DeFi 101: What is a Yield Aggregator
As the DeFi boom continues throughout 2021, the space has seen new and exciting innovations as it’s quickly adapting to new inventions. While still evolving, yield aggregators are emerging as a strong trend in the crypto and blockchain industry.
Compound started the trend by popularizing the yield farming ecosystem by using its government token to maximize investing. They did this by providing liquidity to new protocols using staking. However, Compound wasn’t the only protocol that distributed its governance token this way. Protocols such as Balancer distributed 65% of its governance token BAL through its own liquidity mining campaign. Curve also has a long-term liquidity mining program to distribute its governance token CRV to depositors in its liquidity pools.
What are Yield Aggregators?
With all these protocols rewarding governance tokens for using their protocols, maximizing these earnings is becoming increasingly complex. Simply put, it’s quite hard for a single investor to spot and keep track of various opportunities across the entire market to execute the most profitable ones at the right time. The returns vary, and opportunities can disappear within seconds. Manual monitoring is tiring, tedious, costly, and requires you to constantly move from one platform to another. Isn’t there a better way?
Fortunately, the industry quickly reacted to this need, and yield aggregators (not to be confused with replicators) have emerged to help maximize profit by shifting funds between multiple platforms with the highest yield. Not only do these aggregators offer higher yields and a better user experience for investors, but they also minimize gas fees. According to Alex, founder of Ubiquity.io, it’s a win-win solution to the growing gas-guzzling on the Ethereum network.
So what exactly do Yield Aggregators do?
If you’re hunting for the best yield, you have to monitor DeFi platforms regularly. New protocols introduce functions to automate this process, and it leverages DeFi platforms and the yield they offer to maximize profit for a user. In finding the best deals, yield aggregators also simplify and improve user experience. Besides shifting funds between various DeFi platforms with the highest yield, an aggregator navigates the best returns with the shortest commitment and the lowest Ethereum network gas costs. As a result, DeFi yield farming becomes easier to manage through yield aggregators and saves on gas fees.
The ideal yield aggregator offers investors a careful and unique risk management strategy based on their chosen personal risk tolerance profile. Yield aggregators can help investors find the best and the safest yield strategies through the automatic allocation of funds without manual work.
Ubiquity and Yield Aggregators
To fund the reserves, Ubiquity’s ecosystem will offer a Proxy Yield Farming program to its users, where they will be able to deposit stablecoins in the protocol for Yield Farming. Those stablecoins will then be re-deployed in other smart contracts with low-risk protocols (AAVE, Compound, and Curve) or low-risk yield aggregators (Rari Capital, Yearn.finance).
We’re currently researching what stablecoin yield aggregator would be best to build our proxy yield aggregator on top of. Larry the Cucumber has been an active member of the Ubiquity community and has an amazing collection of yield aggregators over at pickle.finance!
How it works
The fractional reserve fund collects a 10% fee on any deposit as well as all yield in stablecoins generated by the deployment of the funds.
To offset this, the protocol compensates the users with non-expiring debt (uAR) to an amount greater than the collected yield and upfront fee.
The team is still finalizing some of the economic parameters and functionalities, but to start off, we’re aiming for a 2x yield in uAR.
For example:
- Rari offers a 20% APY interest rate on stablecoins, so we pass the user’s funds to this aggregator
- User farms for one year
- User withdraws and receives 40% yield paid in debt tokens
- User redeems debt tokens when the time-weighted average price (TWAP) is above 1.00 (or trades them on secondary markets)
The key takeaways being:
- We can offer double the yield compared to other stablecoin yield aggregators
- The Dollar protocol builds reserves to protect against downswings
- When the protocol needs to print more money, these users will be first in line (before seigniorage rewards for farmers) to redeem their tokens at full value
We’re excited about this product. It will be the first of its kind in the industry, serving users by providing double the stablecoin yields while simultaneously building up collateral for the Ubiquity Dollar.
