Yield Farming With Rehypothecation Uses a Spiral Borrowing Pattern

Stack Sats with DeFi: Single Asset Strategies Using Rehypothecation

DeFi Strategy Series: Yield Farming on a Single Asset

Sometimes a single-asset strategy is optimal. If you decide to go all-in on a coin, skip the complications of stablecoins, liquidity pools, and impermanent loss. Go straight for maximizing your single-asset yield.

Now that BlockFi is cutting their interest rate on BTC from 6% to 2%, you can still earn 8%-13% on BTC using Decentralized Finance. On Binance Smart Chain, returns on ETH are even better than ETH2 staking. As always, this article is for information only and not financial advice. Crypto investment always carries the risk and liability of loss.

First off, you'll need to be committed to a long enough time frame that yield farming makes sense. Though gas fees on Binance Smart Chain are $1-10, instead of the $40-200 fees on Ethereum, single-asset strategies will all come with some initial and exit cost that will have to be earned back. If your investment window is shorter than 1 month, it probably doesn't make sense to spend money on gas and fees- just keep the asset on-exchange or in your wallet.

Rehypothecation, or recursive borrowing, is an advanced and potentially risky investment strategy which has the following benefits:

Benefits of Recursive Yield Farming

  • Boosting available interest rates (for example: from 2.5% to 8%, or from 10% to 20%)
  • Maximizing reward tokens farmed

To execute this strategy a trade is set up where money is deposited, reborrowed, redeposited, and reborrowed and so on. Depending on the parameters chosen you can get some mix of the two benefits above. Most investors don’t execute this strategy on their own. Instead, they will employ yield farming contracts to do it.

Autofarm, Beefy Finance, and ACryptoS are yield farms which employ rehypothecation strategies in their vaults. The underlying asset is invested in Venus.io, a blockchain lender located on Binance Smart Chain. The yield farming vaults can boost returns on normally low yielding coins like BTC, ETH, BNB, LINK, ADA and DOT. These rates will fluctuate daily. Do some shopping around for the best rates when you're investing!

Fees and Expected Returns

WebsiteTVLCompounding Return on Coins
(Variable APY)
Bonus Reward Token APR Entrance FeeExit Fee
ACryptoS$326 Million BTC: 11.6%
ETH: 8.86%
BNB: 21%
DOT: 1.16%
LINK: 1.68%
ADA: 8.6%
BTC: 10%
ETH: 15%
BNB: 14%
DOT: 8.6%
LINK: 9.7%
ADA: 5.15%
0% 0.5% of assets + 5% of gains
Autofarm$1.326 Billion BTC: 12.5%
ETH: 12.2%
BNB: 18.1%
DOT: 3.7%
LINK: 5.5%
ADA: 9.2%
BTC: 8.6%
ETH: 10.9%
BNB: 15.9%
DOT: 6.7%
LINK: 16.3%
ADA: 10%
0.1% 0.1% of assets + 2.6% of gains (reflected in vault APY)
Beefy$567 Million BTC:12.4%
ETH: 11.9%
BNB: 41%
DOT: 3.8%
LINK: 5.5%
ADA: 9.2%
None 0.1% 0.1% of assets + 4.5% of gains (reflected in vault APY)

On Binance Smart Chain, the yield farm Autofarm launched its new Venus Vaults on April 9th. It offers 8-13% compounding interest on Bitcoin, 8-12% on Ethereum, and 16-20% on BNB, plus AUTO token rewards ranging from 6%-16%. $200M in BTC was locked into the old version of this contract. How is this high interest rate possible when other crypto banks like BlockFi have cut their interest rates to 2%?

Rehypothecation is used in these strategies to maximize the reward token, XVS. This XVS is then sold on Pancakeswap to the single-asset vault asset and reinvested the same way. The interest rate is increased without significant exposure to risk in a second asset. The asset level in the vault sometimes will drop in the short term due to accruing interest payments. The interest rate will change based on the reward's market value, but the vault will continually increase the desired token's quantity over the long run. The yield farm systems will try to automatically adjust collateral levels safely as interest rates change.

Similarly on the Ethereum blockchain, many strategies use rehypothecation of DAI stablecoin on the Compound lending platform to farm COMP tokens. DAI rehypothecation is a common Compound token farming mechanism. In fact, at some points there are more cDAI tokens in circulation than actual DAI tokens. Because COMP’s interest rate on DAI is typically higher than the DAI interest rate on Maker, it makes sense to first farm tokens before using DAI for something else on the blockchain.

This similarity between Compound and Venus isn’t an accident- actually, Venus is a fork of Compound.

Example of a Rehypothecation Transaction

Deposit BTC 0.5
Borrow BTC 0.3
Deposit BTC 0.3
Borrow BTC 0.18
Deposit BTC 0.18
Borrow BTC 0.1
Deposit BTC 0.1

Using your BTC in DeFi allows you to control your keys, unlike the centralized finance providers BlockFi, Celsius, and Nexo.

For Bitcoin holders who need an alternative to BlockFi: you can stack sats on BSC. Moving BTC to Binance Smart Chain is 1:1 so it won’t be taxable the same way trading into renBTC or WBTC on Ethereum is. However, making a profit on the farming investment will be a taxable gain in some countries, even if you do not sell your bitcoin afterwards.

There is some contract risk involved in this type of transaction. Complex contracts may be subject to exploits or other malicious hacks which can steal funds.

You're free to withdraw any time. Currently BTC needs to route thru Binance to send it back on-chain. If anyone is aware of any bridges or services to bring BTC onto BSC without incurring a trade, please drop us a note on Twitter @bscgateway!

Manual Rehypothecation on Cream, Aave, Venus, or Compound

You can employ this strategy manually for assets that aren't supported in farms. Some more exotic assets, such as Sushi, Uni, or Pancakeswap LPs can be leveraged in this way. This is risky, as it’s important to always maintain a safe collateralization ratio. If you end up borrowing at your limit, you will be forced to liquidate at a loss. This liquidation is a taxable event, unlike just borrowing.

Other DeFi Strategies

Finally, keep in mind there are alternative strategies in DeFi, which are suitable for other investment goals (such as minimizing volatility). Please check out our other DeFi Strategy articles where we cover this entire chart in detail:

Optimal Strategy Graph

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