Welcome back to Modelling DeFi. Part 8! How far this series has come…
With the recent hype I have seen surrounding BeethovenX’s boosted pools on Optimism, I set out to demonstrate what the big deal is and whether the hype is warranted. In this article, I will provide a quick overview of boosted pools, and dig into the Steady Beets, Boosted pool, to demonstrate the effects of the boost concept. Following this, I also decided to explore and compare a couple of strategies, to demonstrate the effects of certain common decisions. Enjoy!
In most cases, less than 10% of the liquidity deposited into a liquidity pool is being used to facilitate trades at any given time. This is because the size of trades being made in a liquidity pool is generally much smaller than the net sum of the pool’s available liquidity. This suggests that much of the pool is not utilized. However, large trades do still occur, and deep liquidity is still necessary to ensure low slippage.
Boosted Pools essentially delegate small portions of a pool’s liquidity to earn yield behind the scenes. That way, liquidity providers earn more from their idle assets when trading fees and emissions are not enough. Delegated liquidity is deposited into another platform, for example, a lending protocol (Aave) or yield aggregator (Yearn) where it can generate additional yield.
This increases the pools’ returns as it produces the opportunity for liquidity providers to receive additional yield by leveraging “idle” liquidity in the pool.
Of course, a balance needs to be struck between leveraging idle liquidity for yield and inducing undesirable slippage on large trades. If a Boosted Pool routes too much liquidity to earn additional yield, it will miss out on trading fees from large trades that will execute elsewhere to avoid slippage.
Steady Beets, Boosted
On the Optimism blockchain, BeethovenX has a pool titled “Steady Beets, Boosted”. The current yield stats are shown in the image below.
The pool currently has nearly $4.3m in liquidity and offers 7.91% APR.
Of that, 3.98% is boosted yield from Reaper Farm crypts, which are providing the pools additional liquidity to Aave to optimize yield on behalf of liquidity providers.
The same pool, not boosted, would expect returns of 3.93%, from Swap fees and OP rewards. From this, we can compare the trajectories of a unit of capital deposited and auto-compounded, to understand the real-time effect that boosted pools have.
I have used the usual simulated auto-compounder parameters; compounding every hour, a 4.5% performance fee (in the case of Reaper Farm), and the usual assumptions; ignoring gas fees and price action. Using the Reaper Farm auto-compounder model, we can see the difference in capital growth between boosted and unboosted Steady Beets LPs staked in Reaper Crypts.
An unboosted pool takes almost 6500 days to double our capital, whereas a boosted pool doubles it in around 3200 days.
Simple as that.
Thanks for reading along, and shout out to @charlie_defi for getting in touch and requesting a model. Feel free to get in touch and offer feedback or suggestions. I’m always looking to learn more and subsequently teach more!
In my first article, Modelling DeFi Part 1, I demonstrated the effects of auto-compounding for a generic investment. Steady Beets, Boosted, offers a real case study. From the above APRs, Swap fees and Reaper boost are interest-bearing components of the LP tokens, and the OP rewards are emissions. This means we can compare the auto-compounding Reaper Farm (compound hourly, 4.5% performance fee) to a manual strategy (compound daily, 0% performance fee).
Let’s take a look.
Immediately we can see the benefit of auto-compounding in this case.
By now, everyone is aware that I am a fan of auto-compounding. It suits the tax legislation where I live, and my investment strategies don’t include farming large amounts of any particular emissions. Any tokens I want to own, I include in my regular purchases. But to others, there may be merit in farming the emissions. A neat strategy could be to only purchase stablecoins and use them to farm a variety of assets for long-term holding. Future price action might be strongly favorable!
The point of this postscript is not to say that any strategies are right or wrong. It is simply to highlight that understanding the effects of your decisions leads to better decisions, and more often than not, some mathematical modeling goes a long way.