How to maximize the yield — Introducing 2 very simple strategies

8 min readMar 30, 2022

In the article, we will cover the following topics:

Where does the yield come from? That is the reason that we need to apply some strategy to lock and maximize our yield on chain;
Introduce two simple strategies and list the difficulties to apply them;
Utilize Yield Optimizer services on chain to overcome those difficulties;
Demonstrate why it is worthy to use the services;

Let’s dive in!

Where does the yield come from?

If you are a sophisticated Defi user, this part is not as relevant to you. This part provides more clarity into the DeFi world. The blockchain is a mapping of the real world. Selling services and/or products are very fundamental economic activities where sellers can earn and buyers need to pay. The same thing happens on the chain.

Besides above, because all the things on chain are digital, the projects creatively reward their own tokens to the users to incentivize their adoption. So we can summarize 2 types of such yields:

Profits when providing service or selling product and;
Project token reward.

For example, when you are lending out your token on AAVE, as the lender you sell your token’s use right to the borrowers. And they pay you the interest as the fee to use your token. On the other hand, in order to incentivize users, AAVE will reward you with their AAVE token as reward when you are lending out the token.

Introducing two simple strategies to maximize your yield

There are a lot of strategies to fulfill different yield farming purposes. In this article, we are only discussing the most simple ones which are making your yield compound. The power of compounds is well known to the public. It will enlarge more of your yield with longer time compared to simple interest. Here is a graph from the Internet to show the power of compound yield.

It’s easy to understand, because the yield is calculated on the principal amount. When you reinvest your assets, it increases your principal which makes you earn more. If you want to learn more about this, here is an article to read.

This is similar in the Defi world but with a few differences. 1. The price of the reward token is fluctuating which will make your yield uncertain as you will accumulate the tokens but its value will oscillate. 2. The reinvestment may have extra cost. Here is a simple example. Assume that I invest in EarnMuch for $10000 and earn 10 EM tokens for 1 day. The price of EM is $1 on the first day and decreases to 0.5$ on the third day. So when you sell the token on the first day, you will earn $10 but if you sell on the third day you can only earn $5. This will make your yield fluctuate very much. And you need to pay gas fees or other costs when you are doing the reinvestment action on the chain. But from another perspective the more frequently you reinvest, the higher yield will be achieved because every asset will earn a longer time. So there should be a tradeoff between the cost and frequency.

Different users will hold different views of each protocol. If you are just a pure yield farmer, you can just utilize this strategy. Claim the reward, sell the reward token and reinvest the original asset in a tricky frequency to maximize your reward. But you said that you are FOMO of the reward token. Don’t worry. Most of the protocols have investment opportunities for their own token. For example, you can invest the Sushi token to earn the protocol fee. It will gain more as well if you can reinvest the token with specific frequency. So another similar strategy can be applied. Just claim the reward, and invest the reward token to the right place at a tricky frequency.

Everything seems smooth? Hold on as there are several difficulties to apply those strategies. Firstly, you need to find out the frequency to reinvest considering the current gas fee and any other costs that may occur. Secondly, you need to manually do the reinvestment process again and again. Thirdly, if you are earning the yield on Ethereum, you need to pay a very high gas fee.

How can I make less effort to apply these?

There are companies that help the investors manage their money off chain. Most of them are solving the problem mentioned above for the individuals. So the same thing should take place on the chain. But there are no centralized institutions in the blockchain world. All the things can be coded and run automatically without any permission or control. So the best solution for this problem is to invest through a Yield optimizer service on the chain.

The Yield optimizer will:

Find out the best reinvestment timing. It will calculate the best timing for reinvesting especially on the blockchains with high gas fees.
Execute automatic reinvestment. The reinvestment process will be done automatically. It will be much more convenient and smooth. You don’t need to do these manually.
Pay less gas fee. The gas cost is almost a fixed number no matter how much money you execute. When you invest through a yield optimizer, it will gather money from other investors to spend the same gas which means all the investors share the gas cost.
Moreover, most of these services are backed by a community, they are always finding out the new strategies to maximize the yield. You can always invest with the most effective strategies with minimum effort.

Why is it worth using their services?

You may find that all the protocols that help you optimize the yield are charging fees. Most of them charge a performance fee which is a percentage of the reward tokens to cover the operational, development and gas cost. So is it still worth using this kind of service?

Let’s do some math here to explain.

First of all, as mentioned above, there are 2 things which may affect the real yield when you are investing in the blockchain.

The principal you invest

The gas is almost a fixed number no matter how many assets you do the executions on chain. But the yield is a percentage of your principal. So this means the more principal you invest, the less gas you need to pay from the percentage calculation, which means more unit assets will share the gas fee.

The reinvestment frequency

If the gas fee or other costs are zero, the more frequent we invest the more yield we will get. So if the gas or other cost is a smaller percentage of the principal, we can earn more to reinvest more frequently. There should be a trade-off between the cost and the frequency.

Secondly, remember the 2 variables mentioned above and we will show you how they affect the yield.

Selling reward token strategy

Here is an example. Let’s assume that we will sell the reward to the original investment assets and reinvest.

The gas G is the total gas we need to pay when making a reinvestment.

The principal P is the total amount we invest at the beginning.

The daily yield Yd is how much percentage we can earn for one day.

If we do the reinvestment every D days, the APY formula will be:

APY = (((P*Yd*D — G)/P)+1)^(365/D) — 1

Let’s think of a theoretical situation in which G=0 and D=1, meaning that there is no gas fee and we reinvest every day. We call this APY as grossAPY, which represents as:

grossAPY = (1+Yd)³⁶⁵ — 1

But please remember that grossAPY cannot be achieved and most of the projects will show you this number.

If we consider all the fees and other costs, we call it netAPY which is the real projected APY you can earn. And we assume the fee is F which is also a percentage of the total reward token. The formula should be:

netAPY = ((P*Yd*D*(1-F)-G)+1)^(365/D) — 1

To demonstrate more clearly, let’s draw a graph with some real numbers to show the difference between investing by yourself and through service.

Gas and fee: $30

All other fees: 5%

Daily Yield: 0.06%

Individual investment principal: $10,000

Service total investment principal: $100,000, $1,000,000, $5,000,000

Let’s set some benchmarks:

grossAPR = 365*Yd = 21.9%

grossAPY = 24.47%

When you invest by yourself, you will at most achieve a yield between these 2 numbers which you need to be very aware of gas cost.

And let’s see the netAPY graph to compare the individual investment and the investment through service.

There are several conclusions:

1. The higher investment frequency works better on larger investment principal;

2. It’s easy to achieve a netAPY which is closer to the grossAPY when using a certain amount of principal and the proper frequency;

3. Another thing is not directly from the graph but very important. The lower frequency means you need to bear more uncertainty of reward token price;

So this is why we can use this kind of service. Moreover, some of them will reward their own token to their users as well. This will also make your return larger.