Autonomous Investment Managers: Optimizers
This blog post serves the purpose of being a short introduction to the content of the actual paper. The actual paper (in PDF format) can be found in the 3six9 Innovatio Documentation.
This blog post serves the purpose of being a short introduction to the content of the actual paper. The actual paper (in PDF format) can be found in the 3six9 Innovatio Documentation.
This is the second in a series of papers about Automated Strategy Vaults.
Find the paper here: Autonomous Investment Managers: Optimizers
Purpose of This Paper
In our previous paper, we took a look at Defi Options Vaults and laid out a framework on how they fit into the greater Defi ecosystem. In this paper, we move towards an even more Defi-integrated concept: optimizers. Automated strategy vaults got their start with the yield optimizer. While different Defi protocols were scattered across different chains, so were their yield opportunities. A user could miss out on great yield, and protocols faced a more fragmented customer base. With the introduction of yield optimizers like Yearn and its Keeper system, multiple yield strategies could be applied to vaults where tokens could deposit and earn from the best sources, collected and updated by individuals, and automated by bots.
As we go deeper into this series about Automated Hedge Funds, we hope you'll gain a better understanding of the possibilities in Defi now, and the potential for the future. In this paper, we analyze six protocols that utilize the optimizer strategy to grow yield using different, and sometimes aggregated, strategies. By the end, you'll have a framework to extract key takeaways from these and other protocols, by looking at their offers, how they are managed, and what kinds of drawbacks are faced with optimizers.
We hope that this paper can act as a source of information for those interested in this niche or in developing a new solution.
Short Introduction
This is the second installment of our ‘Automated Strategy Vault’ series in which we highlight different structured, yield-generating products. In the first paper, we gave an introduction to automated strategy vaults. We explained how important these products are for DeFi as they take away management and monitoring from the user and automate the whole yield generation process. They can be seen as on-chain hedge funds with the caveat that they are publicly accessible for anyone, regardless of size or citizenship. The main subject of the first paper was DeFi Option Vaults (DOVs). These are projects that offer options strategies, the most common ones being Covered Calls and Cash-Covered Puts. Strategies like these tend to earn high base yield, because of options premiums, but also have their weaknesses. For one, the yield is not guaranteed, since options can expire in-the-money resulting in negative returns for that epoch.
This paper examines the second category of strategy vaults: optimizers. In fact, it was the invention of optimizers that marked the beginning of strategy vaults.
In February of 2020 Yearn Finance was launched by Andre Cronje. The concept of his project was simple: aggregate the best yield on stablecoins across DeFi in a decentralized and autonomous manner. It was something that Cronje had been doing manually in his spare time, however, after a while he found the process of comparing various DeFi projects and their interest rates boring. He started what later would become Yearn Finance. The protocol became a huge success and amassed multiple hundreds of millions in TVL within 8 months after launch. Even more so, Yearn pioneered an immature industry of yield optimizers. One that would grow to dozens of projects with a wide variety of yield-generating strategies.
The core premise of Yearn is straightforward; A platform where users are able to deposit assets which are then deployed in an autonomous and algorithmic manner to high and safe yield venues usually involved in at least one of the following elements: lending, borrowing, and liquidity providing. Over the course of its existence, Yearn has expanded its product suite considerably and now offers stablecoin vaults as well as volatile asset vaults.
Nowadays there are a ton of other yield optimizers on the market, but Yearn still stands out as it maintains a thriving community of strategists and curators, and has a proven track record of being safe, reliable, and efficient.
Credit to Marco Worms, Medium, “Yearn Finance Explained”
What happens with DeFi vaults is that, all of a sudden, these strategies are available to anyone and, in most cases, without a minimum amount to opt-in. This opens up a world of opportunities regardless of a users’ historical net worth or annualized income which is a huge contrast to the gated TradFi world.
Find the paper here: Autonomous Investment Managers: Optimizers
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3six9 Cognitio is the 3six9 Innovatio research and education wing which is currently researching on a variety of topics such as undercollateralized loans, zkKYC, optimized stablecoin designs and much more.
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