SoK: Yield Aggregators in DeFi

Cousaert, Simon; Xu, Jiahua; Matsui, Toshiko

doi:10.48550/arxiv.2105.13891

Cited by 5 publications

(7 citation statements)

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“…A pool is funded by liquidity providers (LP), who receive LP tokens matching the accounting share of their pool ownership. Liquidity takers (LT) request a trade with the pool by providing one asset X plus a transaction fee [9] while receiving another asset Y in return.…”

Section: Automated Market Makermentioning

confidence: 99%

“…If the accumulative value of the tokens in a liquidity pool drops below the hypothetical value of simply holding the assets in a wallet, there exists an impermanent loss (IL), also known as divergence loss. From the moment of an LP deposit, the accumulative asset value decline may occur, when the tokens in a liquidity pool diverge in price from each other [9,6]. If the token values revert to the price ratio at the time of the LP deposit, the IL is reverted.…”

Section: Automated Market Makermentioning

confidence: 99%

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Speculative Multipliers on DeFi: Quantifying On-Chain Leverage Risks

Wang

Qin

Minh

et al. 2022

Lecture Notes in Computer Science

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Blockchains and DeFi have consistently shown to attract financial speculators. One avenue to increase the potential upside (and risks) of financial speculation is leverage trading, in which a trader borrows assets to participate in the financial market. While well-known overcollateralized loans, such as MakerDAO, only enable leverage multipliers of 1.67×, new under-collateralized lending platforms, such as Alpha Homora (AH), unlock leverage multipliers of up to 8× and attracted over 1.2B USD of locked value at the time of writing. In this paper, we are the first to formalize a model for under-collateralized DeFi lending platforms. We analytically exposit and empirically evaluate the three main risks of a leverage-engaging borrower: (i) impermanent loss (IL) inherent to Automated Market Makers (AMMs), (ii) arbitrage loss in AMMs, and (iii) collateral liquidation. Based on our analytical and empirical results of AH over a timeframe of 9 months, we find that a borrower may mitigate the IL through a high leverage multiplier (e.g., more than 4×) and a margin trading before supplying borrowed assets into AMMs. We interestingly find that the arbitrage and liquidation losses are proportional to the leverage multiplier. In addition, we find that 72.35% of the leverage taking borrowers suffer from a negative APY, when ignoring the governance token incentivization in AH. Finally, when assuming a maximum ±10% move among two stablecoins, we pave the way for more extreme on-chain leverage multipliers of up to 91.9× by providing appropriate system settings.

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Section: Automated Market Makermentioning

confidence: 99%

Section: Automated Market Makermentioning

confidence: 99%

Speculative Multipliers on DeFi: Quantifying On-Chain Leverage Risks

Wang

Qin

Minh

et al. 2022

Lecture Notes in Computer Science

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“…Through the usage of its multi-asset tokens, the underlying assets are automatically moved from one liquidity program to another based upon a predefined strategy written by the community to yield the most liquidity returns [14,45]. Another major innovation by Yearn is the release of its governance token, its total volume, to the market (without holding a portion of it for the founders or development team, resulting in boosting the price of this token in the past).…”

Section: Primary Innovations Of Defimentioning

confidence: 99%

“…From a broader perspective, yield farming is the activity of constantly moving funds from one interest-bearing pool to another, constantly trying to place funds in positions with the most annual percentage rate (APR) in the corresponding week [69]. This means that funds could be placed in tokens with riskier positions, but they often have the highest return [45]. For instance, a farmer sets 100k USDT to be loaned out using compound finance.…”

Section: Yield Farmingmentioning

confidence: 99%

Blockchain in Financial Services: Current Status, Adaptation Challenges, and Future Vision

Mia

Rahouti

Jagatheesaperumal³

et al. 2022

Preprint

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Blockchain is undoubtedly considered one of the most innovative technologies in financial services from the past decade. Interests in blockchain technology continue to grow on a daily basis, while many promising blockchain-enabled applications and services continue to draw financial interests in the industrial sector and the broader financial services communities. Furthermore, as blockchain matures, it increases the value of a diversified range of industries and institutes with a better return on investment. However, such organizations must continue to adopt rigorous approaches to enhance their financial services and regulate their policies. In this article, we discuss the current status of blockchain-enabled financial services and applications, in addition to the impacts, implications, and regulations of incorporating blockchain technology in the finance industry. We further tackle the adaptation model for blockchain technology in global banking and provide a vision for the next generation of financial services based on this emerging technology.

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“…To date, the following papers have provided overviews of the DeFi space: Chen and Bellavitis (2020), Schär (2021), and Jensen et al (2021) characterize the structure, advantages, challenges, and use cases of DeFi from their own point of view and experience, i.e., not following a systematic, literature-guided approach. Bartoletti et al (2020b) and Cousaert et al (2021) present 'Systemizations of Knowledge (SoKs)' for the DeFi subspaces of lending protocols and yield aggregators, respectively. They thereby pursue a mixed approach of synthesizing academic literature and conducting own subspace analyses.…”

Section: Introductionmentioning

confidence: 99%