Idle DAO
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Idle DAO

What you need to know about Idle Allocation Strategies

Idle is a decentralized protocol dedicated to bringing automated asset allocation and aggregation to the interest-bearing tokens economy.

This protocol bundles crypto-assets into tokenized baskets that are programmed to automatically rebalance based on different management logic.

The Idle protocol employs a strategy-token system. Every allocation strategy has is own set of tokens that represent a pool of yield-generating assets allocated among different DeFi protocols. These tokens represent the investor’s proportional ownership of the whole pool and the interest accrued over time. This issuing method is similar to traditional mutual funds shares structure, and it allows Idle to be non-custodial.

Currently, Idle uses two different allocation strategies:

  • 🏆 Best-Yield: this strategy combines multiple money markets to automatically provide the highest interest rates, beating the best traditional offerings across interest-bearing tokens and DeFi protocols.
  • 🛡 Risk-Adjusted: this strategy automatically changes asset allocation in order to find the optimal mix between risk scores and yield.

Consequently, users can hold different IdleTokens related to a specific strategy and a specific token. Deposited funds will get rebalanced following the chosen strategy logic.

Idle aims to unlock the power of decentralized finance for everyone by providing a single vehicle that automatically rebalances between underlying providers, to always maintain the highest rates or the optimal risk/return ratio.

Best-Yield Strategy (BYs)

Best Yield strategy allows users to optimize interest rate profitability and seamlessly get the highest yield, without having to manually move funds across different lending protocols to chase the best returns.

Users’ funds are pooled together in the main contract (one for each token supported by Idle) and every interaction with Idle smart contract can potentially reallocate funds to provide the highest aggregated interest rate for all pooled funds.

Interest rates are constantly monitored off-chain by our infrastructure. We calculate the exact allocations for pooled funds in order to maximize aggregated APR and if current allocations are different from the newly calculated one, we submit those allocations to our contract. Every subsequent interaction of any user with the contract will perform the actual rebalance, enforcing new allocations. If no interactions are made for some time (1h currently) we then rebalance the pool.

Hence, by buying and holding IdleTokens, users’ underlying position will be dynamically rebalanced when the best rate changes, in order to always give back the most profitable return.

Rebalance Model

With this strategy we are maximizing current aggregated interest rate, this can be modeled as follows:

where

  • n is the number of lending protocols used
  • x_i is the amount (in underlying) allocated in the protocol i
  • nextRate(x_i) is a function which returns the new APR for protocol i after supplying x_i amount of underlying
  • tot is the total amount to rebalance

Risk-Adjusted Strategy (RAs)

The risk-adjusted allocation strategy provides a way to earn the best rate at the lowest risk level possible.

The algorithm takes account of the total assets within a pool, incorporates underlying protocol rate functions and levels of supply and demand, skimming protocols with a bad score/rate mix, and finally determining an allocation that achieves the highest risk-return score possible after the rebalance happens.

It has been developed in collaboration with DeFiScore, a framework for quantifying risk in permissionless lending pools. DeFiScore provides a single, consistently comparable value for measuring protocol risk, based on factors including smart contract risk, collateralization, and liquidity.

The model outputs a 0–10 score that represents the level of risk on a specific lending protocol (with 10 upper bound = lowest risk, and 0 lower bound = highest risk).

You can read more about the risk assessment model here and join the discussion on their GitHub.

Rebalance Model

With this strategy, we are providing a way to hedge your risk while optimizing returns. Risk-Adjusted aims to find the right balance between risk score and yield, providing a tool to increment security while freed your funds from a single-rate performance.

The algorithm weights score and APR based on k parameter, which can be modeled as follows:

where

  • n is the number of lending protocols used
  • x_i is the amount (in underlying) allocated in the protocol i
  • nextRate(x_i) is a function which returns the new APR for protocol i after supplying x_i
  • nextScore(x_i) is a function which returns the new Score for protocol i after supplying x_iamount of underlying
  • maxNextRate is the highest rate of all implemented protocols after supplying x_i amount
  • same for maxNextScore with regard to the score
  • k is a coefficient for expressing weights of score and apr (k = 1 means equally weighted, currently k = 2 so score weights twice the APR).
  • tot is the total amount to rebalance

This strategy can be used to create different risk/return profiles using RAs, using k parameter to change weights.

How to use various IdleTokens

With all different allocation strategies, you can now compose your own yield-generating assets, with the possibility to choose your right optimization/hedge mix.

The portfolio creation process is manual now, but we are planned to implement more interactive and easy interfaces to build-up many customized yield portfolios.

For IdleTokens integrators, these new strategies represent a way to offer all DeFi rates with a single integration. They can choose the strategy they’re comfortable with or even offer this possibility to their users.

Make the most from your funds

In Idle, we’re committed to helping our users get the most out of their money and we’re always looking for ways to deliver more value by applying automation to problems that technology is better at solving than people are.

At this time, we are preparing a new allocation strategy that will act as an index with fixed weights. It will be called SOLR (Secured OnChain Lending Rate) strategy. Use cases can vary from a benchmark, lend at the average rate of the market, or build derivatives on top of it.

Keep yourself updated

We’re building Idle for the Ethereum ecosystem and its great community. We’d love for you to be part of our development process. Here you can find our documentation: developers.idle.finance.

To follow our updates, new releases, and monthly reports, subscribe to our newsletter.

If you have any questions, feel free to ask us on Twitter, Discord, or Telegram.

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Idle DAO is a decentralized organization that builds financial products for Web3. We believe that everyone deserves the best for their idle funds, both in terms of returns and risks.

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