Smart Collateral

Smart Collateral is an advanced yield strategy that allows you to earn liquidity provider fees while simultaneously borrowing against your LP position. This enables capital efficiency by putting your assets to work in multiple ways at once.

Overview

📌 What it is: You supply a liquidity pool token (like XEGLD/WEGLD LP) and borrow a basic token (like EGLD). Your collateral continues earning trading fees while you use the borrowed funds for other opportunities.

✅ How it works: Your LP token earns trading fees from every swap in the pool. You use that as collateral and take out a loan in a base asset, keeping your LP position intact and earning. The borrowed funds can be deployed elsewhere or converted for additional strategies.

💡 Why to use it: When an LP is super active (high trading volume), you earn more by just holding it than staking a basic token. This strategy maximizes capital efficiency by earning LP fees while also accessing liquidity through borrowing.

How It Works

Step-by-Step Process

1. Provide Liquidity - Create LP tokens by depositing into a liquidity pool (e.g., XEGLD/WEGLD)

2. Supply LP as Collateral - Deposit your LP tokens into the lending protocol

3. Borrow Base Asset - Take a loan in EGLD or another asset against your LP collateral

4. Earn Dual Yields - Continue earning LP fees while using borrowed funds

Example Strategy

Starting Position:

• Provide liquidity: 10 XEGLD + 10 WEGLD = LP tokens

• Supply LP tokens to lending protocol

• Borrow: 8 EGLD (at 60% LTV for safety)

Earning Sources:

• LP Trading Fees: 0.3% per swap in the pool

• Borrowed Capital: Use 8 EGLD for other strategies

• Net Cost: Borrow interest rate

Real Example

Let's assume:

• LP position: $2,000 (10 XEGLD/WEGLD LP tokens)

• Daily trading volume in pool: $100,000

• LP fee APR: 15%

• Borrow rate: 3%

• Loan amount: $1,200 (60% LTV)

Annual Earnings:

• LP fees on $2,000: $2,000 × 15% = $300/year

• Borrow cost: $1,200 × 3% = -$36/year

• Net yield from collateral: $264/year

• Plus you have $1,200 to deploy elsewhere

Total APR on initial capital:

APR = LP Fees - Borrow Cost
      ────────────────────
       Initial Capital

APR = $300 - $36 = $264 = 13.2%
      ──────────   ────
        $2,000     $2,000

Plus whatever yield you earn from the $1,200 borrowed!

Use Cases

1. Liquidity Mining Boost

• Supply high-fee LP tokens

• Borrow stablecoins

• Use stablecoins in other protocols

• Earn from both LP fees and borrowed capital deployment

2. Arbitrage Funding

• Use LP position as stable collateral

• Borrow assets for arbitrage opportunities

• Keep earning LP fees while trading

3. Yield Farming

• Supply productive LP tokens (high volume pools)

• Borrow to enter other farming opportunities

• Stack yields from multiple sources

Risk Management

LP tokens as collateral carry unique risks beyond standard lending positions.

Key Risks

1. Impermanent Loss - LP token value can decrease if one asset outperforms

2. Liquidation Risk - If LP value drops, you may be liquidated

3. Smart Contract Risk - Both LP pool and lending protocol risks

4. Low Liquidity Risk - Hard to exit large LP positions quickly

Health Factor Considerations

LP tokens can be more volatile than single assets:

• Health Factor > 2.5 - Safe for volatile LP pairs

• Health Factor 2.0-2.5 - Moderate risk

• Health Factor 1.5-2.0 - Risky, monitor closely

• Health Factor < 1.5 - Dangerous, reduce leverage

Choosing the Right LP Token

High-Yield Candidates

✅ Good LP tokens for Smart Collateral:

• High daily volume pools (> $500k)

• Stable/correlated pairs (e.g., XEGLD/WEGLD, USDC/USDT)

• Established pools with consistent fee generation

• Pairs with low impermanent loss risk

❌ Avoid:

• Low volume pools (< $10k daily)

• Highly volatile/uncorrelated pairs

• New or unproven pools

• Pairs with one-sided liquidity

Volume vs. APR

Pool Type	Daily Volume	Typical APR	Risk Level
Blue Chip Stable	$1M+	5-15%	Low
Major Pairs	$100k-$1M	10-30%	Medium
Emerging Pairs	$10k-$100k	20-100%	High
Micro Pools	< $10k	50-500%	Very High

Calculating Returns

Net Yield Formula

Net APR = (LP Fee APR × Collateral Value) - (Borrow APR × Borrowed Amount)
          ────────────────────────────────────────────────────────────
                           Initial Capital

Example Calculation

• LP collateral: $2,000 earning 15% APR

• Borrowed: $1,200 at 3% APR

• Initial capital: $2,000

Net APR = ($2,000 × 15%) - ($1,200 × 3%)
          ──────────────────────────────
                    $2,000

Net APR = $300 - $36 = $264 = 13.2%
          ──────────   ────
            $2,000     $2,000

When to Use Smart Collateral

✅ Ideal conditions:

• LP pool has consistently high trading volume

• LP fee APR significantly exceeds borrow costs

• You understand impermanent loss mechanics

• You can monitor positions regularly

❌ Avoid when:

• LP pool volume is declining

• Borrow rates are rising

• One token in the pair is highly volatile

• You need guaranteed access to your capital

Monitoring Your Position

Daily Checks

• Health factor above safe threshold

• LP pool volume and fees

• Impermanent loss impact

• Borrow rate changes

Weekly Reviews

• Overall position profitability

• Alternative LP opportunities

• Rebalancing needs

Exit Strategy

When closing a Smart Collateral position:

1. Repay loan - Return borrowed assets

2. Withdraw LP tokens - Remove collateral

3. Remove liquidity - Break LP position to base assets

4. Calculate final PnL - Include all fees, IL, and borrow costs

Related Strategies

• Liquid Boost - Leverage staking yields

• Smart Debt - Earn from borrowed assets

• Lend and Borrow - Core lending mechanics

Smart Collateral works best with established, high-volume LP positions. Always account for impermanent loss in your return calculations.