ZooDAO: Yield Farming is finally here!
Update on the ZooDAO Roadmap
For the Zooligans who are veterans in the DeFi space, the next step in our journey is an obvious one. For relative newcomers to the project or the world of DeFi, this next milestone will be an opportunity to learn about the inner mechanics of DeFi, and how projects like ZooDAO secure sustainable scaling.
Looking back at our roadmap, ZooDAO has come a long way since Q4 2021, with the launch of our highly successful IDO, followed by the LBP and ongoing Testnet. While these events represent key milestones for users, there have been an enormous number of developments ongoing in the background.
Most importantly, users who joined ZooDAO for the IDO and LBP have enabled the continued growth of our solution to NFT utility, and have proven to be critical to our shared success.
An innovative approach to yield farming
To achieve our goals of ZooDAO providing cross-project utility for users’ NFTs, it’s critical for $ZOO, the native token of ZooDAO to be as broadly distributed as possible, and for enough $ZOO to be available on the market to enable active trading.
To maximize the benefits of participation in yield farming, we have created a unique mechanism in which users may leverage the benefits of both yield farming, and liquidity mining to generate passive income and rewards on their assets. To achieve this, ZooDAO users will soon be able to generate returns using LP tokens generated through depositing $ZOO-$DAI liquidity in Sushi.
What is yield farming?
Yield farming is a network participation strategy in which a user within a DeFi protocol contributes their crypto assets to a liquidity pool, making it easy for others to trade within a platform. In exchange for their contributions, the participants are rewarded with a share of the platform’s fees.
In the case of ZooDAO, yield farming entails staking two assets ($ZOO and $DAI) to a pool hosted on Sushi, in return for a portion of the fees generated by each trade in the pool. Participating in yield farming generates benefits for the user, as tokens which would otherwise be sitting idly in a wallet continue to generate returns, simultaneously creating a benefit for the market, as users provide liquidity to enable tokens to be actively traded.
Yield farming also serves to stabilize the value of a token on the market. With increased liquidity available on a decentralized exchange, the relative price impact of each trade is reduced, decreasing the risk of price fluctuation.
How are yield farmers compensated?
Users participating in yield farming stake their assets in a pool which powers an Automated Market Maker (AMM) where anyone can lend, borrow, buy and sell tokens. Buyers interacting with the AMM incur fees each time they make a trade; these fees are then re-distributed to pay yield farmers — or liquidity providers — for staking their own tokens in the pool.
Compensation for participating in yield farming is represented in APY, or Annual Percentage Yield. This percentage describes the expected output, or real rate of return that a user can expect to earn by participating in yield farming on an annual basis. A more easily understood measure is APR — Annual Percent Rate — which doesn’t take into account the compounding effect of staking. Prior to participating in yield farming, a user can check what the expected APR is based on the current market conditions, and volume of assets in the pool. If the pool is experiencing low supply, the APR will be higher to incentivize users to participate in yield farming and supply liquidity. The APR will continue to fall as users provide liquidity, and the APR generated from trading is re-distributed proportionally across all yield farmers.
When yield farmers stake their assets in Sushi, they receive a Sushi Liquidity Provider token (SLP), as a placeholder for their staked assets. The number of SLP tokens provided in return for staking is proportionate to the total number of $ZOO and $DAI tokens staked. The SLP token can be described as shares in the total liquidity in the pool, and is updated with each trade to add their value relative to the tokens held in the pool.
ZooDAO: Compounding Rewards
ZooDAO users who participate in yield farming can expect to earn returns (APR) by acting as a liquidity provider; these returns are generated by other users buying and selling $ZOO or $DAI tokens from the pool. In most cases, a percentage of fees generated through trading are the sole reward available to users. This is where ZooDAO differs.
ZooDAO’s dApp enables yield farmers to stake their Sushi Liquidity Provider tokens (SLP) to earn even more rewards in the form of $ZOO tokens. Adding the ability to stake LP tokens effectively compounds the rewards users stand to make by pooling liquidity in Sushi.
What are the risks of yield farming?
Participating in yield farming, much like any other mechanism in DeFi is not without risk. We outline the main risks below.
When farming yield, users add liquidity in pairs of equivalent value ($ZOO and $DAI); these assets contribute towards maintaining a balance within the pool. When the price of one of the tokens in the pool changes significantly due to market volatility, impermanent loss can occur. For example, if a user contributes 100 USD worth of $ZOO and $DAI to the pool, and the price of $ZOO decreases after deposit, the exchange rate between $ZOO and $DAI has changed; upon withdrawal, a user would be left with a lower value than what they put into the pool. Impermanent loss is based on sheet value, meaning it can keep changing until an action, like withdrawal from the pool occurs. When you decide to withdrawal after a price change, the loss becomes permanent. Mitigating impermanent loss is challenging due to varying market conditions, however impermanent loss can be temporary: if the price of the token in question goes back down to the original price at deposit, the user breaks even.
Impermanent loss can be calculated here.
Other risks which have historically affected yield farmers include smart contract risks, scams, high gas fees and more. The most common risk aside from impermanent loss is that of smart contract risks. Smart contracts are only as secure as their weakest line of code — which is why all ZooDAO smart contracts go through multiple rounds of internal audit, followed by external independent audit prior to being deployed in the production environment and being available to users.
We encourage users to do their own research on the risks of participation, strategies involved in yield farming and how to make the most of their assets pooled. A few helpful links to begin DYOR are available at the end of this article.
Two platforms were considered by the team to host ZooDAO’s yield farming: Uniswap and Sushi.
As $ZOO liquidity was initially provided in Uniswap V3 via our LBP, use of the platform would consolidate user interaction in a single familiar interface. While this has its advantages, Uniswap V3 has a severe shortcoming in yield farming: the platform provides an NFT instead of an ERC-20 token as a placeholder to users pooling liquidity. While these NFTs can be traded, they cannot easily be re-staked to generate additional rewards for users.
Sushi, by comparison generates an LP token in ERC-20 format which enables users to compound the rewards generated by staking their LP tokens. Additionally, these LP tokens are generated and distributed based on the relative quantity of $ZOO and $DAI contributed to the pool — thereby enabling users staking higher quantities of tokens to secure more rewards in compensation.
The fundamental values espoused by Sushi align closely with those of ZooDAO: true decentralization, innovative approaches to rewards, and user benefit above all. The superior benefit-sharing model employed by Sushi, combined with values consistent with the mission of ZooDAO make the platform the ideal host for our community to engage in yield farming.
Before yield farming opens to users via ZooDAO’s dApp, there are a few critical milestones which need to be passed. The first is the audit of our smart contracts in preparation for yield farming. This step is vital to protecting users assets; as this is the first instance of using a third-party token (Sushi LP Token) in our dApp, it’s all the more vital we get this right. We’re aware that users are eager to start yield farming, however we are adopting a cautious approach to ensure that we have the best possible solution available at launch.
Logistics of $ZOO Availability
Launching yield farming on Sushi enables trading on both Uniswap V3 and Sushi, maximizing the reach of $ZOO token and providing accessibility on the two most popular exchanges used by our community.
Dividing liquidity between two exchanges provides a great deal of benefit, but may result in a small price difference between the two exchanges. To ensure that users are always able to secure $ZOO at the best price, the ZooDAO dApp includes a cost aggregator, provided by Rubic, enabling swap at the most advantageous rate. A short tutorial on using Rubic via ZooDAO’s dApp will follow this article.
We try to keep our articles as informative and accessible as possible. We’d love to hear feedback from the community on what we could do better and how we can make information more accessible to you. Head over to #Suggestions in Discord, or feel free to ask for clarifications on Yield Farming in the #Questions channel.
Getting started with DYOR
- Binance: What is yield farming in DeFi?
- Finematics: What is Yield Farming?
- 101 Blockchains: A beginner’s guide to yield farming
- Cryptogeeks: What are the risks of yield farming?
Find a helpful resource on yield farming? Share it with the community!
The information provided in this article or any other article by ZooDAO does not constitute investment advice, financial advice, trading advice, or any other sort of advice and you should not treat any of the DAO’s content as such. ZooDAO does not recommend that any cryptocurrency should be bought, sold, or held by you. Do conduct your own due diligence and consult your financial advisor before making any investment decisions.
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