Yield Farming Deep Dive

This post was originally published on Set Protocol

Recently, yield farming has been a hot topic in the DeFi space but the UX, complexity, time, and cost has turned away many potential participants. Portfolios in Set v2 will be able to support a wide range of yield generating opportunities across many DeFi protocols.

The advantages of yield farming with Set V2 are:

  • Automated Farming — Buy a Set and let the protocol do all the work for you.
  • Save on gas fees — Only pay Ethereum gas fees when entering and exiting a Set.
  • Copy trade the pros — Let the traders you know and love chase the best yields for you by buying into their Set.

In this piece, we’ll give you a rundown on how these yield farming portfolios will work in Set V2.

The Basics

In Set v2, Yield farming portfolios can be managed either automatically (like Robo Sets) or by a human (like Social Trading Sets). Similar to Set’s current implementation of human-managed Social Trading Sets, there will be portfolios that act as pools of capital that a manager can use to chase the best yield farming opportunities available on Ethereum at any given time. Users automatically benefit from this activity by simply holding the Set token associated with a managers portfolio.

Automated Farming

Those who have used Set in the past will be familiar with how all you need to do is hold a Set ERC20 token in your Ethereum wallet to gain access to a fully automated strategy (such as a Robo Set trading strategy). With Set v2, the scope expands beyond just trading strategies and Sets will be able to automate all kinds of yield farming activities. This saves users time and effort in that they no longer have to do multiple transactions a day to harvest the yield, sell it off and time their harvesting around when gas prices are cheapest.

Each strategy can also be constructed in such a way that the manager can decide to continuously sell off the tokens the Set receives as yield or to “stack” them in order to speculate on its future value or accumulate governance rights in a protocol.

biswap

Different Risk Profiles

Each yield farming Set will have it’s own risks associated with it and users can choose which Set they want to opt in to based on their own risk appetite. We believe that this is important because strategies can vary quite wildly in how risky they are but also more risk usually leads to more reward — we want to empower Set users to make these decisions for themselves.

Low Risk Strategies

Low risk yield farming strategies are usually those that are part of fully audited, battle-tested and reputable protocols. They are less lucrative in terms of net returns but offer safer and more stable yields over the long-term.

Some examples of these include:

  • Curve.fi — earn yield on stablecoins (or other like-for-like assets) and farm the CRV token.
  • Compound — users deposit either stablecoins or other assets such as WBTC or ETH to earn a return and by doing so they also accumulate COMP tokens.
  • Balancer — users deposit tokens into different Balancer pools and can earn both swap fees and the BAL token.

High Risk Strategies

High risk yield farming strategies are those that are brand new, untested, unaudited, and typically only last for a few days or weeks.

Some examples of these include:

  • Yam.finance (YAM) — users were able to stake a range of tokens or supply liquidity to a Uniswap pool to farm the YAM governance token. This farm only lasted a few days and the protocol also had a critical bug in it.
  • Yearn.finance (YFI) — users were able to farm YFI tokens by depositing stablecoins into Curve or Balancer and staking the liquidity provider tokens on Yearn.

Both of these yield farming opportunities were incredibly risky and had a high chance of leading to loss of user funds. In Yam’s case, some users did end up losing funds and the critical bug that affected the protocol resulted in a large decrease in YAMs price and market cap.

Social Trader Farming

Set v2 is being architected in such a way that the managers of Sets can utilize the capital that is pooled with them across a range of different protocols on Ethereum. For example, if a manager wants to chase the newest “flash farm”, they can quickly move the capital they manage out of an existing farm and into the new one in just a few clicks. This allows managers to capitalize on the best opportunities available on Ethereum for their Set holders.

Significant Gas Savings

High gas fees from high Ethereum network usage.

A major advantage of yield farming Sets is that all of the yield farming functionality is handled by smart contracts, meaning that each user doesn’t need to eat the gas costs for winding up or down a yield farming position. Different types of transactions like staking, claiming, and trading the capital are handled by the Set smart contract system, all of which could easily reach over $1,000 to wind up a single position. All of these transactions are handled under the hood for users, the only gas cost you’d need to pay is the gas to enter the yield farming portfolio.

Conclusion

We’d love to hear from you which of these yield farming strategies you’d like to see the most on Set v2.

If you have any ideas on other types of yield farming strategies you want to see on Set V2 or want to create your own V2 Set, reach out to us at [email protected], or ping us on our Discord at https://discord.gg/kNsYA6A.

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Yield Farming Deep Dive was originally published in Set Labs on Medium, where people are continuing the conversation by highlighting and responding to this story.

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