Reward vs Yield tranches
Introducing the latest tranches iteration
Idle DAO is excited to announce the latest iteration of the Yield Tranches product line: vaults that offer users the opportunity to leverage either their points/rewards or yield exposure.
TL;DR: For those looking to enhance their farming activities (namely, farming LRT points, or farming token rewards), the Reward side provides the place to maximize it. Alternatively, users who prioritize yield over potential future airdrops can opt for the Yield side, securing higher returns on their deposits.
Background
In September 2021, Idle DAO released the (Perpetual) Yield Tranches, marking a significant milestone in on-chain risk management. These vaults were designed to offer liquidity providers (LPs) a more tailored, risk-adjusted experience based on different risk appetites. Risk-averse users can engage with more exotic yield strategies while benefiting from the built-in coverage provided by the Junior counterparty. Conversely, risk-takers can earn boosted yields by being more exposed to the underlying assets and by giving priority repayment to Seniors.
Adaptive Yield Split
Initially, Yield Tranches split yield according to predetermined weights (e.g., 60–40). This approach proved unsuitable for the fast-evolving on-chain market, leading Idle DAO to introduce the Adaptive Yield Split. This mechanism dynamically distributes generated yield to Senior and Junior depositors based on the liquidity present on each side, making the vaults more adaptable to liquidity changes.
Over the years, Idle DAO has remained focused on the vision that DeFi should move beyond the one-risk-fits-all approach. New verticals have been integrated, and today, Yield Tranches cover a wide range of investment use cases, including liquid staking, leverage staking, overcollateralized lending, and private credit lending. The suite now offers an increasing number of risk-adjusted solutions for major crypto assets, providing single-side exposure while avoiding impermanent loss or lockups.
User Rewards in DeFi
One of the most dynamic verticals on-chain has been the methods for issuing and distributing new tokens to reward users.
Before the Ethereum launch, this was primarily achieved through launching a PoW blockchain (e.g., Litecoin, Bitcoin Cash). The introduction of the ERC-20 token standard opened the door to a variety of new solutions. In 2017, projects were distributing their tokens to the Ethereum community. In 2020, Compound introduced a Liquidity Mining program to reward active protocol users. Uniswap adopted a more traditional airdrop approach, distributing tokens to early users who had tested and utilized the protocol.
In parallel, DeFi has continued to innovate, introducing numerous strategies to maximize token rewards while earning yield by lending assets to markets.
Points Mania
The latest evolution in token distribution is the “points meta,” which aims to mitigate the “farm & dump” issue by extending token generation and implementing multiple farming seasons. Users accumulate points through time by interacting with the protocol or partner protocols and later receive a pro-rata share of the token airdrop. This method has been particularly effective for LRTs token distributions, such as those by EigenLayer and EtherFi.
Among the DeFi protocols utilizing the points season, Pendle has stood out with its Yield and Principal tokens. The Yield token offers point farming, while the Principal token provides a fixed yield. This setup allows users to speculate on whether the airdrop value will exceed the yield they forgo. This approach has gained popularity among farmers, although it comes with the downside that Yield Token holders lose their principal at maturity.
Yield Tranches: Reward vs Yield
The latest Yield Tranches will feature the Reward vs Yield mechanism for farmers that want to maximize either point or yield exposure without sacrificing the principal.
The Reward-Yield Tranches operate by distributing 100% of points to one side of the tranche and 100% of the yield generated to the other. This setup allows users to choose between maximizing their points accumulation or their yield returns, depending on their investment strategy. Farmers looking to boost their points for future airdrops and rewards can deposit into the Points side, while those preferring immediate returns can opt for the Yield side.
In a nutshell, the Reward vs Yield tranches offer enhanced returns by segregating points/rewards and yield. Each side can optimize its respective rewards, providing better returns compared to a standard mixed approach — while avoiding any principal loss.
Leveraging the current Yield Tranches codebase, these new vaults can be deployed on any chain supported by Idle DAO, including Ethereum, Polygon, and Optimism, as long as a points campaign is running.
The Reward vs Yield Tranches represent a significant evolution in DeFi farming strategies, providing users with more options and better control over their investments.
A glimpse into the future
The deployment of the first iteration of the Yield Tranche primitive marks the beginning of a new phase of product expansion for tranches. With this latest addition, users can manage their risk exposure with the Senior-Junior mechanism or their yield target by picking either yield or points boost.
The Yield Tranches offering has evolved to provide diverse, tailored solutions that cater to varying investment strategies, risk, and yield appetites. Whether users seek the security and steady returns of Senior tranches, the boosted yields of Junior tranches, or the focused maximization of points or yield, Idle DAO continues to innovate and expand its suite of DeFi products.
Looking ahead, Idle DAO is already exploring the next iteration of Yield Tranches in the fixed and variable yield vertical. This future development aims to provide even greater flexibility and customization, allowing users to fine-tune their investments according to market conditions and investment preferences.
As Idle DAO continues to push the boundaries of decentralized finance, the community can look forward to more groundbreaking products and features designed to optimize returns and manage risk effectively. Stay tuned as we build the future of DeFi together.
About Idle DAO
Idle DAO is an on-chain organization that empowers the DeFi credit market with robust yield automation and hedging instruments, facilitating its expansion and establishing a foundation for sustainable financial ecosystems via a more efficient and risk-adjusted capital allocation.
At the heart of Idle product design, there is a much broader thesis on the shifting DeFi lending market. It is formed on the core belief that, over the coming years, the global debt activity will move on-chain, making every transaction and loan programmable and auditable — as the world’s debt moves on-chain, liquidity providers will have the essential need to manage their exposure to it.
