Yield Optimization Protocols
Decentralized Finance presents multiple avenues to generate yields on crypto tokens. However, DeFi is a dynamic ecosystem and the best yield opportunities across different risk spectrums change fast. This gave rise to protocols that specialized in maximizing yields by automatically moving funds within a set of integrated underlying protocols.
Yield Farming is the activity of moving funds between multiple DeFi protocols to maximize yield. The term was coined when DeFi protocols started offering protocol tokens as incentives to bootstrap liquidity and activity.
Compound famously kickstarted the Yield Farming craze by introducing COMP tokens as incentive for anyone who borrowed or lent on Compound Protocol
Yearn Finance launched in 2020 on Ethereum and is one of the pioneers in the yield optimization space. The first version of Yearn Finance optimized stablecoin yields across Aave, Compound, dYdX, and Fulcrum. It was a relatively simple strategy based on where the highest yield opportunities were available. Today, Yearn has multiple vaults where users can lock in their crypto tokens for high yields. These vaults employ multiple complex strategies and can switch between them based on market conditions.
Yearn Finance’s security team does risk assessment of different DeFi protocols internally.
Where Yearn Finance grew up to become the leading Yield Optimization protocol during the DeFi Summer, Beefy Finance emerged as the leader on Binance Smart Chain. Beefy has scaled to 16 blockchain networks today and relies mostly on auto-compounding strategies.
Auto-compounding dApps automatically collect staking rewards & re-invest them in order to get the best APY, instead of the user doing it manually.
The practice of providing protocol tokens as incentive led to a situation where participants were constantly switching between different protocols and selling off the protocol tokens after claiming the rewards that put a downward pressure on the token price. Curve Finance came with an interesting incentive mechanism to address this.
As a CRV token holder or a liquidity provider on Curve Finance, you can choose to convert your CRV tokens to veCRV (vote-escrowed CRV). veCRV is a CRV token locked into the protocol for a period of time in exchange for governance rights and additional incentives such as boosted CRV rewards. You can boost your rewards up to 2.5X by depositing CRV tokens which are in proportion to the liquidity provided by the users.
This presents a challenge for liquidity providers as they need to acquire more CRV tokens to access these benefits. Convex Finance provides a community centric approach to do this where the CRV tokens from multiple people are pooled together and the additional benefits are distributed amongst the liquidity providers. Not surprisingly, today 43% of veCRV tokens are controlled by Convex Finance.
Try the yield optimization protocol Beefy Finance: