Earn Bitcoin Yield using DeFi on Sonic Chain
Following up on my latest Sonic Chain post, today I'll show you a simple and low-risk method to put your Bitcoin holdings to work.
Lombard Finance is a project that aims to make Bitcoin liquid, fully backed 1:1, and generate yield. Through their app (Lombard Finance App), you can stake your BTC and receive LBTC in return. Depositing these LBTC tokens into various vaults provides a low APR (right now 1.45%).
My strategy here involves using Lombard Finance’s native bridge (Lombard Bridge) to transfer your LBTC tokens from Ethereum to the Sonic network.
When the tokens are on Sonic, you can use Silo Protocol (Silo v2), the LBTC/scBTC market. Currently, depositing LBTC into this market yields around a 5.1% APR. If you have a slightly higher risk tolerance, you can employ leverage by borrowing scBTC, as the borrowing APR for scBTC (around 0.5%) is significantly lower than the LBTC deposit APR (5.1%).
After borrowing scBTC, head to a liquid decentralized exchange, such as Beets.fi (watch out with slippage), to swap scBTC to LBTC and re-deposit in Silo. This looping process can be repeated multiple times, effectively increasing your leverage, maximizing returns, and enhancing your eligibility for upcoming Sonic and Silo airdrops.
The max leverage is x12.5. This can be extremely profitbale but also risky because we you are using the max LTV (92%), being the liquidation treshold (95%), so with this market being so volatile can liquidate your position and lose your collateral (your deposited LBTC)
Risks of this Strategy
This is very attractive, but has its risks. Primarily as I said before, it exposes you to liquidation risk if LBTC’s price goes down (BTC dump). With a max Loan-to-Value (LTV) of 92% and a liquidation threshold of 95%, I recommend (and following advice form people who has experience in this type of strategies) try to maintain a safe LTV margin. I recommend a maximum of 40%.
Additionally, monitor borrowing APR closely to avoid unexpected interest increases
