The Vesper View: Defining “Conservative” vs. “Aggressive”
Vesper is a platform for easy-to-use DeFi applications. (Here are some more details about the upcoming launch.) We designed the first application — Holding Pools — as the best way for long-term HODL’ers to put their assets to work in an automated, set-and-forget manner. In service of the ease-of-use mission, we take at least some of our inspiration from the way many conventional financial instruments are marketed (e.g., “Virtucon Mid-Cap Aggressive Growth Fund”).
To help with this, Vesper holding pools will be described simply as either “conservative” or “aggressive” from a risk perspective, at least in the very beginning.
In the finance context, this language is fairly well understood by most. But what do we mean by this? While a lower or higher APY might reflect what we mean by “conservative” or “aggressive,” respectively, it isn’t necessarily the first-order variable.
Within the Vesper context, these terms reflect the following factors:
- The number of smart contracts required to realize the pool’s strategy
- The maturity and reliability of protocols used within the strategy
- The number of audits the protocols used within the strategy have received
- Centralization concerns of protocols used within the strategy
- The pool’s collateralization ratio
Conservative holding pools adhere to higher collateralization ratios, meaning they are better protected from rapid changes in the market price of deposited assets (“Black Swan” events). Additionally, conservative strategies only interface with other audited, longstanding, field tested protocols like MakerDAO, Aave and Compound. They generally interact with less contracts overall. These products are not without risk, but they have proven to be sustainable and insulated from vulnerabilities outlined above.
Aggressive holding pools employ lower collateralization ratios, which maximizes yield generation in the most capital efficient manner. Compared to conservative pools, they have greater exposure to dramatic price swings that could trigger liquidation events. Aggressive strategies may also interact with newer contracts or less audited code, like Yearn Vaults, Curve, and Harvest, and generally interact with more contracts overall.
We believe this approach gives users of all stripes a way to comprehend the risks involved when participating in our Holding Pools. Leaving behind bells, whistles and splashy UIs, we want to provide an experience that leaves participants with a clear understanding of the strategies they are participating in, and in the simplest possible way.