Leverage Your Aave Market Tokens
This tutorial presents detailed steps by which users can leverage their current crypto investments through a clever combination of Mai Finance’s 0% interest loans and the Aave protocol.
Last updated
This tutorial presents detailed steps by which users can leverage their current crypto investments through a clever combination of Mai Finance’s 0% interest loans and the Aave protocol.
Last updated
The picture above demonstrates how you can utilize Mai Finance to increase the earning power of your crypto investments.
Let's assume that you really like MATIC, and think that it's currently undervalued. You think it has the potential to reach $2, $5 or even $10 per token (and you may actually be totally right). However, as a small investor, you only have $100 worth of MATIC token in your wallet on Polygon. Through this tutorial we will show how you can generate more MATIC from your current tokens, because hodling is good, but putting your investment to work is better.
Aave is a lending and borrowing platform where you can deposit your MATIC tokens (among other tokens). By lending on Aave, your deposited tokens will earn yield. As an example, your $100 of MATIC will potentially generate a 1.2% rate of return over the span of 1 year (APY). Sometimes, Aave will also have specific programs that provide additional rewards on top of the base lending APYs.
As your MATIC tokens are in the Aave pool, the interest generated is automatically compounded, which means that the amount of MATIC you hold will grow over time.
By lending your MATIC token on Aave, you receive an equivalent amount of amWMATIC (aave market wrapped MATIC). You may not see these tokens directly in your wallet unless you manually add them, but you do own them.
Mai Finance will accept your amWMATIC tokens on the Yield page of the website. By depositing your amWMATIC on Mai Finance, your funds will be "transferred" from Aave to Mai Finance. You will see that the yield generated by Mai Finance is the same as the yield you would receive on Aave.
However, in addition to the base APY, Mai Finance will also compound any additional Aave rewards that are currently available back into the token of your choice, thus passively generating more of the chosen token over time. In our example (see above), Aave provides 1.16% APY for the deposited MATIC, as well as an additional 3.69% APR paid in MATIC, but this APR reward is not generating any yield. By depositing your amWMATIC on Mai Finance, the reward is collected periodically, and put back into your main deposit in order to apply the 1.16% interest rate on it too.
When amWMATIC is deposited on Mai Finance, camWMATIC is received in exchange. The ratio of these two tokens isn't perfectly 1:1, because camMATIC actually represents a share of the amWMATIC pool on Mai, in which interest and rewards are automatically compounded. It should also be noted that when you deposit amWMATIC on Mai Finance, these tokens are removed from Aave. However, if you withdraw your amWMATIC from Mai Finance, you will find them back on Aave.
Just depositing your amWMATIC (or any amToken) on Mai Finance will allow you to generate more revenue than if you just lend your money on Aave. Indeed, the fact that your base interest and your additional reward are auto-compounded means you don't have to manually claim your reward, convert it in the token or your choice, and deposit it again.
A lot of people have a hard time understanding the difference between amTokens and camTokens. The amToken is a representation of your deposited funds on AAVE. Their amount is pegged to the amount you deposited on AAVE. However, camToken represent a share of the amToken pool on Mai Finance.
Let's assume that when the amToken pool was created on Mai Finance, there was 1,000 amTokens and you deposited 100 of them. Because the pool is just created, the ratio between amTokens and camTokens is 1:1, and you own 10% of the pool. After one year, assuming nobody added any more amTokens nor removed anything, the pool generated 4.93% interest, and now there are 1049.3 amTokens in the pool. However, you still only own 10% of the pool, represented by your 100 camTokens. The ratio is now 1:1.0493, which means that 1 camToken now worth 1.0493 amToken.
Mai Finance allows you to borrow the MAI stablecoin when you deposit collateral. Currently, Mai Finance accepts a broad range of collaterals including camWMATIC from our ongoing example. On Mai Finance, your cam-token collaterals will continue generating yield while deposited as collateral, which means that the amount of your underlying asset will continue to increase over time.
When camWMATIC is deposited into a Vault, the balance on the Yield page will be 0. However, that doesn't mean that it's not compounding your AAVE interests and rewards.
When you navigate to the Vaults page and select camWMATIC from the drop-down vault menu, you will be given the option to create a new vault where you can then deposit your camWMATIC. Keep in mind that you need to keep a Collateral to Debt Ratio (CDR) of at least 155% when you borrow against your camWMATIC.
Note: On this page, you will be able to see your collateral value in USD, and the value is fluctuating based on your collateral type, the token value, and the benefits generated in the camWMATIC pool.
Tip: When I deposit collateral to borrow MAI, I always borrow 50% of the value of my collateral. Ideally, I want to stay above a 200% CDR, and if my collateral value is growing (the token doesn't lose value, and the interest is adding up) I think that it's safe enough. Also, if I'm adding more collateral to a vault, I don't try to match a 200% CDR when I borrow, unless the CDR is bellow 200%. I always borrow up to 50% see the example with numbers below).
You should visit the Vault page from time to time to verify that you're always above the liquidation ratio, and possibly add more collateral if you start falling bellow a "safe ratio". Depending on your risk profile, this safe threshold may vary.
I borrowed $0.10 of MAI, which translates to a 214.56% CDR. Now let's have some fun with my money.
I can now safely go to my favorite DEX (QuickSwap or SushiSwap are great examples) and swap my MAI for more MATIC.
After the swap, I have more MATIC in my wallet.
I initially had 0.20 MATIC in my wallet. This MATIC is now deposited on Mai Finance, generating 4.93% interest annually, and I have an additional 0.09 MATIC at my disposal from the MAI I borrowed. This additional 0.09 MATIC can be deposited on Aave, just like my initial MATIC, and we start the same process over again.
In terms of steps, the best approach is to stop when you deposit you camWMATIC in the vault. Doing so increases the collateral to debt ratio, which lowers your risk of being liquidated. Depending on the last amount you deposit, this may be negligible though. As for the number of iterations, I generally stop when I am within 1% of my initial investment. Here, I would continue the loop until I deposit 0.002 camWMATIC. I may also stop before if the gas price paid for the transactions becomes more important than what I can gain by continuing the loop.
The following examples are based on $1,000 worth of MATIC, with different CDR ratios to illustrate how to leverage your positions using Mai Finance.
| Loop Iteration | Investment | Debt | Estimated Revenue | Equivalent APY |
|---|---|---|---|---|
1 | $1,000.00 | $500.00 | $49.30 | 4.930% |
2 | $1,500.00 | $750.00 | $73.95 | 7.395% |
3 | $1,750.00 | $875.00 | $86.75 | 8.628% |
4 | $1,875.00 | $937.50 | $92.44 | 9.244% |
5 | $1,937.50 | $968.75 | $95.52 | 9.552% |
6 | $1,968.75 | $984.38 | $97.06 | 9.706% |
7 | $1,984.38 | $992.19 | $97.83 | 9.783% |
8 | $1,992.19 | - | $98.21 | 9.821% |
Adding more debt past Loop 7 would only increase my investment by less than $10 (1% of my initial investment), so this is the appropriate time to stop. The increase in APY is negligible at this stage, and I keep a collateral to debt ratio of 200.79%, which is safe enough.
As you can easily see, using a combination of Aave and Mai Finance results in almost 2x the initial APY and significantly more market exposure to the token of choice, when compared to simply holding or using Aave in isolation.
| Loop Iteration | Investment | Debt | Estimated Revenue | Equivalent APY |
|---|---|---|---|---|
1 | $1,000.00 | $571.43 | $49.30 | 4.930% |
2 | $1,571.43 | $897.96 | $77.47 | 7.747% |
3 | $1,897.96 | $1,084.55 | $93.57 | 9.357% |
4 | $2,084.55 | $1,191.17 | $102.77 | 10.277% |
5 | $2,191.17 | $1,252.10 | $108.02 | 10.802% |
6 | $2,252.10 | $1,286.91 | $111.03 | 11.103% |
7 | $2,286.91 | $1,306.81 | $112.74 | 11.274% |
8 | $2,306.81 | $1,318.18 | $113.73 | 11.373% |
9 | $2,318.18 | $1,324.67 | $114.29 | 11.429% |
10 | $2,324.67 | - | $114.61 | 11.461% |
Adding more debt past Loop 9 will not increase my investment by more than $10, so this is an appropriate place stop. The resulting CDR from 9 loops is 175.49%.
We can easily see that with a more aggressive approach the final APY is also more attractive. This is typically true with any DeFi strategy: the greater the risk, the greater the potential reward.
If you are mathematically inclined, then you can calculate your final investment based on the initial investment and the collateral to debt ratio you wish to target. The formula is as follows:
Where n represents the number of loops you want to apply and CDR is your targeted collateral to debt ratio in percentage.
In the example of a 200% targeted CDR with 7 loops, the calculation is as follows:
Using the same method, you can also calculate your final APY with the equation below:
Once again, with our targeted CDR of 200%, an initial APY of 4.93% and 7 loops, we calculate the same final APY as shown above the tables.
Everything presented in this strategy assumes the following:
The Aave APY is stable and remains the same over the span of 1 year (APY will have some variance)
The Polygon APR granted on Aave is stable and remains the same over the span of 1 year (which is unlikely)
The MATIC token keeps a relatively stable price over the span of 1 year (also unlikely)
Keep in mind that a strategy that works well at a given time may perform poorly (or make you lose money) at another time. Please stay informed, monitor the markets, keep an eye on your investments, and as always, do your own research.
