Vesper lending strategies — VSP & vVSP

[Note: The following is not financial advice. I currently work with the Vesper Finance DAO as a researcher and consultant, and I hold VSP. Of course, this is my research and not yours so, as always, DYOR.]

Adventurous Vespernauts holding $VSP and $vVSP received excellent news this week. Recently, the collateral factors for both VSP and vVSP has increased to 25% on CREAM, and an on-chain vote from Rari Capital to give users access to borrowing and lending of $VSP and $vVSP via a new FUSE pool passed unanimously. Let’s take a look at the role of VSP and vVSP within the Vesper ecosystem, at the protocols that are opening up more use-cases for these tokens and how these developments can be translated into interesting strategies.

What is Vesper?

Vesper is a DeFi protocol launched in February 2021 that provides users with a platform for easy-to-use DeFi products. Today, the Vesper product suite includes a variety of interest-yielding Grow Pools: smart contracts that enable users to passively increase their crypto holdings. As such, Vesper Grow Pools are a so-called ‘yield aggregating’ service. (For more information on yield aggregators, you can read a summarizing article of one of my most recent papers.) On top of the continuous development effort of the Grow Pools, other products are being developed and will be developed over time. One of those will be Vesper Earn, a “Deposit-X, Earn-Y” mechanism, launching very soon.

Apart from these products, a core pillar of the Vesper ecosystem are VSP and vVSP, the latter representing a user’s stake in the vVSP vault. VSP tokens give users access to the Vesper revenue model, a process where part of the collected fees by Vesper flow to the treasury box to buy back VSP on the open market, whereafter that VSP gets distributed to vVSP holders. VSP stakers (= vVSP holders) are thus effectively sharing in the revenue created by the Vesper ecosystem. Furthermore, vVSP tokens are eligible to participate in governance votes and are crucial in the decentralization plan of Vesper. In short, VSP and vVSP are pivotal parts in the Vesper ecosystem.

What are C.R.E.A.M. and Rari Capital?

C.R.E.A.M. is a decentralized peer-to-peer lending platform, and is essentially a fork of Compound Finance. Other than Compound, C.R.E.A.M. focuses on longtail assets, with the goal of increasing capital efficiency for all assets in crypto markets. On April 25, an on-chain vote passed to have VSP and vVSP listed on the platform. Until now, users were only able to borrow VSP or vVSP with other collateral assets, as Vesper tokens were not allowed to be used as collateral. That changed on July 9, when the C.R.E.A.M. committee augmented the collateral factor of both VSP and vVSP to 25%.

Rari Capital is a yield-aggregator with a multitude of products, of which one is called ‘Fuse’. The Fuse platform enables anyone to instantly create their own lending and borrowing pool. As a result, users can use a Fuse pool to lend and borrow the assets of that specific pool freely against each other. On July 12, an on-chain vote passed that a new Fuse pool will be created with the following assets: ETH, WBTC, USDC, DAI, VUSD, VSP, vVSP and MET.

Lending strategies

Because of the above developments regarding lending and borrowing of VSP and vVSP, a multitude of strategies will pop up. The following is a non-exhaustive list of possibilities that Vespernauts are now exposed to. All of the below strategies are using leverage, borrowed assets are being used as a funding source to increase the potential return of an investment. As such, every strategy comes with a certain risk attached, and even though combining multiple strategies with each other is possible, the user should be very aware of the potential risks that are attached to increasing leverage.

Deposit vVSP, borrow VSP, stake VSP (and repeat)

The theory: One of the most straightforward strategies would be to deposit vVSP as collateral to earn a small APY of x%. Next, use your vVSP to borrow VSP at a cost of y%. Finally, stake your VSP in the vVSP vault to earn z% APY. This strategy can be used in a spiral, where this cycle is repeated multiple times.

The risks: There is a small financial risk wherein the cost of borrowing VSP (y%) is getting too expensive for the strategy to be profitable. Especially when the cycle is repeated multiple times, that cost becomes increasingly important because of higher leverage. In an efficient market, liquidation risks are relatively small as the value of VSP will increase or decrease similarly to the value of vVSP due to arbitrage opportunities.

Deposit vVSP, borrow risk asset, deploy risk asset

The theory: You could take the first strategy outside the Vesper ecosystem, by depositing vVSP as collateral for x% APY, to borrow a risk asset like ETH or BTC for a cost of y%. This risk asset can then be deployed in any strategy you want outside of Vesper for a return of z%, and you will keep your exposure to the Vesper revenue model with the deposited vVSP. This strategy thus allows you to keep accruing VSP with vVSP, and use your borrowed capital simultaneously to participate in other yield activities elsewhere.

The risks: There is a small financial risk wherein the cost of borrowing the risk asset (y%) is getting too expensive for the strategy to be profitable. Secondly, if the price of the risk asset increases more compared to vVSP, chances of liquidation increase, as the collateral in vVSP will prove to be of insufficient value to cover the borrowed risk asset. The user should keep an eye on the price relationship between vVSP and the risk asset to avoid liquidation.

Deposit stablecoin, borrow VSP, stake VSP

The theory: Deposit USDC, DAI, VUSD or any other listed USD-pegged stablecoin as collateral on C.R.E.A.M. or the Fuse pool to earn x% APY. With these stablecoins as collateral, borrow VSP against a cost of y%. Deposit the borrowed VSP into the vVSP vault and earn z% APY. With the VSP that you have earned in the vVSP vault after a while, you can pay back the VSP loan that you took. Over time, you should end up with the vVSP that you got, in addition to your initial stablecoin deposit. Your final APY should be something along the lines of x-y+z%, not taking into account gas costs.

The risks: First, there is a small financial risk that the cost of borrowing VSP (y%) becomes too high to be profitable. This will happen for example if the borrowing demand for VSP skyrockets relative to the supply. Secondly, as the price of VSP increases, chances of liquidation increase, as the collateral in stablecoins will prove to be of insufficient value to cover the borrowed VSP.

Deposit risk asset, borrow vVSP

The theory: If you are holding a risk asset (ETH or WBTC for example) and you want to simultaneously continue holding that asset and earning a high yield on it, you can put your risk asset as collateral to earn x%. Let’s assume that you value vVSP in your risk asset (that is, instead of saying your vVSP is worth 15 USD, it is worth 0.0045 ETH). If you think that vVSP will increase in value soon, you can borrow vVSP for a cost of y%. In case the vVSP vault has a return of z% APY, you are basically earning x-y+z% on your risk asset. You still have to add a percentage if vVSP increases in value, or subtract a percentage in case vVSP decreases in value.

The risks: The risks in this strategy are slightly bigger compared to the second strategy. If the price of vVSP denominated in ETH goes up for example, your chances of liquidation go up. If the price of vVSP denominated in ETH goes down, it eats away profitability of the strategy as you’ll need more vVSP denominated in ETH to pay back your loan. Because your collateral is a risk asset, you should think deeply about how you value your assets (for example, denominated in USD or in ETH or BTC).

Conclusion

It should be clear that there is immense potential value when users can deploy their vVSP in these strategies. Instead of selling VSP returns from the vVSP pool, investors are now able to use their vVSP as collateral to borrow other assets which they can then deploy however they want. This leveraged strategy allows Vespernauts to keep accruing VSP from the Vesper revenue model, whilst also deploying this capital somewhere else, being it in the Vesper ecosystem or outside of it. This opens up many new ways of using VSP and vVSP in different yield strategies, and even though it is important to keep in mind that some strategies can become increasingly risky and that complex mechanisms can amplify both profits as losses, the utility of both VSP and vVSP will be enhanced greatly with the introduction of C.R.E.A.M and Rari Fuse pool.

Twitter: Simon DeFi
Follow Vesper on Twitter, Telegram, YouTube, and Reddit.

Web3 Research Analyst