What’s The Best Yield Strategy on Solend? Whale Watching with SolanaFM
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Market downturns may be frightening for many investors. During these periods, capital preservation remains the pre-eminent strategy to minimise one’s losses from volatile trading prices. Thus, more investors are turning to DeFi yield protocols like Solend Protocol to generate lower-risk lending rewards.
However, is lending on a single platform the best way to go in this bear market? What strategies do the whales utilize? This is what SolanaFM aims to uncover in this report by digging deep into the largest wallets in Solend Protocol, exploring and evaluating their yield strategies based on risk appetite and profitability. This report will take the most recent wallet activity, particularly transactions taking place from 24th May 2022 to 31st May 2022.
Before we dive in, a quick primer on Solend Protocol and its key features.
Introduction to Solend Protocol
Solend is an algorithmic, decentralized protocol for lending and borrowing on Solana. With a TVL of over $470M and over 20 supported assets including Raydium (RAY), Orca (ORCA) and Serum (SRM), Solend is the largest DeFi protocol in the Solana ecosystem.
How Solend Works
Picture a Compound Finance or Aave Protocol for Solana. Solend enables users to lend their assets and receive an annual percentage yield (APY) from those who borrow; those who borrow pay a borrow APY to the users who have supplied the assets. At the time of writing, the Total Supply Pool consists of over USD$750M of assets while $280M of assets are borrowed from the protocol.
Most Used Markets
Pools in Solend consist of the Main Pool, the Turbo SOL Pool and the STEPN Pool amongst other pools like the NFT Pool and the Shadow Pool. The Main Pool dominance is currently at 57.6%.
The most actively traded assets on Solend are USDC, SOL, and USDT, with the figure below showing the distribution of each asset in the Main Pool.
How to Borrow on Solend
When borrowing, users pay a Borrow APY to the suppliers of the asset. Borrow APY is added to the loan on a per-slot basis; this means the amount of money to be repaid increases over time.
The figure below shows a typical borrowing transaction — a user borrows 15,015 SOL from the Solend supply pool and pays a small borrowing fee (15 SOL) to the Solend DAO wallet, receiving 15,000 SOL.
Every borrow transaction on Solend executes the following instructions:
RefreshReserve: Solend pulls the latest oracle price feeds and updates the prices of every reserve. The interest paid since the last refreshed block is calculated an increase in the borrow value is applied to the cToken Rate for supply side users.
RefreshObligation: The individual Obligations that ran the Withdraw or Borrow transaction is then calculated to obtain the Loan-to-Value (LTV) ratio before the borrow occurs. Based on the financial health of the account, the transaction will be approved or rejected.
BorrowObligationLiquidity: If the instructions above are executed successfully, the borrow transaction will be executed successfully.
With that, let us observe the lending process on Solend.
How to Supply to Solend
Users who lend/supply assets can collect an Annual Percentage Yield (APY) from the users who borrow. The borrow APY is split across the entire pool based on the following equation:
Supply APY = Borrow APY * Utilization
For instance, if there is 2 Bitcoin (BTC) in a pool, and 1 BTC is lent out at 20% APY, the suppliers of the 2 BTC will receive 10% APY each.
APY is given in the same token as the supply, since the APY on borrows is charged on the same yield. The displayed APY is based on compounding over a year.
The figure below shows a typical lending transaction.
We can see that an equivalent amount of cUSDC is sent to the user’s wallet, with the original USDC being taken as collateral. This applies for all assets being supplied in Solend.
cTokens are tradable tokens that are also earning interest through Solend. This means that you can hold cTokens in your wallet to continue earning interest. It can also be sent to other wallets, and those wallets will earn interest as well. In addition, protocols like Saber AMM have also implemented pools for cStablecoins and cSOL tokens for users to earn additional rewards.
Every lending transaction on Solend executes the DepositReserveLiquidityAndObligationCollateral instruction, consisting of the following steps:
Deposit Reserve Liquidity: The user transfers the intended amount to supply to Solend
Mint cTokens: Solend mints cTokens worth amount supplied by the user
CollateralSupplyAddress: If the instructions above are executed successfully, Solend transfers cTokens to the user successfully.
Borrowing Market Strategies on Solend
Onto the main question — What are whales doing after they borrow from Solend?
Our research team managed to retrieve whale wallets on Solend by identifying the most actively traded assets on the protocol from 24th May to 31st May, followed by the wallets with the highest trading volume for each asset throughout the period.
In this section, we will use SolanaFM’s explorer to track their fund movements and analyse how they profit from lending and borrowing. The analysis will primarily be focused on borrowing on $SOL and $USDC.
Tracking Borrower Activity in Solend
In this section we’ll go through two case studies, each with different strategies — one by a whale borrowing SOL and another by a whale borrowing USDC. Let’s explore and evaluate the course of action following a borrow transaction on Solend.
Case Study 1 (SOL)
In this case study, we observe a whale borrowing SOL from the Solend supply pool, converting the SOL into mSOL, then supplying mSOL and their existing stSOL into the Solend supply pool.
The figure below shows the initial borrowing transaction where the Solend supply pool transfers 15,000 SOL to the whale.
Let us track what the whale does after borrowing 15,000 SOL.
In the next transaction, the whale then converts an equivalent amount of SOL to generate 14,318 mSOL (Marinade SOL) through the Marinade Staking Program.
The whale then proceeds to supply 14,303 mSOL into Solend which mints the corresponding cToken — cmSOL.
Finally, the whale proceeds to supply an additional 10,006 stSOL into Solend which mints its corresponding cToken, cstSOL.
In this case study, both assets supplied are wrapped SOL tokens — mSOL and stSOL. Thus, the viability of this strategy is highly motivated by the volatility in the price of SOL. Let’s conduct a theoretical risk analysis of this strategy.
Let us first calculate the amount that the user profited. Assuming the user supplies only what they borrow from Solend — in this case, the user shall borrow 15,000 SOL from Solend and split this amount equally into 7,500 mSOL and 7,500 stSOL, generating approximately 1.76% and 3.90% APY on the Main Pool. Throughout a 7-day period, this would translate into a total of 994.7 USDC.
Nonetheless, there will always be risks involved, in this case, the risk comes about if the price of SOL were to fall more than the amount earned. We will compare the estimated earnings on the supply on Solend throughout the 1-week period with the 7-day change in price of SOL. According to CoinGecko, SOL’s 7-day price change from 24th May to 31st May is about -15%, from $53.49 to $45.39.
The worst case scenario comes about when we factor in the 15% drop in SOL’s price during the 7-day period. This drop translates into a $121,500 loss in value for 15,000 SOL borrowed. Since the loss is significantly larger than the profit of 994.7 USDC, this brings us to the conclusion that the user’s strategy may not be so effective in the short run after all.
However, it is worth noting that the situation could be different with a longer time horizon — most bears implementing these strategies intend to hold for longer periods of time, where the change in asset prices may be less volatile as their rewards compound over time. With this consideration, the risk of this strategy would be less detrimental.
Case Study 2 (USDC)
In this case study, we observe a whale borrowing USDC from the Solend supply pool, then supplying the USDC and their existing BTC into the Orca BTC/USDC Whirlpool.
In this initial transaction, the whale borrows 53,058 USDC from the Solend supply pool.
In the following transaction, the whale supplies 53,005 USDC along with 1.04 BTC into the BTC/USDC Whirlpool on Orca.
Finally, the whale account receives the yield rewards from the Whirlpool address in the figure below.
In this strategy, the whale borrows USDC and provides his own BTC supply into the BTC/USDC Whirlpool on Orca. In this case, the viability of the strategy would be primarily influenced by the price fluctuations of BTC.
Let us conduct a theoretical risk analysis. Assuming all supply into the Whirlpool is taken from the borrowed amount; we will split 50,000 USDC equally into 0.85 BTC (priced at $29,500 on 24th May) and 25,000 USDC. If this amount is supplied into the Orca Whirlpool, taking into account the 7-day average APY of 60%, the supply throughout the 7-day period would generate 575.33 USDC.
Since the Orca Whirlpool involves two assets, we must factor in potential impermanent losses due to a price change in any one of the assets. Note that BTC’s 7-day price change from 24th May to 31st May is about 1.5%, from $30,292 to $30,469. When factoring in BTC’s price change throughout the period, we found that a 1.5% increase in BTC’s price actually translates into a small, almost negligible impermanent loss. This may indicate that this strategy could be a safer option to pursue for shorter-term lending.
The Bottom Line
With the above case studies in mind, this brings us back to our question: Is lending on a single platform the best strategy to survive the bear market?
Our case studies are not entirely optimistic, factoring in the bearish market sentiments and the worst possible scenarios. It is important to note that these are purely data-driven observations of the strategies carried out by whales.
From a general standpoint however, we have observed that lending could be an effective strategy during the bear market. The effectiveness of individual strategies depends on several factors including the APY from lending the token, fluctuations in token prices, etc. Nonetheless, there will always be risks involved — be sure to DYOR before embarking on any investment strategy to protect your funds.
Loan-to-Value (LTV): Assessment of lending risks that lenders examine before approving a loan. It is calculated by dividing the amount borrowed by the value of the asset, expressed as a percentage. The lower the LTV, the less risk incurred by the lender.
Annual Percentage Yield (APY): Compound interest rate tabulated over a year.
cToken: cTokens are yield bearing deposit receipt by Solend. This means that you can convert USDC to cUSDC to get a tradable token that’s also earning an interest on Solend.
Wrapped Tokens: Wrapped tokens are assets that allow the value of a native asset from one blockchain to another blockchain, solving the problem of interoperability.
Impermanent Loss: Loss that occurs when you provide liquidity to a liquidity pool (with more than one asset involved) and the price of deposited assets changes compared to when you deposited them.
Solend Protocol: https://solend.fi/dashboard
Breakdown of Solend Pools and Assets: https://sfm.metabaseapp.com/public/dashboard/46dd0e1a-78d9-426d-bfaa-d8a683c7c84a
Sample borrow transaction on Solend: https://solana.fm/tx/3YV7Vny5HcM6c7qgqqUmsCoAfwzPBaZucUMWxRfxYj4FnYihSwMebus6wjxAEoX4NfVCv2ytNdTYcM3bJTbDpWRg
Sample lending transaction on Solend: https://solana.fm/tx/KjrRPNAjnpVe3nWm6gJstwE1BEt8JdYBwnf9i4myBidJLgVVZPMKHhX9aVmBcT63uKdsDurLSnYFu18Bi1LV1Ap
Orca Whirlpools: https://www.orca.so/whirlpools/browse
Impermanent Loss: https://docs.orca.so/