Yield Farming on Tempus — LP’ing Made Easy 🌾
[DISCLAIMER: This article refers to certain concepts/definitions that are no longer used within Tempus and is therefore outdated. Please refer to docs.tempus.finance for the most up to date information on Tempus.]
Tempus allows users to optimize their existing exposure to variable yield to better match their risk profile. Users can deposit their yield bearing tokens such as stETH (Lido Staked ETH) into contracts with select maturities. These yield bearing tokens get separated into Capital and Yield tokens, allowing users to trade them on our custom AMM. But… how do liquidity providers come into play?
Key Considerations
Future yield tokenization can get complicated and too much complexity can alienate users. Our goal was to allow people who are not necessarily interested in future yield tokenization to benefit from a higher yield as passive liquidity providers (LPs).
In order to do so, we needed to design a seamless passive LP experience. The key considerations were:
- Flexibility on deposit. Allow LPs to join a pool at any time. We allow liquidity providers to deposit the backing token (like ETH) that we deposit e.g. to Lido on their behalf, but we also give them the option to deposit the yield bearing token (like stETH).
- Flexibility on redemption. Allow liquidity providers to withdraw into either the backing token (like USDC) or the yield bearing token (like cUSDC). In additon, we give LPs an option to exit a pool at any time — they don’t have to wait until Maturity.
- Capital efficiency. We didn’t want to introduce multiple AMMs with additional assets such as stablecoins.
How does it work?
To demonstrate how Tempus works for liquidity providers, here’s an example what happens if someone wants to get a high variable yield on their ETH through Lido:
Step 1 (optional): User deposits ETH to Tempus
Step 2: Tempus deposits ETH to Lido, receives stETH
Step 3: The TempusPool contract mints Capital and Yield tokens
Step 4: Tempus deposits (part of) the Capitals and Yields to our custom TempusAMM (which I will cover in another article) as a liquidity provider
Steps 1 to 4 are wrapped into a single atomic transaction.
Liquidity providers end up holding a combination of either Capital or Yield (depending on the current market implied yield) and Tempus LP tokens. Swap fees are generated by being a liquidity provider to the Capital/Yield pool, which is being utilised by everyone who uses the protocol to hedge or trade future yield.
This means LPs are earning two sources of income: (1) yield from the underlying protocol (in this case ETH staking rewards), plus (2) swap fees from the AMM, at the same time, aggregated into one high yield.
On redemption, we withdraw liquidity from the AMM to exit to Capital and Yield and unbundle the transaction, using the redemption (on Maturity) or early redemption mechanics (before Maturity). I will cover these in more detail in future posts.
Disclaimer
The information provided in this article is provided for informational purposes only and does not constitute, and should not be construed as, investment advice, or a recommendation to buy, sell, or otherwise transact in any investment, including any products or services, or an invitation, offer, or solicitation to engage in any investment activity. You alone are responsible for determining whether any investment, investment strategy, or related transaction is appropriate for you based on your personal investment objectives, financial circumstances, and risk tolerance. In addition, nothing in this article shall, or is intended to, constitute financial, legal, accounting, or tax advice. We recommend that you seek independent advice if you are in any doubt.
