Youves is a DeFi app on Tezos that works like Anchor protocol on Terra. The app is designed for leveraging the Tezos token, but I’m interested in getting 15% return on US dollar stablecoins.

Disclaimer: this is something that works for me but may not necessarily be right for you. This isn’t financial advice. Financial advice is a specific recommendation by a professional based on your circumstances. This is just showing what I do for the curious financial independence campaigner.

What Youves is meant for

Youves is an interesting protocol.

The app is mainly a mechanism for users of the Tezos blockchain to lock up their XTZ tokens as collateral for a synthetic asset.

Confused?

Basically, people put some of their Tezos into smart contracts to borrow some other tokens which are worth up to one third of the value.

So, if you put £30 of XTZ into a Youves vault. you can borrow £10 of the other asset. Youves earns the tokens from staking your XTZ on the network. You can get your XTZ back by paying back the loan.

These other assets include a governance token for the protocol, a token that represents an index fund of DeFi, and – most importantly – an algorithmic stablecoin that’s worth $1. That’s the one I’m interested in.

This is a funky protocol, because it lets you leverage your XTZ, if you want to. You borrow the £10, use it to buy more XTZ. The price of XTZ goes up, you sell a small bit of that XTZ you just bought to release your initial deposit.

It also lets you diversify within the Tezos network. The idea is kind of like having bonds in a traditional shares and bonds investment portfolio, but without the regulation and proven history and with inherently riskier assets.

I don’t do much of this. I’ll explain what I do.

How I’m using Youves

Thing is, you can buy the dollar stablecoin on a Tezos exchange, like Quipuswap.

The coin is called “Youves USD”, or uUSD.

About uUSD and algorithmic stablecoins

uUSD tries to track the price of $1. Advanced crypto users can basically track the price and are incentivised to sell it when the price rises above $1. Similarly, they are incentivised to borrow more when the price is lower than a dollar, which raises the price and means they basically get more dollars per, erm, dollar.

This gets weird and it kind of hurts my head thinking about it. The effect is that the rewards and incentives given to borrowers means that market forces are used to promote arbitraging and keep the price stable.

A stablecoin that tries this is called an “algorithmic stablecoin”. There’s no actual US dollar backing it, just the locked up Tezos or whatever. This means a few things:

  1. The price isn’t ever 100% accurate. I’ve found that uUSD can be up to 5% out before it corrects.
  2. It’s not likely to be shut down by the US government. Technically, it doesn’t even need to use dollars as its price target, it’s just that the whole world knows what a dollar is.
  3. If the protocol starts to fail and gets shut down, the uUSD might get taken and you get refunded in XTZ instead. Of course, if it’s failing, chances are that XTZ is having a bad time, too.
  4. The smart contract that makes the magic work might break or get exploited. This would make the whole thing worthless, which is what happened to Iron Finance in 2021.

Buying uUSD directly

I have tried the leverage thing, but it’s not really for me. Crypto is confusing, the literature to help you with strategies is a bit muddy. I have tried borrowing the uUSD with XTZ as collateral, but it wasn’t for me.

Instead, I buy Tezos XTZ tokens on crypto.com or kraken. I then transfer these to my Kukai wallet.

If you want a full step-by-step of how to sign transactions on Kukai, see my previous article on yield farming.

This can take some time…

With the XTZ, I use Quipuswap to buy uUSD, leaving one or two XTZ on Kukai at all times. You need XTZ to do anything on the Tezos network, so I like to have a healthy buffer in there.

This gives me uUSD. Overall, in fees, I expect to lose a small percentage (maybe 1%) in the process.

Depositing uUSD into the savings pool

With the uUSD now in my wallet, I go to the Youves app.

You can see three selections here. I’m using the “saving” tab, which I have artistically circled in red. Beautiful, right?

This takes you through to the savings menu.

This one is the important screen for this post.

Here is where you can lock that uUSD for interest. There’s quite a lot of information here and not all of it is obvious, but it’s important.

Asset Yearly Interest Rate

This is the minimum interest you could earn. You can see it’s 6.66%, which I understand to be Annual Earnable Rate rather than the compounding interest rate (Annual Payable Rate).

Youves works on a proportion basis. The Asset Yearly Interest Rate is paid on all uUSD in existence. However, only uUSD locked in savings gets paid it.

This means that there’s unclaimed interest. Think about it: some of that uUSD is on exchanges like Quipuswap. Some of it is in user’s wallets, like on Kukai.

That unclaimed interest gets shared out proportionately amongst the savers. This means that you’re likely to earn more than this.

Which brings me nicely to the next important bit.

Pool Yearly Interest Rate

This is the rate your savings are actually earning as interest.

You can see that at the moment it’s 15.46%. That’s pretty good and it’s why I’m bothering with all this.

uUSD in Pool

This screenshot shows that 43.1% of the uUSD that exists is in the savings pool. That means that 56.9% is being used for other things, like yield farming on Plenty.

It also shows that the interest rate will drop if the saving app becomes more popular or rise if it becomes less popular. At around 43%, I’d say it was pretty unpopular at the moment, but if crypto markets drop and enter what’s called a bear market then I reckon it will become more popular to hold uUSD in this savings protocol than XTZ in a wallet.

The risks of using Youves uUSD saving

15.46% interest is pretty compelling. Even if it’s variable, that base rate of 6.66% is pretty punchy too.

However, rewards are an incentive for taking risk in most situations and this is no different.

By my reckoning, the biggest risks of using Youves uUSD for savings are:

  1. The risk that Tezos stops being supported by its community. That’s not likely in the near future, but Tezos hasn’t proven to be a market-leader. Still, Tezos is seeing a lot of institutional interest, so I think it’s safe for the next 5 years or so.
  2. Smart contract risk. Youves could have a bug or be exploited and you wouldn’t know until after it has failed.
  3. Currency risk. The dollar could fall against the pound. uUSD is tracking the dollar, so the deposit will lose value in GBP.
  4. Protocol risk. If this protocol just stops being used, the contract will close and the uUSD will be replaced by XTZ. My assessment is that this would only happen because Tezos stops having a working ecosystem, probably because point 1 is met.

There’s also the fact that the deposits are locked for 6 weeks. That might make reacting to these events quite difficult. It’s designed to prevent a bank run, but it’s just as likely to turn a minor tremble into a full panic.

Tax treatment

This isn’t tax advice – this is my interpretation of the HMRC Cryptoasset manuals. Use this at your own peril.

Interest on this is given in uUSD when you withdraw the pot. This means that there’s no exchange of tokens. You put in $100 and leave with, for example $110. That’s $10 of taxable income.

You don’t actually get the income until you cash out, so I think it’s taxable at that point. Before then, you only have a “potential” income.

My assessment is that this is an income tax growth at the point of withdrawal. That can have serious consequences for tax planning, which is a disadvantage of this compared to, say, Anchor.

Speaking of which…

Youves as an alternative to Anchor Protocol

I’m also using Anchor protocol, which is on the Terra network. That offers a more stable 19.5-ish% interest rate.

Of the two, Anchor is my preferred option. Here’s why:

  • Youves accrues at a lower rate than Anchor. The interest rate is generally lower.
  • I believe that Anchor is subject to the lower Capital Gains Tax regime, as the protocol involves exchanging tokens. Youves doesn’t, so its tax treatment is definitely income tax.
  • Anchor is propped up because the Terra blockchain is already used as a payment gateway in South Korea. Youves and Tezos aren’t used this way, yet.
  • Youves savigns are locked for 6 weeks. When you opt to withdraw the funds, they are held for 6 weeks where they earn no interest. That’s less than ideal.

Despite all this, I like that Youves is a permissionless alternative to Anchor. This allows me to diversify my crypto stablecoins, gaining quite a high return with a lower volatility risk than I can expect from my Stocks and Shares ISA. It’s a nice complement and it’s something that I will continue for a few years.

Ending on a word of caution

This is a high risk investment strategy. “Stablecoins” seem safer than they actually are. I like them, but I go into these things with my eyes open and ready to assume the consequences if I’m wrong.

I hope you enjoyed this post, but I would be disappointed if you blindly followed me. Don’t trust your future to some random on the internet! Read around, make up your own mind.