More Advanced Use Cases for Fixed-Rate Loans

Additional advanced strategies that traders can utilize on Term Finance
June 26, 2023

Last week, we introduced advanced use cases for fixed-rate loans, for active participants who may want to short assets or borrow assets to farm an attractive LP pool. This week, we will review additional advanced strategies that traders can utilize on Term, including expressing a view on DeFi rates, using futures to achieve incremental yield on a BTC denominated fund, and creating rate forwards / arbitrage opportunities.

Thierry the Rates Trader

Thierry, a Euro rates trader in a past life, thinks current short-term stablecoin borrow/lend rates in DeFi are too low and will increase as DeFi liquidity is used up. Because of this, Thierry wants to create a position where he earns a floating rate (which he expects to rise) and pays a fixed rate for a duration of 6 months—similar to a swap in TradFi markets. Accordingly, Thierry deposits his USDC as collateral on Term and borrows USDT for 6 months. He then deposits that USDT in a platform like Aave or Compound to earn the variable rate.

Thierry has now created his desired rate position and if USDT depegs, then it will be cheaper for him to repay his USDT borrow—his trade is even more profitable!

Satoshi the BTC Fund Manager

Satoshi manages a Bitcoin fund that is benchmarked to the performance of BTC. He wants to offer outperformance to his clients but wants to do it in a prudent manner without excessive leverage. Satoshi thinks there may be an opportunity with BTC futures arbitrage, in which he buys spot BTC and sells futures to take advantage of a price mismatch between the spot and futures prices.

His fund locks 100 wBTC as collateral on Term to borrow 2MM USDC at a fixed rate of 3.5% for 6 months. He takes that 2MM USDC and buys spot 66.67 BTC at a price of 30k per coin. He uses that as collateral on his futures platform and sells forward 66.67 BTC using the 6-month BTC futures contract, which he sees trading at a 4% premium to spot. He is not worried about liquidation on the futures platform because he owns the spot and is fully funded.

In 6 months, Satoshi delivers on the futures contract locking in his 4% profit (80,000 USD). Fees and interest are fixed on Term, totaling 39k for those 6 months. Because rates are fixed on Term, Satoshi knows with certainty that after paying off his debt plus interest of $2.039MM, Satoshi will still have 41k USDC of arbitrage profit for those 6 months which he can keep as extra return or buy even more BTC for his fund!

Arwen the Arbitrageur

Arwen is a big brain trader and loves to look for market inefficiencies. She started her crypto career by arbitraging spot across different exchanges, but as those trades died out, she started looking for other opportunities. Recently she has been arbitraging DeFi lending rates across chains and protocols where she finds the cheapest borrow and then lends to the platform offering the highest yield.

Term’s auction model is a perfect environment for Arwen, allowing her to put in levels knowing she will only borrow at her target rate or better. Arwen is an active participant on Term and participates weekly. One week, not a lot of borrowers show up for the 3-month wstETH/ETH auction and Arwen receives a windfall on 100k of ETH borrow at 1%. Arwen now has a couple of routes if she wants to box the trade:

  1. She can go and earn the staking yield for the next 3 months or,
  2. She can lend the 100k of ETH for 3 months at 5% on a different platform, or
  3. If she wants to stay on Term, she can create rate forwards by lending for a different duration. For instance, Arwen can tender to lend ETH on a 2-month auction on Term at 1.5%. If she gets filled, her implied borrow rate on the ETH from months 2 to 3 is free*. Then in 2 months, she can then use that 100k of ETH on whatever opportunity offers the highest yield and everything earned is incremental gains.

*1.015^(2/12) = 1.01^(3/12)

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