Minimizing the Cost of Borrowing Stablecoins

The most popular type of loans in crypto is stablecoin loans. On Aave Polygon, there’s much more demand to borrow stablecoins than there is to borrow non-stablecoins. Almost 90% of USDC deposited is lent out compared to 3% and 13% for WBTC and WETH, respectively.

The reason stablecoins are borrowed more is the implication of borrowing a non-stablecoin. When someone borrows WETH or WBTC, they are betting that the price of those tokens is going to go down. This is also known as shorting. As the market is generally bullish on these tokens, people tend not to borrow them. Instead, they borrow stablecoins, whose value is not volatile. In this article, we’ll dive into the world of stablecoin loans on Polygon and see how you can get the best rates.

Interest rates on Polygon

Whenever someone takes a loan, the first thing they look at is the cost they will incur for borrowing. To maximize returns, you always want the cost of taking your loan to be as small as possible. In general, QiDao offers the most competitive rates for long term stablecoin borrowers. Without factoring in added incentives from protocols, the average QiDao loan costs less than on CREAM if held for at least 1.17 months and less than Aave if held for at least 1.62 months. When factoring in incentives, QiDao loans become more cost-effective within one day of holding a loan. This means that users looking to hold stablecoin debt for at least 1 day would benefit from better rates if they use QiDao stablecoin loans.

CREAM has the highest cost of borrowing stablecoins on Polygon, at 5.16% APR, followed by Aave at 3.69% APR. These floating interest rates are much higher than QiDao’s at a fixed 0.50% APR.

The following graph shows the average net return (gain or cost) when borrowing stablecoins against the following assets (wherever applicable): MATIC, WETH, WBTC, LINK, AAVE, and CRV.

The graph below depicts the increasing cost of borrowing on CREAM and Aave vs borrowing on QiDao. The graph does not account for added incentives. It only accounts for variable market interest earned for depositing collateral on these platforms and variable market interest paid for borrowing stablecoins. Since QiDao has a fixed repayment fee, the cost of QiDao loans remains the same regardless of the tenor of the loan. Loans on CREAM and Aave become more expensive than on QiDao after 1.17 months for CREAM and 1.62 months for Aave.

WETH-backed stablecoin loans

The most used collateral on QiDao is WETH (both in it’s WETH and camWETH forms). Below is an analysis on stablecoin loans taken out with WETH collateral on QiDao, CREAM, and Aave.

CREAM has both the lowest deposit returns and the highest cost of borrowing stablecoins against WETH. Since QiDao allows users to borrow against deposits on Aave, camWETH loans on QiDao enjoy the same deposit returns as Aave. The borrow APR cost, however, is much lower for QiDao (0.5% for QiDao compared to 3.96% for Aave). When factoring borrow rewards, QiDao loans become even more profitable. Net return on QiDao loans against WETH collateral is a net gain of 63.62% APR, versus a net gain of 0.39% APR for Aave and a net cost of 7.93% APR for CREAM.

Return on camWETH loans

Return on WETH loans

Taking advantage of QiDao borrowing incentives

QiDao loan incentives benefit those who get loans first. Due to vault debt ceilings, there’s a limit on how much MAI can be borrowed from each collateral type. Once the debt ceiling is hit, it’s raised after 48 hours. In the meantime, only the users with outstanding debt on that collateral will receive borrowing rewards. Users that borrow more MAI will receive a larger portion of borrowing rewards.

You can start borrowing at https://app.mai.finance/vaults/create! Create a vault and borrow MAI at 0% interest. If you have any questions, you can reach out to us on Discord at: https://discord.gg/awVnJbre26.

Written by Benjamin, core team at QiDao.

When I let go of what I am, I become what I might be