APY.Finance: Yield Farming Robo-Advisor
APY.Finance is a robo-advisor that runs a portfolio of yield farming strategies from a single pool of liquidity. Through its interactions with financial primitives, it aims to provide users optimized risk-adjusted returns by addressing smart contract risks, yield volatility, high gas costs and diversification.
What’s wrong with the DeFi ecosytem today?
Users want to earn yields (aka “yield farm”) across a variety of DeFi products in an optimized manner; low risk and high reward. However, yield farming continues to present users with a high barrier to entry, cost and risk.
To address these pain points, APY.Finance aims to give users a low-cost frictionless way to pool their liquidity and allocate it across a portfolio of strategies.
How does it all work?
User Journey: once the user connects their wallet to the platform, they are able to immediately participate in yield farming strategies by depositing stablecoins: DAI, USDC or USDT token. As yield accrues, the user will be able to claim it at any time. The user journey is very simple as it only requires three steps: deposit, claim and withdraw!
Smart Contracts: The APY liquidity pool that handles deposits and withdrawals for the stablecoins issues their native APY token to represent users share of the pool. The liquidity pool then goes through what’s called an APY manager which serves to rebalance any new deposit and/or withdrawal requests. Based on the amount of new requests, the contract will either deploy new capital to the current strategy portfolio or unwound it until all withdrawal requests can be processed. If the notional value of assets in any strategy are also out of threshold based on “allocation ratios”, it will trigger a rebalance.
Further, the rebalance function is decentralized and can be called by any external addresses. Incentives for calling a rebalance are issued from the rebalance pool using yields earned by the strategy portfolio. Through the rebalancing process, assets enter and leave the APY strategy portfolio which is managed using Gnosis Safe. The strategy portfolio consists of smart contracts that interact with financial primitives to earn yield. Today, there are 11 various farming strategies that are implemented across DeFi primitives such as Aave, Compound and Curve generating ~20% APY. The strategies can vary from utilizing leverage to being a liquidity provider. It’s noteworthy to point out that when decomposing the yield on these strategies you find that a majority of it comes from the native APY governance token.
Risk: Each strategy has a risk score associated with it and is updated through governance proposals. They leverage the ConsenSys DeFi Score whitepaper as a template to assess the risk score which are used to weight a strategy’s estimated yield to get a risk adjusted yield.
Pool Safeguards: The platform also has safeguards which prevent funds from being drained in the rare black swan event of a hack or exploit. Holders that own large portion of TVL will not be able to withdraw ~10% or more of the TVL. If necessary, users are being asked to contact their support email.
Portfolio optimization: The computation required to optimize the portfolio will exceed the block gas limit. APY.finance attempts to solve this by allowing off-chain computation of portfolio allocations. If the new set of allocations results in greater risk adjusted yield and transaction costs are lower, the allocations will be automatically accepted.
Mechanism design and tokenomics
APY is the APY.Finance governance token. Specifically, the token grants control over updating system wide parameters such as fees, risk scores and rebalance thresholds. It will also be used to update existing strategies as well as propose new strategies.
Liquidity Mining Program: Incentives are also provided to liquidity providers for depositing their stablecoins. 31.2% of the token supply has been allocated for this purpose. Currently, users are able to provide liquidity on Uniswap and Balancer which yields ~20% APY.
The market value has been hovering around $15 million since the beginning of the year while the total value locked has been steadily decreasing to $19 million from $50 million, which may indicate users are searching for alternative platforms to achieve similar returns. That said, the platform has on their roadmap to increase token utility by decentralizing the platform through liquidity depth with platform owned liquidity (POL) and broadening opportunities for holders to earn rewards. A proposal for deploying the Olympus Pro bonding market recently passed which will allow for additional token utility actions on the platform. As mentioned earlier, the attractive yields are predominately sourced from their native governance token; all 11 strategies sourced ~15% of their yields from their native token. This is similar to Celsius where you earn more when accepting its native token. The assumption here is that the native token will at minimum hold its current value in the future. Otherwise, you may retroactively lose yield. The APY token distribution is concerning as the total APY to be mined are only ~31 million tokens (31.2%) and where most of the supply was distributed to investors in a private sale. Despite the one-year vesting schedule, it may be difficult for retail investors to compete with VCs. Once the entire APY token supply is released, the community may control less than half the governance token supply as a result. Despite their claim on providing best risk adjusted returns, the liquidity risk is significantly larger for those who own a large portfolio of the TVL. Large holders can not withdraw more than 10% of the TVL due to “safeguards” and are advised to reach out to their email support. However, the biggest risks of the platform are the administrative tools used to manage the portfolio as it is heavily controlled by governance. Implementation errors or comprised access controls can lead to loss of funds. The platform provides a solution to mitigate these risks using Gnosis Safe. Lastly, it is not clear on how the yield estimates is used to determine optimal strategy allocations as there is no consistent risk scoring framework that is being utilized across different strategies. The team looks at a variety of risk factors and uses the DeFi Score whitepaper as a template but none are explicitly explained.
Cryptofunds, market makers, and trading desks can engage in DeFi and Web3 with MetaMask Institutional
MetaMask Institutional offers unrivaled access to the DeFi ecosystem without compromising on institution-required security, operational efficiency, or compliance requirements. We enable funds to trade, stake, borrow, lend, invest, and interact with over 17,000 DeFi protocols and applications.
Found this research useful? Connect with the ConsenSys Cryptoeconomic Research team at [email protected]
Disclaimer: ConsenSys Software Inc. is not a registered or licensed advisor or broker. This report is for general informational purposes only. It does not constitute or contain any individual investment advice and is made without any regard to the recipient’s objectives, financial situation, or means. It is not an offer to buy or sell, or a solicitation of any offer to buy, any token or other investment, nor is it intended to be used for marketing purposes to anyone in any jurisdiction. ConsenSys does not intend for any person or entity to rely on any facts, opinions, or ideas, and any financial or economic commentary expressed in this report may not be relied upon. ConsenSys makes no representations as to the accuracy, completeness, or timeliness of the information or opinions in this report and, along with its employees, does not assume any responsibility for any loss to any person or entity that may result from any act or omission based upon this report. This report is subject to correction, completion, and amendment without notice; however, ConsenSys has no obligation to do so.