Interview: Bybit launch liquidity pools offering up to 30% APY

on May 24, 2022
Updated: May 26, 2022
  • Liquidity pools advertised as offering up to 30% APY
  • BTC, ETH and BitDAO pools will all be paired with USDT
  • We ask about Tether risk, fear following the UST collapse, risks and more

Bybit is one of the top three cryptocurrency exchanges in terms of global web traffic and offers multiple products geared towards traders of all levels. While it offers products within the derivatives market, it is not the company’s main focus.

Recently, Bybit announced the launch of liquidity mining protocols. The pools are available across Bitcoin, Ethereum and BitDAO, all paired with USDT – interesting amid the recent de-pegging of USDT down to 95 cents – although with USDC pools also in the pipeline.

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Advertised as offering up to 30% APY, I thought this was notable in the wake of the Terra collapse and the well-publicised implosion of the Anchor protocol, which offered 20% APY. I had other thoughts too, so sent some questions across to Bybit’s Head of Financial Products, Bill Xing.  

For a quick video summary of the interview, see the below embed. The full interview is below. (IZ): Do you think investors will be warier of pouring funds into high-APY products (such as the 30% APY on offer here) following the high-publicity collapse of Anchor and the Terra ecosystem?

Bill Xing, Head of Financial Products at Bybit (BX): Bybit Earn has options to suit all risk appetites. Products such as Flexible Savings offer low-risk returns on crypto assets. Our Liquidity Mining products allow users the flexibility to choose the risk/reward ratio that works for them, with 30% APY representing the high end of the scale for users holding volatile assets in their liquidity mining pairs. In comparison, the Anchor protocol offered only up to 20% APY on Terra’s UST. 

IZ: All three liquidity pools are paired with Tether. Why did you choose Tether over other stablecoins, and do you have any concern after they suffered their own de-pegging recently, trading as low as 95 cents on some exchanges?

BX: Tether is a completely different product to UST, as it is backed by dollar-equivalent assets. Tether’s brief de-pegging was a reaction to the extreme circumstances surrounding the collapse of TerraUSD and not due to a failure in its product. Indeed, the company managed to redeem billions of dollars as promised throughout the crisis. Also, Bybit is planning to add USDC pairs in the near future to cater to the needs of our users. 

IZ: What happens to the liquidity pools here if, theoretically, Tether suffers another de-pegging akin to last week’s events, and a mass sell-out of all Tether occurs from the liquidity pool?

BX: A brief depegging to $0.95 can easily be absorbed by the market and will not affect our liquidity pools. Additionally, a short-term depegging could result in additional earnings for users in our liquidity pools. All in all, Bybit balances our liquidity pools on behalf of our users, even in times of market stress. If anyone’s positions do get unfairly closed, Bybit will compensate them back to the fair market price.

IZ: Can you please elaborate on how the advertised APY of up to 30% is calculated? Is it 100% sourced from trading fees? Is it sustainable?

BX: The 30% APYs we offer are derived from leverage, which means we lend the user extra funds to deposit in the pool. This gives them a larger share of the pool’s fees, which equates to the higher APY. We also use an advanced strategy to maximize the utilisation rate of the liquidity. It’s sustainable as long as the underlying trading market is sustainable as well.

IZ: You say that yields greater than 30% are achievable through leverage. What LTV limit is imposed on leverage here? Secondly, during large crash days in the crypto market (akin to what we saw during the UST debacle last week), will investors always be able to meet margin calls, or is there a chance that transactions to exchanges could slow down like what happened to many who were liquidated on Anchor last week?

BX: We calculate liquidation price using a mathematical formula and allow a maximum of 3x leverage, details of which can be found on our website. Bybit has significant market depth and best-in-class liquidity; our trading system has withstood the tests of time, no matter the volume of crypto market activity. While blockchain speed is not something we can control (as evidenced by the Terra chain last week), Bybit will remind users if their leveraged liquidity position is getting close to a risky level.  

IZ: You say the risk of impermanent loss is minimised through automatic rebalancing in the pool. As this concept of impermanent loss is unique to crypto liquidity pools, and is often the first question those new to the space ask, could you please elaborate on what exactly this risk is?

BX: Impermanent loss occurs when the price of a crypto asset increases or decreases after users deposit them in a liquidity pool. To some users, it could be considered as an opportunity cost as compared to holding the crypto assets and not putting them into the liquidity pool. The reason this is impermanent is that, over time, the trading fees earned could counteract this risk, especially if there is a lot of trading volume happening in the liquidity pool. Therefore, impermanent loss is not considered significant unless the price of said crypto asset fluctuates a lot. To learn more about this, users can check out this calculator by Daily DeFi which uses Uniswap’s constant product formula to determine impermanent loss.

IZ: The insurance fund sounds intriguing – advertised as a way to “protect traders from negative equity and significant losses beyond a trader’s position margin”, can you please elaborate on how this works, and where it’s funded from?

BX: Our insurance fund helps to protect traders from negative equity and significant losses beyond a trader’s position margin, and is funded from our side. As assets are split into half USDT when they are added to the pool, we are able to more easily manage the risks in the pool.  

IZ: With the focus of investors likely to be significantly more focused on the risks that these yield-generating protocols have, could you please clarify what additional risks there are to generating the yield here, aside from the impermanent loss as discussed above? Presumably there are other risks here beyond the price risk of holding BitDAO, BTC or ETH?

BX: Our liquidity pools have options for all risk appetites, including low-risk options. The higher APYs that are available via leverage come with liquidation risk, but this can be mitigated via our insurance fund and is much lower than when trading, say, derivatives contracts.

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