Beyond Traditional APY: Azuro’s Strategy for Liquidity Providers
Why APY Matters
Annual Percentage Yield (APY) is a critical metric for liquidity providers as it depicts their projected yearly earnings. It’s widely understood that a higher APY translates into greater returns on investment, while a lower APY typically yields less. At the same time, elevated APYs often signal increased volatility, leading some investors to approach them with caution.
Yet, like all dualities, this scenario warrants thorough investigation and analysis, as the reality is seldom as simple and direct as it appears.
Risk Versus Reward: A Visual Insight A scatter plot from DeFiLlama’s extensive database paints a vivid picture of the fluctuating returns across DeFi protocols. This plot juxtaposes the average APY with its corresponding volatility, offering a unique perspective on the risks and rewards inherent in these investments.
The x-axis is labeled “APY Standard Deviation,” which represents the volatility of the APY, while the y-axis is labeled “APY Geometric Average,” indicating the average return taking into account the compounding of interest.
The graph shows a wide dispersion of points, suggesting a variety of APY averages and volatilities. It indicates that there isn’t a strong, clear trend or correlation between the average APY and its volatility; however, there is a slight concentration of points towards the middle of the plot, which suggests that the majority of investments have moderate risk and return.
Thus, statistics suggest that there is no pronounced link between APY averages and their fluctuations and that most investments balance risk with reward.
In light of this, we’re curious to see: where does Azuro fit on such a graph?
Comparative APYs: The Numbers Speak
In direct comparison with established protocols like Compound, Aave, and Uniswap, Azuro’s liquidity pool returns stand out. These protocols typically offer lower returns, reflective of their larger, more mature markets. Azuro, conversely, presents return numbers that reflect its distinct market position and growth trajectory.
For instance, Aave issues ERC20-compliant aTokens to lenders in a 1:1 ratio to their collateral, offering loans against a variety of assets. The interest rates, dictated by an algorithm, fluctuate with market supply and demand. Compound adjusts its interest rates based on the asset supply and demand ratio within its market, relying on a smart contract-driven interest rate model. Compound requires user interactions with its cToken contract for interest to accrue, a process that may not always align with real-time market shifts. This method, although technologically sound, might be less attractive for users seeking the more agile and potentially more lucrative APY offering.
Uniswap’s APY for $UNI stakers, as proposed in the recent governance update, presents a more conservative approach which involves a 0.05% protocol fee on trading volume, shared exclusively with $UNI token holders who have staked their tokens. While this development led to a significant rise in $UNI value, the actual APY under realistic conditions (e.g., 50% of $UNI staked with a 50% fee share) amounts to only about 0.9%. Although a bullish scenario could yield up to 4.6% APY, Uniswap’s model is still relatively modest.
Azuro Revenue Generation Explained
Let’s see how Azuro manages to have a competitive edge in liquidity pool returns, considering its revenue generation model doesn’t rely on conventional APY calculations but rather on dynamic LP positions.
In Azuro, liquidity providers (LPs) receive non-fungible tokens (NFTs), specifically ERC-721 tokens, which represent their position in the liquidity pool.
The value of these NFTs fluctuates based on the performance of the liquidity pool, which acts as a counterparty to the betting. The returns for LPs in Azuro can range from negative to positive (from -Y to +X), meaning that an LP’s position can either increase in value (profit) or decrease (loss), depending on the pool’s returns.
What happens under the hood is that when an LP adds liquidity to the pool, the core contract creates a timestamped ID for the NFT it assigns to the user. A timestamp is indispensable in this model since it directly affects which events this liquidity can reinforce (and consequently grow or shrink). It depends on whether the provided liquidity was added before or after the event was added the core contract.
Azuro’s core contract creates a new condition every time an event starts. If an LP enters the pool after this condition is created, their liquidity isn’t processed by the oracle to reinforce this particular condition. The fund for the condition is formed without it, and only those LPs who joined the pool before this condition appeared, are taking part in providing reinforcement and, when the event is resolved, in getting their rewards.
Liquidity Returns in Action
Imagine Jane, a liquidity provider, who decides to invest in the Azuro liquidity pool. Upon her investment, let’s say it happened at 1pm on Monday, Jane receives a unique NFT representing her stake in the pool. Let’s call this NFT “BetStake-One”.
There happened to be a football match that Monday, at 5pm. So, Azuro oracle included Jane’s reinforcement into the condition created by the core contract to receive bets. After the bets got resolved and some bettors got their winnings (while some left their losses in the pool), Jane gets 25% of all the funds that the pool accrued from the lost bets and the margin.
This approach is crucial as it aligns the interests of LPs with the overall success of the betting markets, offering an investment experience that results in higher rewards but has to be more strategic, compared to static APY models. It introduces an element of strategy for LPs, as they must consider a number of factors that contribute to the potential outcomes of their investments.
The following graph shows the attractiveness of Azuro’s model to liquidity providers, displaying the rising trend of LP rewards over time, and the growing number of active liquidity providers joining the fray.
Undoubtedly, such a dynamic approach needs the tech to back it up and ensure smooth liquidity management. Here’s where Azuro has another innovation up its sleeve, called Liquidity Tree.
Liquidity Structure Supreme
The structural backbone of Azuro’s liquidity management is its Liquidity Tree, a data structure that ensures the NFT positions and liquidity distribution are processed effieciently.
A key characteristic of the Liquidity Tree is its use of the Segment Tree data structure, which is essential for Azuro’s dynamic model as it allows for continuous addition and withdrawal of liquidity because of its logarithmic complexity O(log N).
Find out more about Liquidity Tree structure in the dedicated article.
- Contrary to the common practice of using liquid tokens to represent liquidity positions, Azuro opts for NFTs as representations of investment stakes. This is not merely a cosmetic difference but a fundamental reimagining of value representation and liquidity provision.
- While conventional protocols offer a predictable APY range starting from zero to an upper limit, symbolizing only growth or stasis, Azuro embraces a broader spectrum. Its returns span from negative to positive, acknowledging the reality of investment which is subject to both appreciation and depreciation. This transparent acknowledegment equips investors with a clear view of potential outcomes, mirroring the real conditions of the financial markets where values can fluctuate, reflecting both profit and loss.
In synthesizing these elements, Azuro’s innovative revenue model, incorporating NFTs and scalable tech solutions, acts as the driving force behind its rising trajectory. While such a model invites a more strategic approach to investment, it also has higher returns and a guarantee of fair reward distribution, backed up by the robust and scalable algorithms.
Azuro is aiming to provide the highest non-subsidized returns which are independent of the general market conditions. Azuro’s liquidity returns are driven by betting volumes which correlate to real-world events rather than to the fluctuating market swings.
This is significant in the cryptocurrency domain where bear market yields often drop to about 6–7%, while bull markets present higher but less sustainable options, such as Ethena’s rates approaching 30%. Azuro’s model, unlinked to standard crypto market activities, benefits from being independent from purely crypto activity, thus offering a more consistent return.
Azuro is the onchain predictions layer. It consists of modular tooling, oracle and liquidity solutions for EVM chains to host powerful prediction and gaming apps.
With its unique infrastructure layer approach, Azuro makes onchain predictions and gaming portable and composable. It allows anyone to engage and monetize users by building apps, integrations, and products quickly, permissionlessly and with zero upfront or running costs.
- Website: https://azuro.org/
- Docs: https://gem.azuro.org
- Github: https://github.com/Azuro-protocol
- Onchain activity: https://dune.com/azuro/stats
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