The yETH machine gun pool shows an annualized income of about 33.49%, so you can understand how it works.
Original title: “YFI founder: How to understand the $140 million yETH machine gun pool”
Written by: Andre Cronje, founder of YFI Compilation: Porridge Overnight
After the DeFi liquidity mining protocol Yearn.finance recently launched the yETH machine gun pool, it was quickly sought after by the market. According to data on September 4, yETH Vault has successfully locked 345,000 ETH, which is worth about 140 million US dollars. At the time of press, the yETH machine gun pool showed an annualized income of about 33.49%, far exceeding the average wealth management product. Where does the income of this product come from?
For this important question, YFI founder Andre Cronje gave his explanation:
The purpose of this article is to quickly introduce how the yETH machine gun pool works. There seems to be quite a lot of misinformation circulating.
First of all, where does the revenue of the yETH machine gun pool come from?
- Lending, assets are borrowed through Aave, Compound and dYdX platforms to earn interest;
- LP income is provided to Uniswap, Balancer and Curve to earn transaction fees;
- Liquidity incentives, such as Compound, Balancer and Curve, provide additional incentives for liquidity providers;
Risks involved in the yETH machine gun pool:
- The risks involved in lending, since the yETH machine gun pool is a lender, the assets may not always be available. How does it work? When the asset pool is closer to the empty state (that is, the maximum amount of funds is borrowed), the higher the interest it earns. This allows for the provision of new assets (or return of borrowed assets), but there does exist such a window when the provided assets exceed the available borrowed assets.
- May involve smart contract risks, and there may always be loopholes and other defects.
- Lack of trading activity, which means lower fees;
- Liquidity encourages price fluctuations, leading to instability of annualized income (APY);
yETH machine gun pool explanation:
- yETH machine gun pool provides ETH to Maker to mint DAI;
- DAI is provided to yDAI (yearn.finance DAI machine gun pool);
yDAI machine gun pool explained:
- DAI is provided to curve.fi/y;
- curve.fi/y LP tokens are locked in the dashboard to receive CRV;
We have seen a lot of wrong information about the yETH machine gun pool and its minted DAI, and the available DAI. This is no different from the lender/borrower utilization rate.
If you offer 100 tokens to a lender, and someone borrows 50 tokens. Then you can’t withdraw your 100 tokens, but you can withdraw 50 tokens. When you withdraw 50 tokens, the borrower will pay an extra premium, so other lenders will be incentivized to increase tokens. Or the borrower will repay the debt.
This is the basic premise of the machine gun pool, and yETH is no exception. But there is a difference, because yETH uses yDAI, and the “lender” is actually curve.fi.
When the DAI in the asset pool becomes low, arbitrageurs sell DAI in exchange for other stablecoins (USDC, USDT, or TUSD), which increases the amount of DAI in the pool. And when DAI is removed, then trading with DAI becomes more valuable. This is the same as the explanation of lender and borrower utilization.
The only core difference here is that in a normal vault, there is no debt. And yaLINK and yETH have debts, which does increase additional risks, because you need to have enough available funds to pay off debts.
This is why we maintain a ratio of approximately 200%, so there is approximately a 50% buffer in the case of short-term lenders/liquidity.
Most systems have a maximum borrowing buffer, which means that there must be a certain amount of minimum liquidity in the system. The general rule is about 25% (so the borrower cannot borrow more than 75% of the funds). Therefore, the upper limit of yETH vault is about 60 million U.S. dollars and the buffer is about 16 million U.S. dollars, so even if the capacity of the y pool is halved, it will still be available.
Source link: mp.weixin.qq.com
