks like.

(Interest is updated with every new block and that means roughly every 6 seconds!)

After a few weeks, I started getting restless and wanted to try my hand at something more exciting (read: riskier). After more research, I realized that I could combine Anchor and Mirror protocol to earn even higher yields. On top of that, it seemed to be a sustainable strategy and one where I did not have to be on a constant lookout for changing yields/prices. With that, I decided to try my hand at yield farming on Mirror protocol using the Delta-Neutral strategy. But what does this all mean?

Firstly, yield farming is the practice of staking or lending crypto assets with smart contracts and being rewarded with a percentage of transaction fees, interest from lenders or the farm’s native token.

Next, Mirror protocol is a DeFi platform that allows users to issue and trade synthetic assets. These synthetic assets are largely shares that track the price of real-world assets such as shares of Tesla, Apple and more. It is similar to buying and selling shares on Tiger or Moomoo, except that you can buy in fractions (Think buying $10 worth of AMZN at a time).

(Interface of the Farm tab on mirror protocol)

Lastly, a Delta-Neutral strategy basically utilizes multiple positions, in this case two, to ensure that any price movements in the underlying asset cancels out and brings the net change to 0. This strategy hedges against price movements so that you don’t have to worry about capital loss and having to close your position prematurely.

I decided to go with a delta neutral strategy because this would mean that I could yield farm for a prolonged period of time and all I had to do was keep an eye on the price of the underlying asset which I can do by simply setting price alerts on Tiger/Moomoo. The main aim is to keep the collateral ratio above 150% (see pic), you can add funds to your short farm position or close it if it gets dangerously close to 150%. At the time of writing this article, short farming mBABA (which is basically mirrored Alibaba) alone allows me to earn at a rate of almost 40% APY.

(When you hedge your short position and the Chinese market tanks RIP)

There are a few steps to this strategy. Firstly, I used my aUST, which is obtained by depositing UST on Anchor, as collateral when opening a short farming position on Mirror. Short farming is basically shorting the asset but earning yield while you are at it. This allows me to earn both the yield from Anchor (19.5%) and from the short farm at the same time! Talk about yield on yield. However, you are only able to claim your UST from shorting after a two-week lock-up period. This is put in place to prevent the user from using the proceeds to immediately buy back the mAssets, as this will cancel out the effect of lowering the premium.

Secondly, I proceeded to buy an equivalent amount of mBABA immediately after opening my short farming position to remain delta neutral. As the two-week period expired, I had the option to either deposit my claimed UST back into Anchor Earn or open a long farm position for mBABA. This is the third step, and I chose to open a long farm. Even though I am exposed to impermanence loss, the returns from the long farm should be sufficient to cover it. As of now, this overall strategy is yielding me around 50% APY! As the saying goes “time in the markets is more important than timing the market”. This is very true for this strategy as the longer your position remains open, the more rewards you will accrue. The neat part about this strategy is that your exposure is to shares which are less volatile than crypto. There are variations to the strategy that I just mentioned, and you can find out more through this article.

(A graphical depiction of the strategy I used. The illustration is taken from the website linked above)

If what you have just read excites you but you are unwilling to take on such risks just yet, you can consider trying your hand at earning outsized yields by lending on a CeFi platform which allows you to earn 8.88% pa. on stablecoins. Check out this article for more information. To make things even sweeter, you can stack multiple promo codes to allow you to unlock USD$110 worth of BTC just by holding your funds for 30 days!

What I learned

Yield farming on DeFi the past few months has made me realized certain things. Firstly, while the DeFi space is indeed exciting and promises crazy returns, it would be optimal to start with at least 4 figures ($1000 or more) in order to see solid gains on Terra. This is really important as I realized that although my % gains look juicy, the dollar amount is not so due to the fees that I have incurred along the way.

Although DeFi promises low fees, yield farming with a few hundred on Terra makes it difficult to profit still. Transferring and depositing your assets onto Terra would already take up quite some fees. Furthermore, they are in the midst of launching Columbus-5 which is the latest and biggest mainnet upgrade to the Terra ecosystem. As a result, fees have been increased to prevent spam attacks. Columbus-5 is slated to be up and running by the end of September which means fees will return to normal shortly after.

While there are many farms with 4-digit yield or more, I realized that those are highly inflationary and unsustainable, and it is mostly a game of timing. Hence there are 2 rules to farming in such farms: 1. Early bird gets the worm. The earlier you enter the farm, the more time you have to profit from it and dump on others. 2. Don’t get rugged. This second point is more obscure and tougher to practice. However, both rules will work out to your benefit if you stay well informed and read up on updates about the ecosystem regularly. I regularly watch crypto videos on Youtube by Taiki Maeda, Danku_r, and The Babylonians. If something catches my eye in those videos, I then dig deeper by reading articles on Medium or go on to the project’s Twitter account to see what other documents are available.

Lastly, with DeFi being a nascent field, it makes it a very attractive place for scammers to make a quick buck. There are so many ways that one can get scammed. As such there are a few things to take note of. Firstly, never ever reveal your seed phrase to anyone especially not to someone who claims to be from “support”. There’s only about a 100% chance they are trying to scam you and you should just ignore them. Secondly, always ensure that the web app you are connecting to is the legit one and always look through your transactions properly before approving them.

Overall, even though the TVL for DeFi projects has skyrocketed as a whole since 2020, I believe it is still rather new and that there are many more opportunities for us to take advantage of. If you have any questions or thoughts, feel free to leave a comment below or connect with me on Linkedin! Happy farming!

Disclaimer:

As always, this is not meant to be financial advice and it is imperative that you do your own research. Yield farming on decentralized platforms is highly risky for a number of factors. Please do your own due diligence (DYODD) before investing in any type of financial securities.