The risks of APY too high



Decentralized Finance Liquidity Extraction (DeFi) returns are usually denominated in Annual Percentage Returns (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 general public user, this information is not readily available. Before those yields hit the sack, high gasoline costs, impermanent losses and the like lurk behind the scenes, reducing efficiency, yields, and reducing DeFi’s promise.

In addition, the market is strewn with risks, tensions, pitfalls and uncertainties. As returns, capital and hope for the average liquidity provider (LP) continue to dwindle.

How serious is the threat of temporary loss?

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

The APY published on the interface of each of the protocols corresponds to the real APY that the user receives. The return you estimate when providing the asset is not the actual return you receive. There are several factors at play here, but the impermanent loss (IL) is the most concerning. It’s also clear that the brilliant APYs being sold to DeFi users today are simply unrealistic and misleading.

Beaver Finance is a protocol that took the first initiative to combat IL and invariably deceptive APY, ensuring that users get exactly what they see.

Asset allocation enables a unique next-generation asset staking experience. It takes the hassle out of manually collecting puzzle pieces to earn returns as an LP. It does this by combining the unique asset provided by a user with another asset in equal proportions. Additionally, the second pair of assets comes from Beaver’s own pool of limited partnerships resulting in a deep liquidity situation. However, Beaver’s Impermanent Loss Hedger, or ILH, backed by Asteria Finance Lab, steals the show. Having proven its effectiveness in years of back-testing practice, ILH can cover impermanent losses to almost zero, thereby remedying DeFi’s most important and frustrating pain points – impermanent loss.

Competition analysis

We have launched a competitive analysis to interpret Beaver’s performance against protocols such as Alpha Finance and CoinWind. The table below illustrates how Beaver performed against Alpha Homora and CoinWind.

Table Description automatically generated

Frictionless user experience and maximized returns

A complex user interface and excessive technical jargon have clogged mainstream user access points in DeFi. Additionally, factors such as slippage, hampered transactions, and asset depreciation can dampen returns over time. Let’s take a look at how each of the three protocols behaves in terms of curing these pain points.

On Beaver, the dynamic asset allocation engine eliminates slippages, trade friction and asset depreciation. In addition, Beaver achieves optimized returns through his ILH which manages the IL at almost zero via option-based strategies. On Alpha Homora, slippage and gasoline costs remain persistent issues. At the same time, a loan protocol increases the user’s theoretical mining capital, but with the same exposure with greater market risk and proportional impermanent loss. Finally, on CoinWind, users can only use the dual asset staking module and incur the loss along with the risk that comes with it.

Economic and operational efficiency and irreproachable safety

Safety and efficiency are second to none in DeFi. To this end, on Alpha Homora, profitability is low due to the impermanent loss; however, safety remains on the positive side of the meter with constant audits and internal testing. For CoinWind, the protocol heavily claims to hedge against short-lived losses, but the level of uncertainty and disclosure issues tell a different story. For Beaver, it protects against short-lived losses with a carefully designed portfolio of options, which protects user profits. Additionally, the protocol is audited by several enterprising blockchain and cybersecurity auditors. In addition, they use multiple OpenZeppelin security stacks to ensure high security standards.

As such, each protocol has a way to go, and while Alpha Homora and CoinWind are already on the move, it will be interesting to see what lies ahead for Beaver.

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