The Dark Side of Liquidity Mining: Unrealistically High Risks from APY

Press release

Profits from liquidity mining in decentralized finance (DeFi) are often referred to as Annual Percentage Yield (APY) or Annual Percentage Yield (APR). APY includes compound interest while APY does not. With the same annual return, the APY’s actual daily profit will be lower than the APY, and compounding the APY can make it artificially high. It is impossible that such information is not available to the general user. Before those returns take hold, high gas charges, temporary losses and other factors lurk behind the scenes, reducing efficiency, output and breaking the DeFi promise.

In addition, the market is full of risks, carpet tears, pitfalls and uncertainty. While returns, capital and hopes for medium-sized liquidity providers (LPs) continue to wane.

How serious is the risk of inconsistent loss?

Let’s break down the APY metrics for the top three productive farming platforms: Alpha Homora, Rabbit Finance, and CoinWind. In the table below, 1 Binance Coin (BNB) + 481 Tether (USDT) is offered for each platform. The APYs published on the three platforms are then compared to the expected return before the calculation of the temporary loss and after the calculation of the temporary loss.

The APY published on the interface of each protocol does not match the actual APY received from the user. The return you estimate at the time the assets are offered does not match the actual return you will receive. Several factors play a role here, but Transient Loss (IL) is the most worrying. It’s also clear that the shiny APYs being sold to users in DeFi today are just plain impractical and misleading.

Beaver Finance is a protocol that took the initiative to fight IL and always mislead APY to ensure users are getting exactly what they see.

Asset allocation enables the next generation zoning experience for individual assets. This eliminates the laborious manual collecting of puzzle pieces in order to receive the output as LPs. This is done by coupling content provided by the user with another in equal proportions. In addition, the second asset pair comes from Beaver’s private LP pool, which leads to a low level of liquidity. Beavers Impermanent Loss Hedger, or ILH, backed by the Asteria Finance Lab, however, stole the program. ILH has proven its effectiveness in years of backtesting practice and can protect near zero perishable losses, thereby overcoming DeFi’s biggest and most frustrating pain point – often vanishingly small losses.

Competitive analysis

We started a competitive analysis to explain how Beaver compares to protocols like Alpha Finance and CoinWind. The table below shows how Beaver compares to Alpha Homora and CoinWind.

Smooth user experience and maximum profit

Complicated user interfaces and overly technical jargon have clogged the entry points for general users into DeFi. In addition, factors such as slippage, frustrated trading, and falling asset prices can reduce returns over time. Let’s take a look at how each of the three protocols work in terms of overcoming these difficult points.

On Beaver, dynamic asset allocation eliminates slippage, transaction frictions and asset depreciation. In addition, Beaver achieves optimized performance through its ILH which manages nearly zero IL through option strategies. Price slide and gas charges remain ongoing problems during Alpha Homora. At the same time, the credit protocol increases the theoretical mining principle of the user, but at the same time harbors higher market risk and temporary loss rates. Finally, users at CoinWind can simply use the dual asset zoning module and bear the losses and risks that come with it.

Cost and performance and perfect security

Safety and efficiency are second to none at DeFi. With Alpha Homora, however, the cost efficiency is low due to the temporary loss, but the safety at the active end of the measuring device is maintained through ongoing controls and internal tests. For CoinWind, the protocol makes a strong claim to protect against temporary losses, but the level of uncertainty and disclosure issues tell a different story. Beaver protects against temporary losses through a carefully crafted portfolio of options that protect users’ profits. In addition, the protocol is being tested by many daring cybersecurity and blockchain experts. In addition, they use several secure stacks from OpenZeppelin to ensure high security standards.

Hence, each log has a journey ahead of it, and while Alpha Homora and CoinWind are running it will be interesting to see what Beaver can expect.