Auto-Repay on ApeCoin Loans to Maximize Returns on Staking
Last updated
Last updated
At Parallel we have emphasized the importance of auto-compounding your ApeCoin staking rewards to maximize staking yields. But similarly important for users who borrow and stake is to keep their outstanding loans from auto-compounding, and indeed Parallel now offers Auto-Repay to those borrowing ApeCoin and staking them alongside their NFT's. Why and what benefit does the user see?
The core problem auto-repay solves is straightforward: borrowing interest rates on ApeCoin are high, and those borrowing rates climb even higher if we allow interest to auto-compound. Specifically on Parallel users are able to borrow and lend cAPE--our derivative token which corresponds 1:1 to ApeCoin staked via our auto-compounding pool.
The minimum interest rate on cAPE in ApeCoin terms is the auto-compounding staking yield on the single-side ApeCoin staking pool. At time of writing the non-compounding APR paid by the Horizen Labs single side ApeCoin pool is 90%. As soon as we compound this on a daily basis and over the course of a year, however, that becomes an APY of 150%.
Without auto-repay the user must also pay the the cAPE borrow rate on cAPE. At time of writing that APY stands at 14%. Thus their Effective Borrow APY can be calculated as following:
In this case this becomes an Effective Borrow APY of 160%.
Critically that APY is below the current auto-compounding yield of 252% on the Bored Ape Yacht Club NFT pool and the 267% APY on the Mutant Ape Yacht Club pool. But also note that we can bring our Effective Borrow APY rate down to APR terms if we simply pay off the cAPE loan and thus do not let it auto-compound.
]If instead of allowing the cAPE debt to auto-compound we pay off at regular intervals our Effective Borrow rate falls to 122%, and indeed we can considerably boost our net yield if we repay.
Below is a chart which compares total returns for a Bored Ape Yacht Club max-borrow staking position of 10,094 at current staking yield and borrow rates.
Passive Returns shows what the user would achieve if they simply borrowed the full stake, did not compound their staking returns, and allowed their debt to compound. Semi-Active is an auto-compound of staking yields with no debt repayment. And finally "Active Returns" is auto-compounding of staking rewards and auto-repayment of interest on the ApeCoin loan. Notably the below chart does not include gas fees and is thus the approximate maximum the user would earn with these strategies:
The user could see noticeably better returns at the end of a full year if they auto-compounded their staking position and paid off interest on their outstanding ApeCoin loan.
We need to optimize for total staking yield, minimize total interest accrued on our borrow position, and we need to take care to minimize gas spent on all re-stake and repay transactions. We wrote about optimization of auto-compounding frequency under the same gas assumptions.
Here we will assume that total gas spent for each compounding operation is roughly equal to 0.004 ETH at the 90-day average base gas fee of 22 gwei at time of writing. At current exchange rates this translates to 1.1 $APE, and to be conservative we round this up to 2 $APE per compounding. Further we will assume we pay this gas fee at every debt repayment and thus an aggregate of 4 APE per auto-repay and auto-compound transaction. And finally, we will use current ApeCoin staking yields and cAPE borrow rates as referenced above.
For Bored Ape Yacht Club NFT pool max-borrow-and-stake positions we can theoretically maximize returns if we auto-repay every 5 days:
The lower principal amounts for Mutant Ape Yacht Club NFT pools mean that gas fees are a larger proportion of staking rewards. And indeed our calculations suggest that a user can maximize auto-compound and auto-repay aggregate yields if they wait 10-15 days before every operation.
Parallel follows similar logic and uses an off-chain service to determine the ideal frequency and timing of auto-loan-repay. And indeed a user need not spend the gas to perform the same transactions if they simply wait for Parallel's auto-compound and auto-repay bot to perform the same action at regular intervals.
Similarly for Bored Ape Kennel Club NFT pools our daily rewards are considerably smaller and thus gas fees cut significantly into our claimed and re-staked rewards. Thus a user could theoretically maximize returns on their BAKC max-borrow-and-stake position if they auto-compounded and repaid interest every 15-30 days. Of course there are fast diminishing returns after 10 days, and indeed Parallel's auto-repay bot will algorithmically choose the best time to do the same.
Parallel automates loan repay and thus the user need not perform these transactions on their own. Of course users should be aware that this is happening; they will see their loan balance has declined but no new staking rewards have accumulated in their account.
We expect the yields for ApeCoin staking to continue to decline over time as users reinvest their staking rewards to maximize their staking principal, thus lowering yields for those who have already max-staked their NFT positions. And as such the above calculations will likely change over time.
In broad strokes, however, it is reasonable to expect the general relationship will hold. And Parallel will continue to support users as they look to maximize their returns on ApeCoin staking via our auto-compounding and soon our auto-repay functionality.
