What it is
Borrow stablecoins at one floating rate and supply them where the rate is higher, earning the spread on the borrowed amount. One pass, no recursion: this is the single-cycle relative of looping.Mechanics on AGI3
- Post collateral and borrow the stablecoin: Borrow against collateral.
- Supply the proceeds into the higher-rate market: Supply assets, with a swap first if the target market takes a different asset.
- The book now carries two positions, and Net APY is the readout: earned minus paid, against your equity.
When it fits
- A persistent spread between two markets, made of borrower-paid interest rather than a rewards program. The rate breakdown shows which; see How yield is calculated.
- Collateral already committed, so the spread is earned on top of exposure you already carry rather than justifying new exposure by itself.
- Tolerance for both legs floating independently for the life of the position.
What it costs
- The borrow leg accrues continuously. The spread is the entire margin, so entry and exit costs (network fees, and price impact where a swap is involved) consume a real share of it.
- Exit is two-sided: the supply leg is subject to the market’s withdrawal cap, while the borrow leg accrues regardless.
How it fails
- Inversion is the canonical failure, and the worked example in Net APY is this strategy’s arithmetic: a 2-point spread inverted by a 3.5-point move in one leg, amplified by leverage in both directions. Nothing prevents it, and no warning precedes it.
- The legs correlate under stress. The same squeeze that raises your borrow rate drains liquidity from the market you supplied into; the two utilizations are independent variables in calm conditions and correlated ones in a crisis.
- A rewards-built spread has a budget and an end date that someone else controls. If the supply leg’s rate is mostly a rewards program, so is your margin.
- The exit can trap. A heavily utilized supply market caps your withdrawal while the borrow side keeps accruing: the spread can invert while the earning leg cannot be closed.
Managing it
- Track both rates, not the net alone. Net APY tells you the position moved; the legs tell you which one, and why.
- Decide the exit spread at entry: the level below which the position no longer pays for its risks, treated the way the health-factor floor is treated.
- Prefer interest-driven supply rates for the leg the strategy depends on.
- Watch the supply market’s utilization as an exit indicator as well as a rate driver, on the cadence in Monitor positions and alerts.