Exploring Yield Generation of Yala’s $YU Stablecoin

In this blog post, we’ll delve into the various strategies Yala employs to generate yield for $YU holders. From leveraging DeFi opportunities to exploring traditional finance yields and implementing robust mechanisms to manage vault fees and payouts, we’ll provide a comprehensive overview of how Yala ensures the sustainability and attractiveness of $YU to tokenholders.

Whether you’re an investor or a potential user, this post will give you a clear understanding of how Yala is building a resilient and rewarding stablecoin ecosystem.

Understanding the Need for Yield-Bearing Stablecoins

Yield-bearing stablecoins are an essential innovation in the DeFi space. They offer users not only the stability of traditional fiat-backed stablecoins but also the opportunity to earn returns on their holdings.

The rationale behind creating yield-bearing stablecoins like $YU is straightforward: without an ongoing incentive to hold these assets, users would likely sell them in favor of other investments offering higher returns.

The Importance of Incentivizing Users to Hold $YU

1. Sustained Demand: To ensure that $YU remains attractive, it must offer competitive yields that incentivize users to hold it even after initial DeFi incentives have dissipated. Without this, the selling pressure could increase, leading to a reduction in the overall supply of $YU as users convert back to BTC.
2. Preventing Supply Shrinkage: If there’s significant selling pressure without adequate demand, the supply of $YU could shrink. This would undermine the stability and usability of the stablecoin, as a near-zero supply would render it ineffective for its intended purposes in the DeFi ecosystem.
3. Creating Long-Term Value: By offering yield-bearing opportunities, Yala ensures that $YU provides long-term value to its holders. This is crucial for building a stable and sustainable ecosystem where users feel confident in holding $YU for extended periods.
4. Cash Management: Given that BTC is the primary collateral backing of $YU, it is essential to offer BTC asset providers not only a stablecoin for working capital but also a short-term, yield-bearing cash management option. This allows BTC asset owners to access working capital while earning a sustainable yield on their holdings.

Initial Strategies for Yield Generation

To ensure that $YU remains an attractive asset for users, Yala has implemented several strategies aimed at generating consistent and sustainable yields.

Overcollateralization of BTC

One of the primary strategies involves overcollateralizing BTC to mint $YU. Here’s how it works:

1. Collateralization Ratio: Users deposit BTC into Yala’s vaults at a specific collateralization ratio (set by the Yala Foundation), ensuring that each $YU is backed by more than its equivalent value in BTC. This overcollateralization provides a buffer against price volatility and enhances the stability of $YU.
2. Borrowing and Minting: Based on the collateralization ratio, users can borrow and mint $YU against their BTC deposits.
3. Yield Generation: By holding $YU, users can earn yields generated from various DeFi yield farming activities, such as lending, staking and liquidity provision. These activities are designed to provide a steady stream of returns, making $YU an attractive asset to hold.

Developing a DSR-Like Module: YSR, Yala Savings Rate

Another option that will be implemented is the development of a DSR (Dai Savings Rate)-like module for $YU within the core of the Yala protocol. This module allows users to lock their $YU into a savings contract to earn yields directly from the protocol, reducing the likelihood of users selling their holdings for other stablecoins. Equally, it reduces potential smart contract and loss of funds risks associated with locking $YU in unreputable third-party DeFi protocols.

1. Savings Contract: Users can lock their $YU into a dedicated savings contract, which then earns interest over time. This contract is designed to provide a stable and predictable yield, incentivizing users to hold $YU.
2. Interest Payments: The yields generated from the savings contract come from the fees and revenues generated by Yala’s vaults ecosystem. This ensures that the interest payments are sustainable and backed by actual economic activity from protocol users.
3. Reducing Selling Pressure: By offering a reliable way to earn yields, the YSR module helps to reduce selling pressure on $YU, ensuring that users have a strong incentive to keep their holdings within the Yala ecosystem.

Leveraging DeFi Yield Opportunities

In addition to overcollateralization and the YSR module, Yala integrates various DeFi yield opportunities to maximize returns for $YU holders. These include:

1. Lending Markets: Integrating with established lending markets allows $YU holders to lend their stablecoins and earn interest from lending pools borrowers. This strategy leverages existing DeFi infrastructure to generate reliable yields for $YU holders.
2. AMM LPs: Automated Market Maker (AMM) Liquidity Pools (LPs) offer another avenue for yield generation. By providing liquidity to these pools, $YU holders can earn a share of the trading fees generated within the ecosystem. Yield can be generated through both DeFi stablecoin-focused pools and volatile asset-stablecoin pool combinations. The choice depends on the user’s risk appetite for impermanent loss.
3. Staking & Composability: As DeFi markets are continuously evolving, multi-step yield farming strategies allow sophisticated users to boost their base yields through DeFi interest and derivatives markets. While these strategies might involve a higher level of financial and smart contract risks, it could appeal to more sophisticated and higher-risk $YU holders.

Exploring Traditional Finance (TradFi) Yield Opportunities

To further enhance the yield potential of $YU and provide more stability, Yala is exploring future opportunities beyond the DeFi space by integrating traditional finance (TradFi) on-chain native strategies. These strategies aim to diversify yield sources and offer more consistent returns, especially in volatile market conditions.

Incorporating Real World Assets (RWAs)

Real World Assets, such as highly-liquid short-term fixed income instruments and other income-generating assets, offer stable and predictable yields that can complement DeFi returns.

• Diversified Income: By incorporating RWAs, Yala can provide $YU holders with diversified income streams, reducing reliance on purely crypto-based yields.
• Risk Mitigation: Highly-liquid and fixed-interest RWAs often exhibit lower volatility compared to cryptocurrencies, helping to stabilize returns and mitigate risks during market downturns.
• Predictable Returns: These income assets offer predictable returns, making them an excellent addition to the yield-generating strategies for $YU.
• Capital Preservation: These asset classes are typically lower risk, helping to preserve capital and provide a safety net during periods of high market volatility.

Leveraging TradFi Investment Strategies

Hedge Fund Strategies: In the future, the ecosystem could enable hedge fund strategies such as arbitrage, long/short equity, and market-neutral strategies, providing higher yields while effectively managing risks. These strategies will be suitable only for more sophisticated $YU holders.

• Alternative Income: These strategies offer alternative sources of income that are not directly correlated with the traditional markets, providing more stability and diversification.
• Professional Management: Leveraging the expertise of professional fund managers can optimize returns and manage risks efficiently.

Mechanisms to Maintain Yields

To ensure the stability and attractiveness of $YU, Yala implements mechanisms designed to maintain yields. These mechanisms are crucial for providing users with a reliable and rewarding experience, even during adverse market conditions.

Yala Savings Rate — YSR

Savings Contract: Similar to MakerDAO’s Dai Savings Rate (DSR), this module allows users to lock their $YU into a savings contract, earning compounded yields from the protocol over time.

• Predictable Yields: The YSR module provides users with predictable and stable yields, incentivizing them to hold $YU.
• Automated Management: The Yala protocol manages the underlying assets and yields, simplifying the process for users and ensuring consistent returns.

Interest Payments: The yields generated in the YSR module come from the fees and revenues within Yala’s ecosystem smart contracts.

• Sustainable Income: Interest payments are backed by actual economic activity within the Yala platform, ensuring sustainability.
• Reducing Selling Pressure: By offering reliable yields, the YSR module reduces the likelihood of users selling their $YU, maintaining demand and stability.

Managing Vault Fees and YSR Payouts

Vault Fees: Yala charges a recurring fee for vault creation and maintenance. These fees are compounded daily and contribute to the overall revenue of the platform.

• Fee Structure: Users are required to create their own vaults and pledge BTC assets to mint $YU. The fees start compounding from the moment the vault is created.
• Revenue Generation: The fees collected from the vaults are used to fund the YSR payouts, ensuring that the system remains solvent.

YSR Payouts: The interest earned from the YSR module is distributed to users who lock their $YU in the savings contract.

• Net Interest Margin (NIM): The difference between the vault fees collected and the interest paid out in the YSR module forms the protocol’s NIM. This margin ensures that the platform remains profitable, provides sustainable yields and can sustain its ongoing operations.

Incorporating CEX Trading Strategies

Additionally, sophisticated Yala protocol users can draw inspiration from the yield generation strategies employed by centralized exchanges (CEXs) to maintain and enhance the basic yield offerings for $YU holders. These include:

• Delta-Neutral Strategies: By holding a position in a cryptocurrency and simultaneously shorting the same asset on a perpetual futures market, protocol users could capture funding rate fees with reduced exposure to price volatility. This method generates consistent yields, especially during periods of strong market sentiment in one direction​ (James Chen) (James Bachini)​.
• Dual Investments: Sophisticated users could introduce structured financial products, such as dual investments, that can provide higher yields. These products often involve sophisticated trading strategies like options or market arbitrage.

By offering these yield strategies to Yala users, $YU would remain a valuable and attractive asset for users in both bull and bear markets. The combination of diversified income streams, including those inspired by CEXs, creates an ecosystem that fosters long-term demand and stability for $YU.

Conclusion

As we’ve explored throughout this post, Yala’s approach to yield generation for the $YU stablecoin is designed to be robust, sustainable, and adaptable to the ever-changing landscape of decentralized finance.

To stay updated on the progress of our indexer technology, feel free to follow our developments on GitHub.

Keep an eye on Yala as we keep pushing the boundaries of innovation and shaping the DeFi space’s future.

About Yala

Yala connects Bitcoin liquidity with a meta yield stablecoin. Designed as both a potent asset and a liquidity enhancer, the stablecoin, YU, operates across various ecosystems, increasing efficiency without the need for bridges or relocating the underlying Bitcoin. Yala empowers Bitcoin holders and ecosystem participants with expanded utility, all while maintaining the security of Bitcoin’s infrastructure.

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