The founder of YFI personally described the high-yield principle of locking up 140 million US dollars in the yETH smart pool

The DeFi liquidity mining protocol Yearn.finance recently launched the yETH smart pool, and it quickly became popular in the market. According to data on September 4, yETH Vault has successfully locked 345,000 ETH, worth about 140 million US dollars. At the time of writing, the displayed annualized return of the yETH smart pool is about 33.49%, far exceeding that of general wealth management products. So where does the return of this product come from?

For this important issue, YFI founder Andre Cronje gave his explanation:

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The article is intended to provide a quick introduction to how the yETH smart pool works, and there seems to be a fair amount of misinformation circulating at the moment.

First of all, where does the income of the yETH smart pool come from?

Lending, assets are lent through Aave, Compound and dYdX platforms to earn interest;

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LP income, provided to Uniswap, Balancer and Curve to earn transaction fees;

Liquidity incentives, such as Compound, Balancer, and Curve provide additional incentives for liquidity providers;

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Risks involved in yETH Smart Pool:

The risk involved in lending, since the yETH Smart Pool is the lender, assets may not always be available. So how does it work, the closer the asset pool is to being emptied (that is, the maximum amount of funds lent), the higher the interest it will earn. This allows new assets to be offered (or borrowed assets to be returned), but there does exist a window when more assets are offered than are available to borrow.

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There may be smart contract risks involved, and there is always the possibility of bugs and other flaws.

Lack of trading activity, which means lower fees;

Liquidity encourages price fluctuations, resulting in unstable annualized yield (APY);

Explanation of yETH Smart Pool:

The yETH smart pool provides Maker with ETH to mint DAI;

DAI provided to yDAI (yearn.finance DAI smart pool);

Explanation of yDAI Smart Pool:

DAI provided to curve.fi/y;

curve.fi/y LP tokens are locked in the dashboard to receive CRV;

We’ve seen a lot of misinformation about the yETH smart pool and the DAI it mints, vs. available DAI. This is no different than lender/borrower utilization.

If you offer 100 tokens to a lender and someone borrows 50 tokens. Then you can't withdraw your 100 tokens, but you can withdraw 50 tokens, when you withdraw 50 tokens, the borrower pays an additional premium, so other lenders are incentivized to increase tokens, Or the borrower will repay the debt.

This is the basic premise of the smart pool, and yETH is no exception. But there is a difference, since yETH uses yDAI, the "lender" is actually curve.fi.

When the DAI in the asset pool becomes low, arbitrageurs sell DAI in exchange for other stablecoins (USDC, USDT or TUSD), which increases the amount of DAI in the pool. And when DAI is removed, then trading in DAI becomes even more valuable. This is the same explanation for lender and borrower utilization.

The only core difference here is that in a normal vault, there is no debt. And yaLINK and yETH have debt, which does add additional risk because you need to have sufficient funds available to pay off the debt.

That's why we maintain a ratio of about 200%, so there's about a 50% buffer in case lenders/liquidity are short.

Most systems have a maximum borrow buffer, which means there must be a certain amount of minimum liquidity in the system. A general rule is around 25% (so borrowers cannot borrow more than 75% of their funds). So, the yETH vault is capped at about $60 million and the buffer is about $16 million, so even if the y pool is halved, it will still be available.

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