This strategy is in essence the same as our earlier strategy Comp Leverage Mining (please refer to the Medium article for more details. However, there’s a major difference here: it’s ETH based, which means ETH is used as the principal currency for your earnings. A lot of strategies are based on stablecoins (please refer to another Medium article). There are a few for ETH. Yearn’s strategy for ETH is to pledge ETH in MakerDAO for DAI and then earn interests on DAI via Curve. In this strategy, ETH is used directly to earn Mining Rewards.
Cream is a fork of Compound. It works essentially the same as Compound except for that it accepts more tokens for lending/borrowing. As such its average lending and borrowing rates are higher than Compound.
Recently, Cream has launched a service for its users to stake ETH with them, for participating in the ETH2 staking. ETH 2 staking provides 10%-20% yields for ETH per annual for the staking period (up to 2022 when the Ethereum is migrated to PoS)This is attractive to ETH holders, who usually have single digit APY. However, ETH 2 staking needs a stable node and a powerful computer to handle the large data storage, so it’s beyond the capacity of individuals. So many platform come to rescue by crowd-funding a ETH 2 node — and Cream is one of them. To participate, users only need to mint or buy a new token crETH2, soft pegged to ETH at 1:1. For more details, please read our early strategy paper Cream Staking ETH2.
Cream incentives its holders to stake by providing its platform tokens to users who provide liquidity for crETH2-ETH pair and also borrowing and lending crETH2. We have covered the economics of providing liquidity in the earlier paper. For this paper, we are covering the economics of borrowing and lending crETH2 (https://vote.cream.finance/#/cream/proposal/QmVsiKWaFn7CVnEyuSRnSVRo6UkCwGMaTqYK4i4W2q3TAb, details of the rewards are here).
Cream offers 700 CREAM/week for 4 weeks for borrowing and lending of crETH2. Currently, the APYs for such Mining Rewards for each of lending and borrowing are 20.83% and 45.02%, respectively. Net of lending and borrowing interests APY, the net rates are 26.01% and 25.07% for lending and borrowing. The distribution (aka Mining Rewards APY) are based on CREAM price real time.
The simple way to earn this earning is to deposit ETH (earning a small lending APY of 2.68%) and borrow crETH2, within the 75% borrowing limited. To buffer the price fluctuations, one can keep the borrowing rate lower to be 50% to 60%. At 50%, this will give you a net APY of 2.68% + 50% x 25.07% = 15.2%, which is higher than any ETH-based strategies in the market for now.
One can also further leverage the borrowing, as we have described in the strategy paper COMP Leverage Mining, by lending the borrowed crETH2 back to Cream. Currently, Cream does not stop users from lending and borrowing the same tokens concurrently. For instance, if you have 100 ETH, you can effectively borrow 100 crETH2 and deposit this 100 crETH2 back to lending. You can achieve so by either putting more ETH to start with; or making a few rounds of crETH2 borrowing and lending. Then you have a final leverage ratio of 50% only (if ETH is 1:1 for crETH2). This will give you a better yield: 2.68% + 25.07% + 26.01% = 53.76%, for the 100 ETH you have.
As you are not owning any crETH2 but merely borrowed and lent the same amount, you are not exposed to the price volatility of crETH2. crETH2 is soft pegged to ETH, as it will be converted to ETH in the future but it’s interest-bearing and inliquid, so its exchange rate to ETH may vary. Theoretically, it should be in the range of 20% plus minus, but the market can be irrational at times. Control the borrowing ratio in Cream to a reasonable limit to buffer against market irrational movements.
This incentive only lasts for 4 weeks, if the governance of Cream does not vote to extend it.
(Serenity Team, Twitter, 7 Dec 2020)