If we choose to take on pricing risk with a recursive strategy, we find that the risk as been magnified due to the leverage inherent in the strategy. An adverse movement of 1% in price would have an impact of 4% for a collateral factor of 75%. This makes the position more sensitive to liquidation from sudden price movements. Mitigating this risk involves lowering the borrowed amounts to maintain a buffer, but this will also impact returns. The full recursion strategy table is shown below to see the maximum theoretical yields:

With our $50,000 invested recursively into the matched COMP token strategy above, we get:

• $125k deposited
• $75k borrowed
• 17.6% APY The table below shows the returns for the paired tokens with a recursive strategy

The upper limits for this strategy are as follows:

• Total Deposited amount = starting_capital / (1-collateral_factor/100)
• Total Loan = Total Deposits - starting_capital
• Aggregate APY = Simple APY / (1-collateral_factor/100)

Ramp it up with Recursion

So you've deposited your COMP tokens, borrowed 60% and you're earning 7% APY. So what do you do with the COMP tokens you've just borrowed? Deposit & do it again. And again. It's turtles all the way down... This practices is known as recursive investment, and it allows you to leverage up, depositing and borrowing far more than your original capital pool. As you can only borrow a portion of your collateral each time (the collateral factor) this recursive strategy reaches a practical limit after a few iterations. This is especially true when you factor in gas costs for each transaction.

A Simple Strategy

A simple investment strategy for our $50000 would be to:

• Swap to token with the highest deposit yielding
• Deposit this on Compound & capture the deposit yield
• Take out a loan using the highest yielding borrow APY token, to the maximum allowed by the collateral factor of that market.

The net APY for this strategy is:

(base deposit APY + COMP deposit APY) + collateral_factor * (COMP borrow APY - base loan APY)

These numbers are shown in the table below, where all combinations of tokens have been listed in order of highest Net APY:

Practical notes:

• Claiming COMP rewards is a manual step. This analysis assumes this is done continuously and the proceeds reinvested. In practice, a paired coin deposit/loan may become insolvent at the max collateral factor as the underlying borrow rate is less than the deposit rate. Practical yields may be slightly lower than those stated due to this factor.
• This analysis ignores the impact of gas on transactions. This will be meaningful to the analysis with small investment amounts or high gas costs, especially in the recursive case. The recursive case can be executed using flash loans to make it more gas (and time) efficient.
• There are other risks to these strategies which have not been covered here. These are not inherently from the strategy, but stem from the underlying risks in the Compound Protocol, and DeFi and Ethereum in general.

Here we see that the COMP token has the highest yield in strategies that avoid price risk. With the stablecoins, we make the assumption that they maintain their peg - in practice you may borrow a percentage point or so below the maximum in order to keep safe from liquidations.

Simple Strategy Without Price Risk

To mitigate price volatility risk, we can either:

• Deposit & borrow matching assets
• Deposit & borrow stablecoin pairs

This strategy allows us to capture the COMP rewards without being exposed to pricing risks. Let's re-run the above table and filter for stablecoin pairs and paired assets.

At the time of this report, depositing DAI and borrowing 65% of the value of the DAI in WBTC gives an overall yield of 9.34% APY.

You have already noticed that we took out the loan to the maximum borrowing possible. If the value of the collateral asset was to drop in relation to the borrowed asset, the loan would become insolvent and would be liquidated. Given the volatility of assets like WBTC against the USD, this is a high risk strategy. Risk can be managed by borrowing less, but this will also impact returns

Compound provides 4 rates which are relevant to maximising a yield strategy. These are:

• The Deposit APY - yield paid when an asset is deposited
• The Borrow APY - the interest rate cost when a loan is taken out
• Compound Governance Token (COMP) distributions on deposits (as an APY)
• COMP distributions on loans (as an APY)

There are a number of markets in Compound where the COMP distributions for borrowings are higher than the loan interest rate - you literally get paid to borrow!