Smart Debt

Smart Debt is an advanced strategy that reverses traditional collateral patterns by borrowing productive assets (LP tokens) while supplying liquid staking tokens. This creates a unique arbitrage opportunity between different yield sources.

Overview

📌 What it is: You supply an xToken (like XEGLD) and borrow an LP token. This inverts the typical collateral-debt relationship to take advantage of yield differentials.

✅ How it works: This is a reversal of Smart Collateral. Now you're borrowing an LP token (which slowly gains value due to trading fees), but your supplied xToken may gain value faster through auto-compounding. As long as borrowing the LP is cheaper than borrowing the base token, this strategy wins.

💡 Why to use it: When borrowing something like EGLD is very expensive (high borrow APR), but borrowing the LP token is cheap. The LP token you borrowed earns fees passively, reducing your effective borrow cost.

How It Works

Mechanism

1. Supply liquid staking token - Deposit XEGLD earning staking rewards

2. Borrow LP token - Take a loan in XEGLD/WEGLD LP (which earns trading fees)

3. LP fees reduce borrow cost - The LP token grows in value, lowering your net debt

4. Profit from spread - Earn when staking APR > (LP borrow cost - LP fee generation)

Why This Works

Traditional borrowing:

• Supply XEGLD (earning 8% APY)

• Borrow EGLD (paying 5% APR)

• Net: 8% - 5% = 3% return

Smart Debt:

• Supply XEGLD (earning 8% APY)

• Borrow XEGLD/WEGLD LP (paying 3% APR)

• LP earns trading fees (2% APY)

• Net: 8% - (3% - 2%) = 7% return

Real Example

Market conditions:

• XEGLD staking APY: 8%

• EGLD borrow APR: 5%

• XEGLD/WEGLD LP borrow APR: 3%

• LP trading fee APR: 2%

Position:

• Supply: 10 XEGLD ($1,000)

• Borrow: XEGLD/WEGLD LP worth $600

Annual Returns:

• Staking rewards: $1,000 × 8% = $80

• LP borrow cost: $600 × 3% = -$18

• LP fee earnings: $600 × 2% = +$12

• Net profit: $80 - $18 + $12 = $74/year (7.4% APR)

Compare to traditional:

• Supply XEGLD, borrow EGLD: $80 - $30 = $50/year (5% APR)

When to Use

✅ Ideal conditions:

• LP borrow rates significantly lower than base token borrow rates

• LP pool has consistent trading volume and fees

• Your collateral (xToken) has stable or growing staking yields

• You understand both staking and LP mechanics

❌ Avoid when:

• LP borrow rates approach base token rates

• LP pool volume is declining

• Staking yields are dropping

• You're unfamiliar with LP token dynamics

Calculating Profitability

Net Yield Formula

Net APR = (Staking APR × Collateral) - (Borrow APR × Debt) + (LP Fee APR × Debt)
          ────────────────────────────────────────────────────────────────────
                                  Initial Capital

Example Calculation

• Collateral: $1,000 XEGLD at 8% staking APR

• Debt: $600 LP at 3% borrow APR, earning 2% LP fees

• Initial capital: $1,000

Net APR = ($1,000 × 8%) - ($600 × 3%) + ($600 × 2%)
          ────────────────────────────────────────────
                          $1,000

Net APR = $80 - $18 + $12 = $74 = 7.4%
          ───────────────   ───
              $1,000       $1,000

Risk Considerations

Smart Debt carries unique risks due to borrowing productive assets.

Key Risks

1. LP Value Growth - Borrowed LP increases in value, increasing debt

2. Collateral Depreciation - If XEGLD staking stops or reduces

3. Rate Changes - LP borrow rates may increase

4. Liquidation - If LP value grows faster than collateral

Health Factor Management

Because LP tokens appreciate:

• Health Factor > 2.5 - Safe buffer for LP growth

• Health Factor 2.0-2.5 - Moderate, monitor regularly

• Health Factor 1.5-2.0 - Risky, LP growth threatens position

• Health Factor < 1.5 - Dangerous, consider reducing debt

Comparison: Smart Debt vs Traditional Borrowing

Metric	Traditional (Borrow EGLD)	Smart Debt (Borrow LP)
Borrow APR	5%	3%
LP Fee Benefit	N/A	-2% (reduces cost)
Net Borrow Cost	5%	1%
Collateral APR	8%	8%
Net APR	3%	7%

Advanced Strategy: LP Token Management

What to do with borrowed LP tokens:

Option 1: Hold and Earn

• Keep LP token in wallet

• Earn trading fees passively

• Reduces effective borrow cost

Option 2: Break and Deploy

• Remove liquidity from LP

• Deploy base assets elsewhere

• Requires active management

Option 3: Stake LP

• Some protocols allow staking borrowed LP

• Earn additional rewards

• Highest complexity but maximum yield

Exit Strategy

Closing a Smart Debt position:

1. Acquire LP tokens - Buy or provide liquidity to get LP

2. Repay loan - Return the LP tokens

3. Withdraw collateral - Remove XEGLD

4. Calculate final returns - Account for all fee accrual

The hardest part of Smart Debt is acquiring LP tokens to repay. Ensure the LP pool has sufficient liquidity before entering.

Use Case Examples

Scenario 1: Rate Arbitrage

• High EGLD borrow rate (6%)

• Low LP borrow rate (2.5%)

• LP earning fees (1.5%)

• Strategy wins by 5% APR spread

Scenario 2: Yield Farming

• Supply XEGLD earning 8%

• Borrow LP at 3%, earning 2% fees

• Break LP and farm elsewhere for 6%

• Total: 8% + 6% - 1% = 13% APR

Scenario 3: Market Neutral

• Concerned about EGLD price but want staking yield

• Borrow XEGLD/WEGLD LP (price-neutral exposure)

• Earn staking rewards without price risk

Related Strategies

• Smart Debt Classic - Using base tokens as collateral

• Smart Collateral - Supplying LP, borrowing base assets

• Liquid Boost - Leveraging staking yields

Smart Debt requires active monitoring. LP token value appreciation increases your debt in real terms. Always maintain a healthy safety buffer.