Leverage Liquid Staking with Minting Decentralized Stablecoins

6 min readMay 21, 2024

The “liquidity” in the liquid staking name means that the assets you staked are liquid and you can reuse them in other DeFi protocols while earning staking rewards. One of the possible ways to do so is to use Aqua Protocol to mint stablecoins with liquid staking tokens.

In this article, we’ll explain how decentralized crypto-backed stablecoins work, how to use Aqua Protocol to leverage liquid staking APY, and why having more stablecoins is beneficial for the whole TON DeFi ecosystem. Let’s start.

What are Aqua and AquaUSD?

In our previous article, we explained in detail how the Aqua Protocol works. In short, it allows users to mint AquaUSD stablecoins backed up by collateral in TON, tsTON, stTON, and hTON, the most robust value-storage assets in the TON ecosystem.

Under the hood, there’s a borrowing mechanism. Users provide their tsTON or other tokens as collateral and borrow AquaUSD backed by them. The collateral has to be worth at least 200% more than the stables you borrowed or their collateral in vaults will be liquidated to prevent depeg. In numbers, borrowing $0.50 AquaUSD per $1 in collateral is risky (200% collateral ratio), while borrowing $0.33 AquaUSD per $1 is safe (300% collateral ratio).

You can use borrowed stables anywhere in DeFi while your tsTON or other LST will keep generating staking rewards and rising in value.

How to Leverage Liquid Staking with Aqua Protocol

Currently, the Aqua Protocol is in Testnet and you can’t make money with it right now. We want to explore some potential use cases so our users will be ready to make yields with AquaUSD once it goes live.

Borrowing AquaUSD costs 0.5% to mint, 0.5% to repay, and 0% for borrowing. As long as you earn more than 1% APR on your stablecoins, you are in profit.

So, let’s begin with Alice who holds 1000 TON in her wallet while TON is trading at $5. She decides to stake her TON with Tonstakers to start earning staking rewards of 4% APY.

Alice receives liquid staking tokens (LST) tsTON that represent her share in the staking pool plus accumulated staking rewards. She deposits tsTON worth $5000 to Aqua Protocol and mints 2500 AquaUSD. The liquidation risk is moderate as the collateral ratio is 200%, so Alice can freely use her AquaUSD in DeFi.

The first option is to provide AquaUSD to DEXes like Ston.fi or DeDust to liquidity pools with stablecoins. Many users are swapping between stables and generating returns for liquidity providers. E.g. jUSDT/USDT pool on DeDust brings 28% APY and jUSDT/jUSDC brings 21% APY. Plus, there’s no risk of impermanent loss which is possible for providing volatile assets like TON or NOT.

The second option for Alice is to supply her AquaUSD to a lending protocol like EVAA. USDT, jUSDT, and jUSDC supply rates are at 3–8% APY at the time of writing and we can expect a similar rate for AquaUSD.

The third option for earning more is to buy more TON with AquaUSD and stake it again with Tonstakers or another protocol. That’s plus 4% APY.

Those additional APY will be applied only to AquaUSD she borrowed at 200% collateral ratio, so they must be divided by 2. Instead of having only 4% APY from staking TON Alice can earn:

18% APY on her initial TON holdings by minting and providing AquaUSD to DEXes.
8% APY by minting and supplying AquaUSD to lending protocols.
6% APY by minting and swapping AquaUSD to TON and staking it again.

Why is it better to mint AquaUSD with LST instead of directly swapping LST for stables? Minting AquaUSD keeps Alice exposed to her tsTON and staked TON. She can return all deposited funds at any time once she repays her minted AquaUSD to take the profits from TON price growth. Should she swap tsTON for AquaUSD or another stablecoin, she loses her exposure and won’t benefit from prices rising.

How to use Aqua Protocol to mint AquaUSD

Currently, Aqua is in the testing stage, so to try it you have to switch to TON Testnet and get some Toncoin there — it’s free. The team has prepared a detailed guide, so we’ll skip the technicalities.

The Aqua Protocol Testnet parameters are the following:

testJetton, tsTON, stTON, and hTON are supported as collateral.
The liquidation ratio is 150% — you can mint up to 0.5 AquaUSD for each $1 in collateral but with a very high risk of liquidation. It’s better to mint less to avoid risks
The borrowing rate is 3% APR in Testnet and will be 0% in TON Mainnet. Also, users pay 0.5% for minting and 0.5% for repaying, bringing the cost of using Aqua to a one-time 1% fee.

Before you start, you have to connect your Testnet wallet and get some TON on it. Then, deposit your TON to Tonstakers on Testnet and receive Testnet TUNA tokens.

Then, go to the Aqua Protocol app. There you’ll have four tabs on top for different assets and more tabs below to manage your vaults and stablecoins.

Deposit some TUNA (tsTON) to start. Then, use the Mint tab to mint AquaUSD. A few moments later, you’ll receive AquaUSD in your wallet.

At the app’s bottom, you’ll see your current vault stats. The most important one is the collateral ratio — should it drop to 150%, your vault might be liquidated. Try to keep it at 200% or more by adding collateral or repaying AquaUSD to lower the collateral utilization.

To withdraw your collateral, you’ll have to repay AquaUSD you borrowed. If you withdraw what’s left after minting without repaying, you increase the chances of liquidation of your vault.

There’s one more interesting thing about Aqua Protocol — the Redeem tab. It allows you to swap your AquaUSD to the selected collateral asset in one click. You might use the Redeem function when AquaUSD price goes below $1 on DEXes to earn some money on arbitrage while helping to keep its peg to USD. Redeem swaps AquaUSD for collateral of the least collateralized vault with 3% profits for the vault owner to keep its collateral vault above liquidation treshold.

Remember: with Repay, you return the AquaUSD and free up the collateral in the vault. With Redeem, you swap AquaUSD to the collateral assets directly to your wallet.

Join the AquaUSD testing activities!

Aqua Protocol launched its testing campaign on Zealy. Participants will have to do some activities on social media and go through all functions: deposit, minting AquaUSD, adding and withdrawing collateral, repaying, and redeeming.

While completing these activities, you will test Aqua Protocol’s integration with Tonstakers by staking Testnet TON and using Testnet tsTON in Aqua.

All testers will receive rewards and the most excellent ones will receive something extra.

Follow the testing guide by Aqua Protocol’s team.

Conclusions

Aqua Protocol provides all the necessary functions for decentralized stablecoin issuance with a fixed one-time fee of just 1%.

Having more stablecoins is also good for DeFi in general, as it brings more opportunities for arbitraging and leveraging liquid staking. By utilizing all passive income opportunities in the TON ecosystem, users can boost their staking APY up to 18% with a moderate risk.

Besides leveraging liquid staking, advanced DeFi users can utilize AquaUSD to earn on undercollaterized vault liquidations, leverage farming, or quickly get liquid capital for sudden opportunities. It’s a very versatile instrument for the Web3 economy and we’ll cover more scenarios in our next features.

Farm Aqua points in telegram mini app: @Gleam_AquaProtocol_Bot

Telegram channel: https://t.me/aquaprotocolxyzchannelen

Telegram community: https://t.me/aquaprotocolxyz

Website: https://aquaprotocol.xyz/