Sturdy Finance: The Decentralized Yield Farming Fund

One prominent example of this is borrowing and lending protocols. Under the dominant Aave and Compound lending protocol model, lenders only earn more when borrowers pay more. This leads to the familiar song and dance of users cycling around protocols looking for the best rates and protocols offering native token rewards in a desperate attempt to keep them.

Doesn’t take a genius to see that this is not optimal.

Sturdy offers a better option. An option where borrowers and lenders both win. An option where it evolves beyond a typical lending protocol and into something more: a decentralized yield farming fund.

We’ll define that in a minute, but first, let’s explore what the lending and borrowing game looked like before Sturdy came along.

The typical DeFi lending model, popularized by Aave and Compound, works roughly as follows:

• Borrowers provide collateral to a liquidity pool.

• Lenders provide assets.

• Borrowers take out a loan with an algorithmically determined interest rate.

• Lenders earn a portion of the borrower’s interest payments.

It’s a straightforward model that has proven very successful, with Aave and Compound becoming DeFi blue chips.

However, just because that model worked for Aave and Compound doesn’t mean it works for everyone. In reality, lending on Ethereum is dominated to a remarkable extent by these two protocols.

The reason for this is simple: when algorithmic interest rates pit borrower and lender against each other, the platforms cannot retain liquidity over the long run.

Even if rates are favorable to start, they will inevitably become less so over time as the pool becomes diluted, leading to users seeking greener pastures elsewhere. To prevent this, lending protocols often offer liquidity mining programs where the native token is rewarded to users. The problem is that the protocol must constantly print more tokens to keep yields high. This is an impossible task. No matter how hard they try, the tokens are eventually dumped, yields crash, and the protocol is left with a heavily diluted token and no users.

That is why you see so many lending protocols enjoy a brief period in the sun before getting kicked back into the mud, never heard from again. There’s nothing keeping users from fleeing to the next hot lending protocol. Just look at Euler, Benqi, or Bastion. All started off hot, but they could not keep users on the platform over time.

Aave and Compound have proven to be the exceptions to this rule, as they are buoyed by a massive first-mover advantage. However, even these giants have been taking hits during the bear market.

The culprit for the down-only charts is the same culprit stopping new lending protocols from gaining a foothold: algorithmic interest rates.

Algorithmic interest rates are determined based on demand. The more demand there is, the more expensive it is to borrow, and thus, the higher the yields are for lenders. This works great during a bull market when everybody is itching to borrow and lever up, but horribly during a bear market when everybody is just trying to survive.

There’s just no demand right now. The result is that the supply APR for USDC is currently 0.81% on Aave and 1.69% on Compound. In a world where a 1-year US Treasury Bill yields 4.68%, it’s easy to see why people aren’t rushing to lend on DeFi. Unfortunately, outside of Aave or Compound ramping up liquidity mining programs, there’s nothing they can do to boost demand. All they can do is wait for the markets to turn.

What Aave, Compound, and every other lending protocol needs is a way for lenders to earn healthy yields while keeping borrowing rates low. That way, users on both sides are incentivized to use the protocol, even during a bear market.

Turns out that is precisely what Sturdy offers.

Sturdy is similar to Aave and Compound in that lenders and borrowers interact through a liquidity pool, with lenders supplying assets in return for a yield and borrowers taking out loans after providing collateral. The major difference between Sturdy and other lending protocols is the source of the yield for lenders.

As we’ve discussed, lenders in the Aave/Compound model earn yields from the borrowers’ interest payments. On Sturdy, there is no borrowing interest rate when the utilization rate is below 80%. Instead, the yield comes from the productive use of the borrower’s collateral.

What??? Revolutionary, I know. Let’s dive into it further.

When a borrower deposits collateral on Aave/Compound, it is locked in a smart contract until the loan is repaid. It serves no purpose except to cover the loan in the event of default.

Sturdy takes a different approach to collateral. Instead of stashing it away, Sturdy stakes the collateral into a separate protocol to create interest-bearing tokens (ibTokens). These ibTokens are then locked into Sturdy’s smart contracts, constantly producing yield that is converted to stablecoins and given to lenders. When the loan is repaid, the ibToken is unstaked, and the borrower receives their collateral back.

As you hopefully realize, the choice of collateral staking strategy is critical in a protocol like this. Not only because it determines the yields earned by lenders, but also because it determines the fate of user funds.

Sturdy uses a few different collateral staking strategies:

• On Fantom, all collateral assets are staked via Yearn.

• On Ethereum, ETH is converted to stETH by either staking directly in Lido or swapping in Curve, depending on the exchange rate.

• Frax3crv, sUSD3crv, and tusdfraxbp are staked via Convex.

Yearn, Lido, and Convex are three of the most respected and safest yield-earning strategies available today. Add in the fact that staking APYs are more stable than algorithmic interest rates, and you have a protocol that consistently delivers strong yields to lenders.

Put it all together, and the process from beginning to end goes something like this, courtesy of Sturdy:

The result is that Sturdy is DeFi’s first positive-sum lending protocol.

Everybody eats.

Sturdy, as a positive-sum lending protocol, does an excellent job of delivering consistently strong yields to lenders and zero-interest loans to borrowers. This alone makes it a valuable addition to the DeFi lending ecosystem.

However, its mechanics go deeper than this. Zero-interest loans and a low possibility of liquidation enable some extreme degen behavior.

Imagine you have the Curve LP token frax3crv. On Sturdy, depositing frax3crv currently pays out 3.29% APY. Not great, but don’t worry, you can make it great.

The key is that dirty word: leverage. Because Sturdy’s loans are interest-free and based around stablecoins, a dangerously sexy flywheel reveals itself:

Now, you may be thinking that leverage like this is what ruined so many “smart” protocols and traders. You are correct; it did. But Sturdy’s leverage is inherently different for two reasons:

1. There are no interest payments.
2. You’re borrowing and providing stablecoin collateral, so liquidation is impossible unless the stablecoin depegs or interest rates kick in for a long enough time (begins when utilization rate >80%).

It’s basically free and safe leverage, and with max leverage (8.5x) on Sturdy, you juice the measly 3.29% into a much more robust 27.96%.

Besides quenching the degen thirst, this also throws an interesting wrinkle into the Curve Wars. Protocols can now offer high yields for their Curve LP tokens without having to spend boatloads of money to acquire enough CRV and CVX to direct gauge voting. Now, all they have to do is convince people their stablecoin is safe enough from de-pegging to lever up on Sturdy.

The best way to prevent a depeg? Have deep liquidity.

The best way to acquire deep liquidity? Curve pools.

The best way to attract people to your Curve pool? Sturdy leverage.

Oh wait, we might have found another flywheel here.

Few.

Sturdy has done pretty damn well considering that we’re in a brutal winter, and it’s really a testament to its mechanics. There is a clear demand for what Sturdy is offering.

The best, however, is still to come:

• Sturdy 1.0 will unveil an entire UI revamp. New additions include a one-click leverage/deleverage button to make it simpler and cheaper to lever up. It will also offer clear insights into important aspects of the protocol, such as enhanced reserve visibility and historical APY data, improving transparency and UI.

• Sturdy is also continuously onboarding new assets. In recent months TUSD-FRAXBP and sUSD have been bought on, and more are sure to follow.

• An ETH market is due to be released soon. This ETH market will incorporate Aura’s wstETH token, and through leverage, users can get 30% APYs on ETH with liquidations only occurring if stETH depegs by more than 10%. Sheeeesh.

• A token will eventually be released. With the flywheels of Sturdy, this is an airdrop you should be trying to farm.

DeFi’s dealt with a lot of negative press lately. The normies are taking turns dunking on us for things that have nothing to do with DeFi, but are associated with it in their mind. Nobody likes it. I definitely don’t. However, we can’t ignore the innovative protocols building for the future, bear market be damned.

The thought that borrowers and lenders can both come out ahead is hard to wrap your brain around. It has never existed before in DeFi. It sure as hell doesn’t exist in TradFi. Yet, amazingly, Sturdy has done just that with their positive-sum lending protocol.

Is Sturdy without risks? Of course not. Every DeFi protocol has smart contract risk, especially one like Sturdy that is integrated with other protocols. There can also always be a massive stablecoin depeg that liquidates everyone, but at that point, we have bigger things to worry about.

Ultimately, Sturdy has created a product that is a pure positive value add to the DeFi ecosystem.

That’s something worth celebrating and rooting for.