Yield-Farming is a way to put your crypto to work and generate additional crypto. It involves you interacting with the magical realm of smart contracts and conjuring passive income while you’re at it. However, Yield-Farming is vulnerable to excessive Impermanent Losses owing to market volatility and the divergence in the prices of your underlying assets supplied.
Simply put, Impermanent Losses are what Liquidity Providers would have had they not provided liquidity and simply held the tokens in their wallet. Therefore, this puts Liquidity Providers in a dilemma: to provide Liquidity or not provide Liquidity.
How Overnight’s ETS Solves this dilemma of Impermanent Losses
Overnight’s ETS (Exchange-Traded Strategy) is an additional product launched by the protocol in addition to the Yield-Bearing Stablecoin — USD+. The ETS mitigates being vulnerable to market volatility whilst simultaneously allowing its users to benefit from Yield-Farming.
The strategy adopts an innovative approach to Yield-Farming and in doing so, hedges against the price of the volatile asset. The term ‘hedging’ refers to a risk management strategy employed to offset losses in investments by taking an opposite position in a related asset. Hedging in this case involves borrowing BNB with BUSD as collateral on the Money Market: Venus Protocol which is then used in the BNB/USD+ pool.
Instead of buying the asset, it is borrowed and thereby reduces potential Losses that may have occurred during the market down-trend. The offering is unique and holds the rails to change how we Yield-Farm entirely. By removing its inherent drawbacks, the strategy appeals to the more risk-averse investors as well. Let’s take a numerical example from what we’ve observed on the ETS thus far to further put this into perspective.
On a day when the price of BNB plunged by 1.668%, a user would have realized a net loss of 0.834% for a BNB/USD LP position. However, the very same day, Overnight’s ETS generated a whopping 73.475% APY all the while BNB dropped — this is highlighted via the image below.
How the Strategy Works for the USD+/WBNB Pool
The strategy works as follows:
- The user deposits USD+ into the ETS
- Logic-automated smart contracts redeem a portion of USD+ for BUSD
- The BUSD redeemed is deployed as collateral on Venus
- BNB is borrowed against Venus at a Health Factor of 1.35x
- The remaining USD+ & the borrowed BNB are used to make LPs via Cone
- The LPs are staked in their Gauge Pool to earn inflationary $CONE rewards
- Frequent Rebalances are executed to reduce Impermanent Losses and therefore maximize rewards
The payout methodology is as follows:
- CONE rewards are harvested and swapped for BUSD
- BUSD is used to mint USD+
- The strategy does a payout that auto-compounds your holdings
- Fees earned from the strategy are used to bribe veCONE holders
- ETS is 100% liquid: at any moment in time users can redeem ETS back to USD+
The above methodology is summarized as per the image below:
ETS vs Regular Yield-Farming: Pros & Cons
When comparing Overnight’s ETS with Yield-Farming itself, the benefits are evident as the strategy reduces the hassles involved while Yield-Farming includes: a lengthy process of auto-compounding, converting into LPs, being vulnerable to excessive Impermanent Losses, etc.
The ETS makes the hassles mentioned above as simple as depositing USD+ into the said strategy while smart contracts take over and execute daily profit payouts for the user — this is summarized in the table below.
Pros
If you’re bearish on BNB’s price volatility but still willing to benefit from Yield-Farming, this strategy is for you and upon using it, hedges you against its divergence. All of this happens on-chain and the user initiates the process simply by depositing USD+ on Overnight’s dApp. Your position is monitored through vigorous analytical processes executed according to meticulous calculations to avoid liquidations.
Furthermore, rebalances upon new mints & redemptions make the rebalancing process massively efficient and negate liquidations even all the while BNB deviates by as much as a whopping 50%.
The strategy is tremendously lucrative and a week into inception has achieved a total APY of a staggering 105.8%!
Cons
Hedging isn’t as safe as lending out on AAVE owing to interacting with AMMs and their smart contracts. Moreover, it isn’t immune to Impermanent Losses either but largely reduces its occurrence owing to how the strategy works. Despite the Impermanent Losses, the strategy has been profitable even in the face of immense volatility. However, with immense volatility within the Crypto Markets, there may be a negative payout at some point in time.
Fees & Preventing Dilution: Problems Tackled by the ETS
The ETS employs a vigorous mechanism to prevent the rewards from being diluted too quickly. In doing so, it adopts a two-tiered approach: Charging its users’ Fees & having a TVL cap
Fees
The strategy has a 0.5% entry fee, 1.5% management fees (annual fees with 1/365 charged every day) and 20% performance fees. No subsequent performance fees are charged if/when the strategy has a negative payout (there have been no negative payouts since inception).
All subsequent fees are used to acquire more veCONE (the governance token) to divert more Gauge Votes in favor of the WBNB/USD+ to increase its emissions and in an effort to increase its APYs.
Anti-Dilution
Overnight realizes that excessive TVL can eventually prove counter-productive and cause yields from being diluted “too quickly.” As a result, the TVL is capped at $500,000 after which no new mints can be made for the ETS. Hence, new mints can only be made once the TVL is below its cap.
How to Get Started with the ETS
To get started with the strategy, all the user has to do is deposit USD+ that can be minted on Overnight’s dApp against BUSD after which Logic-Automated Smart Contracts take over and execute the processes mentioned above.
Hence, the strategy is an inherent Game-Changer and is dubbed as “Yield-Farming for the Pros” since it makes intricate Yield-Strategies more accessible for the novice user.
