Spring means — $YAM harvesting season is kicking off!
TL;DR: YAM is kicking off its synthetics platform degenerative.finance with incredibly exciting products like uGAS, uSTONKS, uVOL that run for 2–4 month periods so you can “set and forget” whilst earning very lucrative rewards on your ETH or stablecoins (350%-1,000%+ APR depending on synth), with limited IL and manageable risks (Google Sheet is linked here).
I am YAM contributor but all views are my own, based on public information, DYOR, no financial advice.
Yes, you heard it right: YAMs are growing again out of yield farms! This time in a much more delicious fashion than previously. Gone is the rebase, and off we go with a governance token that’s backing a bunch of cutting-edge DeFi products, including the flagship degenerative.finance-synthetics
Synthetic tokens are the name of the game and this article tells you all about APRs of 350%-1,000%+ APRs, with uncapped upside potential.
100% alpha-leak guarantee…
Degenerative.Finance: Synthetic tokens build by YAM on UMA Protocol
YAM has partnered with UMA to bring you leading DeFi synthetics. The team has started with uGAS which tracks 30days median gas prices on Ethereum. Launching next week is uSTONKS, which represents stonks popularized by WallStreetBets. In April, volatility products on BTC and ETH will be next.
What all these synths have in common:
- Minting and LPing synths is a very profitable way to utilize your ETH or stablecoins
- You retain full exposure to your ETH upside (in the case of uGAS; uSTONKS is collateralized by USDC)
- A user deposits collateral, mints the synth and then provides them as liquidity to the Uniswap pool
- This entitles the user to receive $YAM and $UMA rewards + transaction fees from the Uniswap pool
The degenFi synths are unique and no other protocol has similar products in the pipeline. Being early in degenFi synths pays off: Get a larger share of token rewards and any trading fees.
What’s so special about the synths?
Synths like uGAS follow mean-reverting price moves, meaning that these synths oscillate around a mean value: They go up and down, almost like clockwork. This is important because it means that impermanent loss can be mitigated and should not be a real concern.
Governance tokens or coins on the other hand, can rise for extended periods of time exposing LPs to significant IL potential, that is irreversible.
Mean-reversion is a huge USP of degenFi synths to mitigate IL.
Let’s take median gas prices for the last 60 days to illustrate the point. The following data-points show the daily median gas prices for transactions on the Ethereum blockchain. We had unprecedented high gas prices especially in February. However, taking a simple 60 days average shows that periods of gas-moves in one direction are followed by moves in the opposite direction:
- Gas prices went down throughout January
- Gas prices went up throughout February
- Gas prices are moving down again since late February/early March
The specific implications for impermanent loss become clear with the following charts & graphics.
The Median Gas Price Index shows the cumulative percentage change for 30days median gas prices. The Index topped at 1.80 and has retraced to 1.70 ever since. With gas prices falling again, this price index will continue its descent and likely trend back towards levels sub-1.4.
What does this mean for IL? We look at 3 scenarios: IL uGAS moving at 80%, 70% and 40% vs ETH.
Peak IL would have amounted to 4.17%…
…however at 70% gain vs ETH, IL is only 3.42%…
…and with 30 days median gas prices falling to a mere 40% gain vs ETH, the IL is a mere 1.40%
Talking about IL:
- Token rewards compensate for IL. Plus, as soon as there is enough liquidity and awareness, transaction fees in the pool will be meaningful
- In addition to the above, the YAM team is currently exploring Balancer pools with 80/20 or 95/5 weightings to absolutely minimize the potential for IL, and increase capital efficiency.
Please note: uGAS is supposed to track 30 days median gas prices but there’s no guarantee it will be a perfect fit before expiry. The above data points are used to illustrate the argument. If you hold the uGASJUN21 token until expiry, the token price will settle at the 30 days median gas price (hence the perfect fit is assured at expiry).
How to mint
Go to degenerative.finance to mint
Minting the synths and LPing to the Uniswap pool is a very simple process: Deposit your collateral, select the number of synths you want to mint and confirm. At the time of minting, there’s a failsafe mechanism built in: You can only mint at the Global Collateral Ratio!
This way, the platform makes sure no minter is exposed to fat finger errors when minting. The important thing is to always stay above the minimum collateral ratio of 1.25x (= 80% max LTV).
A detailed step by step guide is available here.
For those with experience on MakerDao and AAVE, the below table helps to conceptualize the differences between minthing synths on DegenFi vs minting/borrowing DAI on either of these platforms.
Rewards
To bootstrap liquidity in the synths products, YAM together with UMA gives generous token rewards. We want to reward early supporters of degenFi and ideally welcome them as permanent community members to build out the protocol.
This way, we make sure you have an incentive to become a degenFi user, compensate you for opportunity cost of capital and any impermanent loss risks. The best thing is that you get two tokens and thus have much more optionality in terms of price upside or liquidity event. Both tokens are actively traded on DEXes (Sushiswap) and CEXes (Binance, Coinbase, Huobi) thus giving you liquidity and upside. APR visibility is much higher than at a number of other protocols with no listings or trading volume.
It’s essential to understand that both tokens have strong upside potential leaving u with significantly higher APRs if u hodl:
YAM: Other than being laser-focused on degenerative finance, YAM is also launching DAO House (Treasury Mgmt tool for other DAOs) and Umbrella (insurance). YAM has stopped the rebase model back in late 2020 and now transitions into a fully-fledged governance token with revenue-generating projects. YAM has a weekly newsbrief that keeps you up-to-date about all developments at yambrief.substack.com.
UMA: Highly innovative, oracle-free platform to build any synths you like. TVL has grown to ~$100m with total synth market cap of ~$35m, available here. UMA is pushing boundaries with KPI options that will incentivize users and protocols to bring liquidity to UMA.
Given the above catalysts for re-rating, the below simulations provide some direction on the true APR potential of degenFi’s liquidity mining programme.
Risks and mitigants
There are two main risk categories with relevant mitigants.
Impermanent loss:
IL is a reality in the world of AMMs. This tool is a good simulator . However, for longer-term products like uGAS-JUN21, the mean-reverting element of gas prices is likely to play out, potentially leaving the LP with zero IL. In case there is IL, trading fees and rewards compensate.
Always keep in mind that for any “lost” synth from IL, you will receive more of the quote asset (ie ETH or USDC)!!! Hence, whatever you lose in the form of the synth, you have gained as the quote asset.
As a heads-up: The YAM teams is exploring Balancer pools 80/20 or 95/5 to absolutely minimize the potential for IL. uGAS-JUN21 and uSTONKS however will run on Uniswap 50/50 pools.
Liquidation risk:
Always keep the collateral ratio above 1.25x to be safe. There are a few mechanisms in the system to make sure you are safe…
- When minting a new position, you can only mint at the GCR which has historically sat comfortably above the 1.25x threshold to allow for significant buffer.
- There is a collateral ratio monitoring tool (available on YAM Discord and soon as telegram bot and email bot) that alerts you if your collateral ratio falls below your comfort zone (say 2x, u can set it). Watch this!
- In case you fall below your comfort zone collateral ratio, you should top up your collateral position OR redeem the synth and retrieve your collateral
The liquidation price is based on 2hr TWAP. Price spikes are evened out and thus this mechanism protects against sudden liquidations.
Refer to this Google Sheet to see number examples, understand the calculation of liquidation prices and simulate collateral ratios for your own positions.
Going extra mile: Extra-alpha for the ultra-curious
I have minted and LPed uGAS-JAN21. Given this position is expired, there are some very useful insights to be generated.
Any liquidity miner who provides ETH to mint uGAS should care about whether he’s/she’s better off with uGAS & LP vs hodling ETH. Look at the screenshots below from APY.Vision to see how much uGAS mitning & LPing is more profitable than just hodling ETH.
The “net gains” ignore the UMA rewards and there was no trading activity happening in the liquidity pool, hence the $46-loss is not representative. Look at the highlighted box: By minting and LPing, I earned ~20% on my ETH vs just hodling!
