Beaver Finance Algorithmic Yield Farming With Impermanent Loss Hedging-How It Works
Beaver Finance is a Single-Asset Intelligent Yield Farming platform which is the first in DeFi to integrate Liquidity Mining with the Option-based cutting-edge hedging solution for Impermanent Loss.
Beaver’s Algorithmic Asset Allocation Engine dynamically pairs a single token (supplied by an LP) from within Beaver’s own LP pools. Then automatically supplied the algorithmically formed pair as liquidity on major DEXs.
This enables users to automatically gain yields that would be only possible in dual-token LP farming but in single-token staking mode.
Beaver’s Impermanent Loss Hedging Engine supported by Asteria Finance Lab, protects LP assets of farming positions by constructing European Option Portfolios for hedging against IL.
Beaver provides 2 types of yield strategies: Farming and Hedging, both of which only require single-currency deposits on the Beaver platform.
The functions and differences between the two strategies are as follows:
Farming:
Beaver Finance would support currency pairs with high yields and high levels of safety on major DEXs such as PancakeSwap and Biswap.
Users can choose any token pair and deposit one asset into Beaver LP pools and leave the rest of operations such as token pairing, LP supplying, and staking for mining for the platform to automatically exercise.
Hedging:
The capital with the pools of the ILH is used to hedge potential impermanent loss on the principal asset of liquidity providers. Option portfolios are constructed based on rigorous mathematical models, and automatic Delta Neutral hedging is also carried out simultaneously. This mechanism not only shields LPs’ assets from IL but also ensures the stability of ILH pools.
Beaver Finance Innovations
Beaver’s two strategies complement each other, offering much higher, true, and honest single-token yields while minimizing the Impermanent Loss. The advanced algorithms applied in two sections of asset pools are able to dramatically elevate capital efficiency, yields, and system solidity.
LP Mining Strategy
Dynamic Assets Allocation
Under a single-token staking mode, Beaver’s asset allocation and pairing algorithms between realizing return rates comparable to dual-token yield farming scenarios.
Traditionally the rest of DeFi adopts the functionality of “borrowing + swap” to form a token pair, which can result in increased leverage factor as well as risks:
1. Directional risk is magnified proportionally, which could lead to two potentially disastrous consequences: liquidation of borrowed assets and dramatically enlarged IL.
2. The swap process of (usually half of) staked token to targeted pairing token will also affect the exchange rate when the amount is large, and the slippage will automatically generate IL.
Beaver Finance, however, matches between existing asset pools to achieve dual-token pairing. This strategy involves the implementation of more logically sophisticated smart contracts and prevents users’ assets from exposing to the risks of high volatile cryptocurrency secondary markets.
Fully-Automatic Operations
After the 1:1 asset pairing process, operations like dual-token supplying, LP token staking, yield withdrawal, opening and closing positions (when users’ asset amount changes) are all automatically implemented by Beaver’s smart contracts. In other words, users only need to finish the first step — deposit a single token to enjoy LP yields which originally requires multiple operations on DEXs.
Impermanent Loss Hedging
Beaver hedges Impermanent Loss for liquidity providers through a set of European Option Portfolio supported by Asteria Finance Lab using the Carr-Madan Formula.
The basic concept is that for any return structure f(ξT) with respect to ξT that expires at time T, it can be realized by constructing a European Option portfolio with ξT as the target and expiration date T, under the condition of f(ξT) is second-order derivable, which is essentially a static investment strategy.
Upon this basis, the classic Black-Scholes-Merton option pricing model is applied to calculate the cost and hedging result:
During the backtest of three-year data (2019, 2020, 2021), the average cost is 0.7% and hedge efficacy sits at 99.8% (blue line), compared with the unhedged asset change (yellow line), the LP principal is basically lossless.
Beaver and Asteria also conducted detailed backtesting on <BTC, USDT> pair for hedging result of ILH pools:
Year 2019 daily hedging returns:
Year 2020 daily hedging returns:
Year 2021 daily hedging returns:
The backtesting shows that IL hedging is profitable most of the time. Beaver guarantees that single-token staking in ILH pool is LOSSLESS. Additionally, long-term protocol users will be rewarded with Beaver tokens.
Beaver is the Set and Forget platform for every class of crypto investors to derive true and honest yields without worrying about impermanent loss or the high barrier to entry costs seen in the rest of DeFi.
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