Isolating ERC4626 yield
Fringe Finance DeFi platform (fringe.fi) allows you to tailor your financial exposure in a controlled, nuanced way to maximize capital efficiency.
If you are a holder or considering to be a holder of ERC4626 yield-bearing assets, this user guide shows how to use Fringe without losing exposure to your existing assets and to hedge against the price volatility of underlying assets to your ERC4626 tokens.
Problem being solved
Use case 1
- Gain exposure to ERC4626 token’s yield while retaining exposure to your existing assets.
As an ERC4626 holder, I want to earn yield from my ERC4626 assets without losing exposure to my existing asset holdings.
- To note, the above obviates the need for users to sell their assets to open ERC4626 positions.
Use case 2
- Gain exposure to a ERC4626 token’s yield without being exposed to the underlying asset.
As an ERC4626 holder, I want to hedge my exposure to the underlying asset of the ERC4626 tokens that I purchase.
- To note, this use case is for situations where the underlying asset is not a stablecoin.
Use case 3
- Gain exposure to ERC4626 token’s yield and wanting to maintain exposure to my own crypto assets, which I expect to appreciate relative to stablecoins. This is particularly relevant in a bull run.
As an ERC4626 holder, I want to hedge my exposure to the underlying (stablecoin) asset of the ERC4626 tokens that I purchase.
These use cases can be achieved using Fringe Finance via the same mechanism. As shorthand, let’s call these use cases “isolate ERC4626 yield from underlying exposure”
Mechanism overview
To achieve this strategy using Fringe Borrow facility, you as an ERC4626 participant would take the following steps:
- Step 1: On Fringe Borrow, use assets you already own by depositing as collateral,
- Step 2: Then on Fringe Borrow, borrow the underlying asset of the ERC4626 you are interested in.
- Step 3: Use the borrowed underlying asset to invest in (mint) the ERC4626, via your preferred third-party ERC4626 platform.
This mechanism is diagrammed below.
Your exposure dynamic using this mechanism is presented below:
This results in the following:
- You achieve isolated exposure to the ERC4626’s yield.
- You now have no exposure to the ERC4626’s underlying asset. Any downward price action of the ERC4626’s underlying is hedged and therefore does not affect you.
- This also applies to underlying stablecoins, which experience a “downward” price action relative to other crypto assets — particularly in a bull run.
- You retain the exposure to your collateral asset — given you did not need to sell your assets. You may continue to enjoy its upside potential. Your original asset positioning is not negatively impacted.
The net effect is that yield seekers can participate in the ERC4626 ecosystem in a more capital-efficient, flexible, and nuanced manner.
Instructions
This guide explains how to achieve the strategy using Fringe Borrow.
There are various starting points you may take when executing this strategy. These include
- having a known quantity of capital and wishing to seek optimal yield via an ERC4626 token you have already identified or yet to identify, or
- wishing to take a known ERC4626 position size and calculate the starting collateral to use.
There may be others also, depending on your personal circumstances.
To clearly illustrate at least one example in this user guide, we will use the scenario where you have a known quantity of capital and wish to seek optimal yield via an ERC4626 token you have already identified.
To note: The strategy described in this user guide may not be applicable if you already hold a given asset and simply wish to seek yield on that asset via a corresponding ERC4626 token and without hedging the underlying.
Using Fringe Borrow facility
For a straightforward approach, follow these steps to achieve the strategy using the Fringe Borrow facility:
- Use any third-party app to identify your desired ERC4626 yield opportunity
- Deposit collateral on Fringe
- Borrow underlying asset for the ERC4626
- Use the borrowed underlying assets to open the ERC4626 position
Use any third-party app to identify your desired ERC4626 yield strategy
Given we’re using the scenario where you have a known quantity of capital and wish to seek optimal yield via an ERC4626 token you have already identified, first use any relevant third-party app to identify your desired ERC4626 yield strategy. Note the underlying asset for the selected ERC4626. For the purposes of this example user guide, we’ll assume the underlying asset is ETH.
Deposit collateral on Fringe
Navigate to app.fringe.fi, connect your web3 wallet and select your chosen chain.
Deposit your assets as collateral onto the Fringe Borrow user interface.
Note: For this use case, it is not necessary for you to use the same chain on which the ERC4626 exists, given this mechanism does not entail any atomic operations. You can choose a chain on which Fringe has sufficient liquidity of the asset you wish to borrow and where there is the most favorable borrow interest rate.
Identify your asset to deposit. Let’s assume you hold PENDLE and wish to borrow against it while maintaining your exposure to PENDLE.
Press the
button to present the Deposit modal. Then specify the amount of collateral you wish to deposit.
Note: Fringe may first ask you to Enable spending your PENDLE.
Then press “Deposit”.
You will now see your PENDLE deposited as collateral.
Borrow underlying asset for the ERC4626
For this example, we’re going to borrow ETH which will be later used on the third-party ERC4626 issuing platform to mint the ETH-based ERC4626.
Press the
button to present the Borrow asset selector and select ETH by pressing the Borrow button next to Ethereum.
Note the Borrow APY for the asset you wish to borrow. This will apply to the borrowed amount for the period of your loan. This can be thought of as the ‘insurance premium cost’ for achieving this strategy of hedging the asset underlying the ERC4626 position you wish to open on the third-party ERC4626 app. You can offset this cost against the expected capital gain of your collateral assets.
Once you have selected the capital asset to borrow (ETH in this case), the Borrow modal will appear. Enter an amount of ETH to borrow that will result in a Safety Buffer within your risk tolerance.
In the example below, we’ve chosen to borrow 0.025 ETH ($93.66), which is less than the full borrowing capacity (0.03 ETH) of your collateral deposit.
i.e. the amount shown as follows:
This results in a Safety Buffer of 34.13% -
which allows the collateral value (PENDLE) to fall in relation to the loan value (ETH) by 34.13% before the position becomes subject to liquidation.
To note: Your collateral’s borrowing capacity is a function of the collateral value multiplied by the loan-to-value ratio of the collateral asset and capital asset.
When ready, press “BORROW” to borrow the specified amount of ETH. Confirm the transaction using your web3 wallet.
The Borrow UI will now show that you’ve borrowed 0.025 ETH against your PENDLE collateral. And your web3 wallet will reflect the additional 0.025 ETH balance that you have borrowed.
Use the borrowed underlying assets to open the ERC4626 position
On the third-party ERC4626-issuing platform, use that borrowed 0.025 ETH to mint the selected ERC4626 yield strategy. To achieve this, refer to that platform’s user guides.
Using Fringe Margin Trade facility
Rather than using the Fringe Borrow facility, you can use Fringe’s Margin Trade facility to achieve the same outcome. This approach requires calculating the correct leveraged trading position size to hedge your ERC4626 position.
If you choose this approach, the following steps apply:
- Use a third-party app to select your desired ERC4626 yield strategy
- Open the ERC4626 position
- Calculate the size of the required Fringe Margin Trade position to hedge the underlying in your ERC4626 position
- Deposit collateral on Fringe
- Open the Fringe Margin Trade position
Note: Though it is possible to use Margin Trade, we recommend using Fringe Borrow for its simplicity to achieve this strategy. For that reason, we do not further describe here how to achieve this strategy using Margin Trade.
Why Fringe?
Given Fringe supports a wide range of regular and exotic assets, Fringe offers multiple advantages:
- Due to the number of tokens we support as collateral, you can execute the above strategy without having to forgo exposure to your small cap assets.
- Fringe allows you to hedge a greater range of assets that underlie ERC4626 tokens due to the variety of lending assets we support. Therefore, Fringe offers the opportunity to achieve this hedging strategy for a wider range of ERC4626 assets.
Fringe is able to support a wide range of exotic assets due to its purpose-built security measures, which other lending platforms lack. For example, see our New Price Oracle model and our Partial Liquidation model.
Using Fringe also results in lower interest rate volatility — because Fringe employs a unique interest rate model based on a controller that targets a utilization rate. This means that you are better assured against surprise interest rate spikes that are characteristic of other DeFi platforms which simplistically enforce a fixed relationship between a given lending asset’s interest rate and its utilization rate.
Summary
Fringe Finance allows you to execute nuanced and sophisticated financial strategies to maximize the capital efficiency of your asset holdings. You have the power to decide your desired exposure to maximize your potential gains and minimize potential risks.
As this user guide shows, all this can be achieved via simple-to-use DeFi facilities.
- Fringe Finance — DeFi for everyone
About Fringe Finance
Fringe Finance is a non-custodial DeFi margin trading and lending platform that supports a wide range of exotic assets across multiple chains. Fringe has advanced user facilities for easier interaction and advanced protections against price manipulation attacks for lender and borrower safety. Fringe is part of the DeFi evolution.
