The dark side of liquidity mining: The risks of unrealistically high APYs

Yields in decentralized finance (DeFi) liquidity mining are typically denominated as either annual percentage yields (APY) or annual percentage rates (APR). APY includes compound interest, while APY does not. With the same annual rate of return, APY’s actual daily income will be lower than APR, and APY can be made falsely high through compound interest. Unfortunately, for the mainstream user, such information is not readily available. Before these yields hit the bag, high gas fees, impermanent loss, and other such factors are lurking behind the scenes, dampening efficiency, yields and chipping away at the promise of DeFi.  

In addition, the market is fraught with risks, rug pulls, pitfalls and uncertainty. While the yields, principal and the hope for the average liquidity provider (LP) keep thinning away. 

How serious is the threat of impermanent loss?

Let’s analyze the APY metrics on three leading yield farming platforms: Alpha Homora, Rabbit Finance and CoinWind. In the table below, 1 Binance Coin (BNB) + 481 Tether (USDT) is supplied to each of the platforms. The APY published on the three platforms was then compared with the projected return before calculating impermanent loss as well as after calculating impermanent loss. 

The APY published on the interface of each of the protocols does match with the true APY that the user receives. The return that you estimate at the time of supplying the asset does not match with the actual return you receive. There are several factors at play here, but the impermanent loss (IL) is the most worrisome. It is also clear that the shiny APYs being sold to the users in DeFi today are simply unrealistic and misleading. 

Beaver Finance is a protocol that has taken the first initiative to fight IL and, invariably, the misleading APY, ensuring that users get exactly what they see.

The asset allocation allows for a next-gen single asset staking experience. It removes the hassle of manually gathering puzzle pieces to derive yields as an LP. It does this by pairing the single asset supplied by a user to another asset in equal proportion. Moreover, the second pair of assets comes from Beaver’s own LP pool, which results in a setting of deep liquidity. However, Beaver’s Impermanent Loss Hedger, or the ILH, supported by Asteria Finance Lab, steals the show. Having proven its efficacy in years of back-testing practices, the ILH can hedge impermanent loss to almost zero, thus remedying the biggest, most frustrating pain points of DeFi — impermanent loss. 

Competitor analysis

We initiated a competitor analysis to interpret how Beaver performs in comparison to protocols such as Alpha Finance and CoinWind. The table below illustrates how Beaver performs in comparison to Alpha Homora and CoinWind.

Frictionless user experience and maximized yields

A complex UI and excessive technical jargon have clogged the access points for mainstream users in DeFi. Moreover, factors such as slippage, hindered trading and asset depreciation can dampen yields over time. Let’s look at how each of the three protocols performs in terms of remedying these pain points.

On Beaver, the dynamic asset allocation engine eliminates slippage, trading friction and asset depreciation. Additionally, Beaver achieves optimized yields via its ILH that manages IL to almost zero via options-based strategies. While on Alpha Homora, slippage and gas fees remain persistent issues. At the same time, a lending protocol increases the user’s theoretical mining principal, but at the same exposure with bigger market risk and impermanent loss proportional. Lastly, on CoinWind, users can only utilize the dual asset staking module and incur the loss as well as the risk that comes with it. 

Cost and operational efficiency and impeccable security

Security and efficiency come second to none in DeFi. To that end, on Alpha Homora, cost efficiency is low due to impermanent loss; however, security remains on the positive end of the meter with constant audits and internal testing. For CoinWind, the protocol strongly claims to hedge against impermanent losses, but the level of uncertainty and disclosure problems tell a different story. For Beaver, it hedges against impermanent losses through a carefully crafted option portfolio, which protects the user’s profits. Moreover, the protocol is audited by multiple enterprising blockchain and cybersecurity auditors. Additionally, they employ several safety stacks from OpenZeppelin to ensure high standards of security. 

As such, each protocol has a journey to make, and while Alpha Homora and CoinWind are already in motion, it will be interesting to see what awaits for Beaver.