Earning AVAX with AVAX #24 — $sAVAX Liquidity with Poolside
Earn 21% APY on $AVAX by providing liquidity to the $sAVAX LP and staking with Poolside for additional rewards and points.
Introduction
Today’s article will be taking a look at Poolside, a relatively new DEX from the Buttonwood team designed specifically for yield bearing assets. This makes it a very appealing option for LSTs, or liquid staking tokens, as the unique design allows depositors to retain the maximum inherent yield from the underlying assets, which can be arbitraged or otherwise eroded away in more traditional AMM models.
Specifically, I’ll be providing liquidity to the $sAVAX pool. Doing so will also make me eligible to join the Poolside Party for it, which is a non-custodial rewards program. This currently has dual incentives in the form of $QI from BENQI and Poolside Points from Poolside themselves.
Poolside
The problem that Poolside sets out to address is that the additional value produced by yield bearing assets can be diluted or lost entirely when providing liquidity to traditional pools.
Since it’s what I’ll be using today, let’s use $sAVAX as an example. This accrues value against $AVAX over time by delegating the underlying assets to Avalanche validators, earning staking rewards in the process. As a result, the exchange rate between the two changes constantly, with 1 sAVAX being worth more and more $AVAX over time.
One way of dealing with value accrual is to use rebasing assets, which increase the supply proportionally when the yield is distributed. This causes issues for traditional AMMs, as in the diagram from Poolside above, as the additional tokens would be added to the rebasing token side of the pool when each rebase occurs, causing it to become imbalanced and reducing the internal value of the rebasing token within the pool.
Poolside introduces a concept called Reservoirs to deal with this, which is where the inactive liquidity from positive rebases flows, meaning the internal pricing remains unchanged. An equivalent amount of the underlying token would then need to be added to the pool to match with the assets in the Reservoir for it to then become active liquidity, allowing depositors to retain the full yield.
For tokens like $sAVAX, which don’t rebase, but instead adjust their exchange rate when yield is distributed, Poolside use rebasing wrappers to track and handle this so the same concepts apply.
This is quite a simplified explanation of the mechanics, so I’d highly recommend taking a look at the Core Concepts page of the Poolside documentation if you’d like you read more on exactly how it all works under the hood.
Another aspect I’m really interested in is the Poolside Party, which is their non-custodial rewards program and explained further in their documentation. In the case of the $sAVAX pool that I’ll be joining today, this allows me to earn both $QI and Poolside Points by subscribing to the rewards.
The exact future uses for Poolside Points haven’t been revealed yet, so this is pure speculation on my part, but my best guess would be that they may contribute to a future airdrop allocation, as the protocol doesn’t currently have a token. I also think it’s quite likely that an upcoming token or the points themselves may have future use for either revenue sharing or yield boosting through something like a vote escrow style model.
Wallets
I set up a new wallet with the following address to use for this strategy:
- 0x6Af0bf3eA1FbdE8F254C08f2B683A0E4ca32c4e3
Which you can track, follow and verify with DeBank and SnowTrace:
I then sent 10.2 AVAX to this address, with 10 AVAX to be used for providing liquidity and the remaining 0.2 AVAX to cover gas fees.
Providing Liquidity to the $sAVAX Pool
I wanted to enter the pool with equal amounts of each asset, which meant I first had to exchange some of my $AVAX for $sAVAX. To do this, I compared the rates for staking directly with BENQI against swapping on Yak Swap from Yield Yak and swapping on Balancer.
Yak Swap gave me the best rate, so I went ahead with the swap there. This required just a single transaction and gave me 4.432018458 sAVAX in exchange for my 5 AVAX and routed the swap through Pharaoh Exchange. Whilst the difference is minimal on small swaps such as this, it can become much more significant with larger amounts.
As mentioned above, Poolside use a rebasing wrapper for $sAVAX, which is called Rebasing sAVAX, or $rsAVAX. To wrap my newly acquired tokens, I pressed the Wrap option along the top of the page, selected $sAVAX to wrap and $rsAVAX to receive, pressed my balance to make sure the full amount was used and then pressed the Approve sAVAX button.
This required one more transaction for the approval and displayed a notification once it was confirmed, which I unfortunately missed in the screenshot above.
To finish the wrapping process, I then pressed the Wrap button.
There was another transaction required for this, which again notified me upon confirmation, and I managed to catch in the screenshot this time.
The wrapping process gave me 5.0041725968 rsAVAX in return for my 4.432018458 sAVAX. With 1 rsAVAX representing 1 AVAX, this demonstrates the benefit of checking exchange routes for $sAVAX, as I received slightly more than I would have if I’d staked for it directly instead.
Next, I selected the Pools option along the top of the page and then pressed the New Position button, as prompted on the page.
This displayed the page above, allowing for a couple of choices for adding liquidity. The Balance Pool option can be used to provide single-sided liquidity, in this instance adding just $AVAX to match the current $rsAVAX balance in the Reservoir.
Instead, I wanted to add both tokens to the pool, so I selected both $AVAX and $rsAVAX and pressed my balance under the $rsAVAX option to ensure the full amount was selected, which automatically populated the matching amount in $AVAX. Happy with the preview, I then pressed the Approve rsAVAX button.
There was another transaction required for the approval, and a notification was again displayed once it was confirmed. I cleared the transaction submitted message and pressed the Supply button to continue.
This required one final transaction to complete the process of providing liquidity to the pool. There was another notification shown when the transaction had confirmed, and an animation of confetti being showered down the page, which doesn’t translate quite as well in a screenshot as does in motion, but I thought was a nice touch.
My deposit consisted of 5.0265915073 AVAX and 5.0041725968 rsAVAX, and gave me 4.9633589025 POOL-V1 LP tokens in return, representing my position in the pool.
The entire process up to this point cost me a total of 0.0492583072 AVAX in gas, leaving me with 0.1507416927 AVAX of the original 0.2 AVAX that I had allocated for the fees. I wasn’t sure of how much to expect from the fees for wrapping and providing liquidity, but this was better than I expected, which is always a nice surprise.
Joining the Poolside Party
To start earning the additional $QI and Party Points rewards, I then had to join the Poolside Party for the LP. To do this, I selected the Party option along the top of the page and then pressed the Join Party button.
Next, I pressed my balance to select all my LP tokens and then pressed the Approve POOL-V1 button.
The approval required one transaction and a now familiar notification was displayed once it was confirmed. To complete the process, I then pressed the Join Party button.
This required two signatures, one to subscribe to each of the Points Party and BENQI Party, followed by one final transaction, and I was notified and shown the confetti animation again once it was successfully confirmed.
Unfortunately, I missed taking a screenshot of both again, and had to refresh the page to display my position in the Poolside Party as in the screenshot above. This then showed the rate at which I was earning Poolside Points and the $QI rewards that I had begun to accrue.
Joining the Poolside Party cost me 0.02329649 AVAX in gas fees, meaning I spent a total of 0.0725548012 AVAX on gas for the entire process, leaving me with 0.1274451987 AVAX of the original 0.2 AVAX that I had allocated for this purpose. Again, this was lower than expected, particular as an NFT is minted when joining the Poolside Party in order to track rewards.
Projections
Figuring out the APY for providing liquidity to the $sAVAX LP isn’t as simple as I’d like, as the base and swap fee rates aren’t actually displayed anywhere, as far as I can tell.
With that said, there is currently very little volume going through the pool, so I won’t be including the swap fees in my projections as they’re too low to make a material difference at the moment.
Instead, I’ll be using a combination of the $sAVAX staking rate from BENQI and the rate for the $QI portion of the rewards from the Poolside Party.
Since liquidity providers on Poolside receive the full underlying LST yield and the active $sAVAX component makes up 50% of the pool in the form of $rsAVAX, I should receive half the ~5.80% APR quoted on BENQI, for a base rate of ~2.90%.
Combined with the current 18.10% APY for the $QI rewards from joining the Poolside Party, my total rate should come to an APY of around 21.00%. Assuming this remains the same, then I can expect to earn the following on my ~10 AVAX deposit:
- 1 week — 0.0403846153 AVAX
- 1 months — 0.175 AVAX
- 1 year — 2.1 AVAX
I’ve also excluded the Party Points from the above as they currently have no monetary value or utility, so a rate compared to the value of my deposit or their impact on the yield cannot be calculated.
There are also a few things to keep in mind about these projections, which I expect to have an impact on the rate over time:
- Whilst volume is low now, aggregator integrations are being worked on which should increase volume through the pool, earning more swap fees and contributing a larger amount to the overall rate.
- The effective rate from joining the Poolside Party will depend on the price of $QI relative to $AVAX at the time of claiming or compounding. If the price of $QI rises relative to the price of $AVAX then the effective rate will increase, and the inverse if it drops instead.
- The $QI rewards are from incentives, so when these end I’d expect the rate to drop significantly, unless volume through the pool has picked up enough to compensate by then.
- If the Poolside Points allow claiming an airdrop or utility similar to that I speculated on earlier, then this would increase the effective rate through additional revenue or boosted yield.
Conclusion
Looking for similar options to the approach I’ve taken today, for yields on $AVAX with no impermanent loss, the rate from Poolside’s LP and additional Poolside Party rewards would actually place it at the top of those listed on DefiLlama.
Comparing the projected rate to those I’ve been tracking over time in my January 2024 Strategy Performance review, it’s also extremely competitive. I’m really looking forward to see how it measures up in the coming months as well, as I think there’s quite a lot of potential for it.
One thing that I think will have significant impact is the integration with DEX aggregators. For example, looking at the Yak Swap metrics in the screenshot above, we can see that $sAVAX makes up a significant amount of the volume over the last 7 days. The same applies when checking other periods of time as well, with $sAVAX consistently being amongst the most traded tokens through the aggregator.
As mentioned above, the volume currently going through the pool is incredibly low, so any increase would be a huge step up. However, with such large volumes of $sAVAX being consistently traded, if Poolside can capture even a fraction of it through aggregator integrations, then the impact it will have on yields for liquidity providers will be significant.
Whilst I’ve been keeping an eye on Poolside for a while now, today was my first time actually using it for more than just having a look around, and I really enjoyed the experience.
The process might not be quite as simple as it is on some other platforms, for example having to wrap $sAVAX for $rsAVAX before providing liquidity or choosing whether or not to balancer the pool with the funds in the Reservoir, but I think that once you understand the steps you need to take then it’s really quite straightforward.
Every action that you need to undertake is clearly explained in the UI, such as having to unstake from the Poolside Party before removing liquidity as in the screenshot above. There’s some nice touches I really liked as well, for example the transaction confirmation notifications and animations displayed on successful deposits.
Overall, I’ve been really impressed with Poolside. I love their design, both of the underlying mechanics and the visual aspect on the front end, and I’m looking forward to seeing how things progress over time. I think that the strategy used today has a good chance of performing incredibly well, as long as we see some aggregator integrations and Poolside offering an optimal route.
I’m also curious to see whether any of my guesses on the potential future uses of Poolside Points will be correct, as that could open up some interesting yield opportunities.
