This article looks under the hood of what yield optimizers are, how to invest, and the next stage of their evolution.
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Yield optimizers have become the hottest topic, with Beefy first starting the trend in the early days of the Binance Smart Chain (BSC) and others adopting similar strategies. The token prices of yield optimizer projects have outperformed many other De-Fi products, such as AMMs and lending services. This article looks under the hood of what yield optimizers are, how to invest, and the next stage of their evolution. As in all of our articles, evoking a project is not and will never be a sign of endorsement, but merely serves as illustrative examples that underpin our arguments. In short, DYOR (Do your own research).
Yield optimizers compound returns of an investment in a liquidity pool (LP) on a set schedule in what are called vaults. Simply, vaults harvest the staked rewards in a pool at regular intervals and then re-stake the reward automatically while taking a small fee, including the gas fee. In the end, this creates a compounding effect because the reward earned is used again to get more profit.
Compound interest is, in the immortal words of Albert Einstein, the 8th wonder of the world. That’s how you get from daily rates of 2% ballooning to thousands of % in a year.
Generally, three factors impact vaults’ performance, which we will demonstrate by the graphs below. In all the graphs, these general assumptions are made: a principal investment of $100, a 1% daily ROI, that the vault is 10% of the pool, 1 compound per day, and no gas fees are accounted for unless otherwise stated.
1. Daily ROI of pool: It may seem obvious, but if the pool yield is less, no matter how the vault compounds, returns will be less. In the same vein, if the pool yield is high, the compound effect will be more significant. See the graph below, displaying different pool daily yields and its impact over time.
2. Duration of the stake in vaults: Generally the longer time staked, the more exponential the compounding effect is over time. See the graph below on vault returns over time, compared to its corresponding pool.
3. Number of times compounded per day: The more frequent the compounding, the greater the effect on returns, but the result is not exponential but it is marginally different. The graph shows returns concerning the number of compounds per year for different daily ROI %.
Note: The compound interest equation used here for simplicity and gas fees will also increase with the number of compounding’s unaccounted for in the model below.
Harder, better, faster, stronger
So what does this all the above mean? When compounding, there are really two main ways to optimize how to win:
Compound earlier than most
Compound longer than most
There are a few reasons why the above advice. First, per the second principle, the compound effect only starts making real effect over time. Thus, to maximize the compound effect, an investor is best suited to invest early and keep the investment in the vault for as long as possible.
As the third principle shows, the maximum compounding effect happens when the vault is a smaller percentage of the pool. This only happens in two ways; either the investor goes in early when the vault is still a tiny percentage of the pool, or the pool expands in size, and the vault remains a small percentage of the pool.
Choosing a pool with higher daily ROI will give exponential returns and the frequency of compounding has an exponential effect initially, but the effects wear out later depending on the daily ROI.
It also needs to be noted that when the reward token is different from the staking token the rewards must be sold partially or entirely to re-stake in every compound cycle.
All Around The World
The yield optimizers sector on the BSC is still developing but check out some of the existing players below.
There are a few things that will evolve as the ecosystem matures. Below are some of the highlighted strategies that will happen:
Increasing TVL: This is the strategy that most yield optimizers seem to pursue, as this is a direct metric on the value (ie. dividend) of each yield optimizer’s token.
Cross vault optimization: this is something that Beefy is doing, in that there will be one big vault with automatic optimizing within and across vaults. The first step that Beefy will need to pursue is to break apart vaults and allow the balancing of the load across different vaults
Building an ecosystem around yield optimization: like Fuel is doing, creating a whole ecosystem with a yield optimization beachhead and other incentives attached.
Last but not least, we leave the final word to some of the players in the space and what they hope to achieve:
x – ACryptos from ACS
For now, I feel the evolution of yield optimizers on Binance Smart Chain will pretty much follow Ethereum’s lead, as it is still where most of the innovation in defi is happening. I hope this changes though, as I feel the success of Binance Smart Chain, and projects like ours as part of that ecosystem, hinges on whether we can attract and retain talented developers to build and innovate here. Once we start seeing some innovation happening here that Ethereum does not already have, it means we are starting to hold our own as an ecosystem and BSC would be seen as a more viable and sustainable platform to build on.
Mild Giraffe from Autofarm
Going forward, Autofarm aims to improve the speed of integrating new farms as well as going cross-chain. Autofarm is also releasing AutoSwap in Q1 2021, BSC’s best DEX aggregator.
Miro from Jetfuel
One of the major issues investors in DEFI and crypto currency face is the uncertainty of the projects they’re researching. There have been hundreds of bad actors and rug pullers, costing investors millions of dollars in 2020. Introducing Jetfuel Launchpad, a division of the Jetfuel Ecosystem Development Fund and Accelerator. The Jetfuel Launchpad seeks to bring confidence to investors by partnering only with vetted projects. The Jetfuel team will rigorously research and interview prospective partners.
We think yield optimizing will grow especially as more people realize BSC is more efficient.We think our project will pave the way for new growth through innovative strategies like allowing cross-chain with ETH
Source : bsc.news