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‍Introduction To DeFi Yield Aggregators 

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How to use DeFi yield aggregators to maximize DeFi earnings.

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Research
Max Yampolsky
March 3, 2023
Mar 3

I. Introduction to DeFi Yield Aggregators 

After attracting $7 Billion in VC Funding during the first three months of 2022, the Cryptocurrency & Decentralized Finance industry officially became the most attractive Fintech sector for investment globally.  This is an irrefutable testament to the accelerated adoption rate of cryptocurrencies and DeFi services by retail and corporate investors worldwide —and Yield Aggregators have played a key role in this accelerated growth.  

In addition to auto-deploying strategies to maximize profits, Yield Aggregators fundamentally help DeFi investors to effectively hedge volatile market swings and minimize costs associated with investing in the cryptocurrency industry. 

In this article, we will provide a comprehensive overview of DeFi yield aggregators, and you can deploy them to maximize your DeFi earnings. Well will discuss how it works, the risks involved, and how to choose the right DeFi yield aggregator for your crypto portfolio

II. What Are Yield Aggregators?

Yield aggregators, also known as 'yield optimisers' or 'auto-compounders,' are autonomous tools with built-in smart contracts that hunt for protocols/pools to maximize yields on investments with minimal human expertise or effort. In simple terms, yield aggregators collect users’ deposits into a pool and then deploy the assets across multiple DeFi protocols and yield strategies. This essentially minimizes risks, eliminates trading fees, and optimizes profits —all autonomously. 

Similar to how Fund Managers, Family offices, and Hedge funds in TradFi, take care of an investor’s portfolio —Yield aggregators collect crypto assets (tokens) from various investors into a pool and autonomously invest them into a mix of multiple yield-bearing products such as lending pools or staking services. It autonomously manages funds, auto-compounds yield, and distributes profits through pre-programmed smart contracts. 

But first, why would anyone need a computer program to manage their assets for them? 

Tighter profit margins in TradFi mean that many Institutional investors and retail traders have turned to the DeFi investment protocols to generate passive income on their assets. However, when investing in DeFi, they have been hit by certain critical risks and limitations as well. 

According to a recent survey culled from Statista, crypto traders rank Security (40%), High trading fees (37%), Inadequate Trading pairs (18%), and Inconvenient user Interface 22% among the leading challenges that they face when investing cryptocurrencies today.

Problems Faced by Cryptocurrency Traders & Investors. Source: Statista

Fundamentally, Yield aggregators aim to solve each of these problems through automation of the trading and investment processes. They help investors to autonomously identify auto-compounding yield strategies across different protocols — thereby giving them a crucial competitive edge in today's market without drastically increasing user fees.

III. How Do Yield Aggregators Work?

In traditional finance, return on investments is largely limited to dividends and value appreciation of underlying stock price. Things work differently in Decentralized finance. In DeFi, users can generate passive income on their digital assets in various ways through a process called Yield Farming. 

With yield farming, holders of digital assets can increase their ROI by locking up their tokens to secure a network, providing liquidity for a trading pair, or lending out their tokens to borrowers. 

Depending on market conditions, each of these strategies generates varying levels of passive income. The process of analyzing the markets, assessing risks, and identifying protocols and strategies that pay the highest yield for the lowest fees —in real-time, is a herculean task for many crypto investors. This is where yield aggregators come in.

Yield aggregators work by automating the Yield farming process, moving assets around in real-time, and generate the highest yields possible. 

For clarity and brevity, we can break down the modus operandi of Yield aggregators into 3 different phases. 

  • Yield Optimization 

The Yield Optimization phase is all about maximizing the returns that investors can earn from their digital assets. Yield aggregators carry out this function in two steps. 

Step 1: Pooling Assets —Yield Aggregators collect funds from multiple investors into a pool and issue a receipt in the form of “Liquidity Provider (LP) tokens” or "pool tokens". An LP token is a crypto token issued to users who loan their crypto to a liquidity pool. The LP tokens typically represent the holder's pro-rata share of the aggregate component tokens in the underlying pool. 

Typically, the investor can always redeem the LP tokens for the original tokens that they deposited. 

Step 2: Optimized Yield Farming —After collecting tokens from investors, Yield aggregators deploy the assets across multiple sources of yield, such as interests from DeFi lending protocols, liquidity mining platforms, and staking pools. Yield aggregators are programmed to move tokens autonomously in real-time across yield-farming protocols that offer an optimum yield. 

By collecting tokens into a larger pool and moving them around in real-time response to changes in the market dynamics, Yield Aggregators can offer their users a higher overall yield than they would be able to achieve by investing in yield farming sources individually.

Step 3: Auto-compounding — After generating yield, DeFi yield aggregators can exponentially increase the ROI by auto-compounding the gains. 

Yield aggregators conduct auto-compounding by automatically reinvesting the earnings generated by a user's investments into the same investment, effectively compounding the interest or yield over time. With 24/7 up-time, this process can be repeated indefinitely, resulting in exponentially increasing returns. This means that users save time, gas fees, and effort while still benefiting from the power of compound interest.

IV.DeFi Yield aggregators that focus on Yield Optimization

  • Harvest Finance: 

Harvest Finance is a crypto asset management protocol geared towards generating the highest yields for its users. It optimizes your funds by depositing them into a variety of liquidity pools. 

Harvest automatically farms the highest yield available from the newest DeFi protocols and optimizes the yields received by auto-compounding the rewards earned. To maximize yield, Harvest finance allows users to deposit their funds into a pool that autonomously invests in different DeFi yield farming protocols simultaneously.

Harvest Finance made headlines in 2020 when it amassed over $1 billion in total value locked (TVL) within just a few weeks after its launch.

Alchemix: 

Alchemix is another prominent yield-optimizing aggregator. It enables users to deposit stablecoins and receive a credit line that can be used to invest in other yield-generating strategies. In contrast, the deposited stablecoins continue to earn yield through automated yield optimization.

By borrowing a synthetic version of your collateral asset that you deposit on Alchemix, you get to retain exposure to the potential upside of the underlying assets while also making them work for you. Meaning that you can generally leverage your crypto assets more efficiently, without taking on the added risk of liquidation. 

  • Cost Minimization

The second phase of the impact of yield aggregators on asset efficiency is the reduction in costs of generating yield. According to the Statista survey depicted above, DeFi traders consider trading fees among the highest challenges of trading and investing in DeFi. 

In the process of Yield Farming, traders often incur different costs such as —gas, deposit fees, un-staking penalties, withdrawal fees, token burns, tax, and so forth. By pooling together funds from multiple users, Yield aggregators can help to minimize these transaction costs for each user.

Here are 6 ways that DeFi Yield Aggregators can help investors minimize costs associated with trading and yield farming:

  1. Fee aggregation: DeFi Yield Aggregators can consolidate multiple transactions into a single transaction to reduce gas fees.
  2. Fee optimization: Yield Aggregators can find the best possible trade routes across multiple decentralized exchanges to minimize slippage and transaction costs.
  3. Gas optimization: before executing trades, Yield Aggregators can assess real-time gas price predictions to optimize transaction fees across different blockchain networks.
  4. Liquidity provision: Some Yield Aggregators may provide liquidity to decentralized exchanges to earn a share of trading fees, which can offset transaction costs for their users.
  5. Finding the best trade routes: they utilize a smart-contract-based algorithm that finds the most efficient trade routes across multiple decentralized exchanges to minimize slippage and transaction costs. This means that users can get the best price for their trades without having to manually search for the best exchange to use.
  6. Aggregating liquidity: they also aggregate liquidity from multiple decentralized exchanges, which means that users can access a larger pool of liquidity without moving their funds between multiple exchanges. This helps to reduce transaction costs and improve trading efficiency.

Trading Automation 

Many DeFi users list ‘Inconvenient user interface’ as one of the main challenges of investing in crypto. With trading automation tools, DeFi aggregators can deploy smart contracts and other AI-powered data algorithms to execute trades and manage cryptocurrency investments. 

With trading automation, investors can create customized trading strategies based on their unique risk tolerance and investment goals. They can then proceed to auto-execute trades without manually navigating the markets around the clock.

V. How Yield Aggregators Can Automate Your Trading Process?

Certain DeFi aggregators focus on providing users with advanced trading tools and automating the technical aspects of the trading processes. This may include market data analysis, trade execution, auto-withdrawals, etc. These features help investors to optimize their trades and manage their investments more efficiently.

These aggregators typically offer a range of features, such as automated rebalancing, portfolio management, and risk management tools. Here’s how it works 

  1. Automated rebalancing: This feature allows users to automatically adjust the composition of their investment portfolios based on predefined rules and conditions. For example, if a user's portfolio becomes overexposed to a particular asset or market sector, the automated rebalancing feature can automatically adjust the portfolio to reduce risk and improve overall performance.

  1. Portfolio management: This feature allows users to manage their investment portfolios more effectively by providing real-time tracking and analysis of portfolio performance. Users can view their portfolio holdings, track their performance over time, and make informed investment decisions based on the latest market data.

  1. Risk management: This feature allows DeFi users to manage risk more effectively by providing tools for assessing and mitigating various types of investment risk. For example, users can use real-time data analysis provided by Robo Advisors to assess their exposure to market volatility and other types of investment risk —then take steps to mitigate these risks accordingly.

VI. DeFi aggregator Tools that focus on Trading Automation

These tools leverage the power of automation and real-time data analysis to enable users to make more informed investment decisions and achieve better overall investment outcomes.

TokenSets and One Click Robo Advisor are prime examples of automating tools that enhance your performance. 

  • TokenSets: TokenSets is a decentralized Asset management platform that uses smart contracts to manage portfolios of cryptocurrencies on behalf of users. 

The platform allows users to create and customize their own investment strategies, and provides automated portfolio management based on these strategies.

  • One Click Crypto

One Click Crypto’s yield aggregator and robo advisor deploys AI & machine learning technology to analyze on-chain transaction history related to the particular wallet owner and make personalized portfolio recommendations based on the data acquired. 

The primary benefit of the One lick Robo Advisor is its simplicity and ease of use. It does not require users to navigate complex investment options to customize their portfolios manually.  

Instead, it provides a simple and streamlined interface that allows users to get started with just one click. Additionally, it is completely non-custodial and can be used from any web3 wallet like Metamask or Trust Wallet.

VII. Are DeFi Yield Aggregators Risky?

Like any investment process, DeFi yield aggregators carry certain inherent risks that investors should be aware of before using them. 

Here are some of the potential risks associated with DeFi yield aggregators: 

  1. Smart contract risk: DeFi yield aggregators rely on smart contracts to automate investment and earning strategies. If a smart contract has a vulnerability or is not properly audited, it could be subject to a hack or exploit, resulting in the loss of funds.

  1. Market risk: DeFi yield aggregators invest in various DeFi protocols and assets, which are subject to market fluctuations. Even when yield aggregators generate nominal profits, these market fluctuations can result in impermanent loss, especially if a user is not diversified across multiple protocols and assets.

  1. Liquidity risk: DeFi yield aggregators may rely on liquidity pools to generate returns. If there is a sudden increase in demand for a particular asset, the liquidity pool may not be able to meet that demand, resulting in losses.

  1. Regulatory risk: DeFi yield aggregators may be subject to changing regulations in different jurisdictions. These regulations can impact the ability of these platforms to operate and the risks associated with using them.

  1. User error risk: DeFi yield aggregators may involve complex investment strategies and require users to provide some manual input about how to allocate their assets. If a user makes an error in their investment strategy, it could result in losses.

It is important for investors to understand the risks associated with using DeFi yield aggregators and to take appropriate measures.  Some ways to mitigate these risks include choosing diversified portfolio strategies, researching and selecting platforms with well-audited smart contracts, and generally exercising caution when investing. 

 

VIII. Tips for Choosing the Right Yield Aggregator for Your DeFi Portfolio

Here are some expert tips to help you choose the right yield aggregator for your DeFi portfolio:

Research and compare: Take the time to research and compare different DeFi yield aggregators. Look for platforms that have a good reputation, are well-audited, and have a track record of generating consistent returns.

Consider the user experience: Look for yield aggregators that have an intuitive and user-friendly interface. The platform should be easy to use and provide clear information about investment strategies and potential risks.

Optimize for Diversification: Look for yield aggregators that offer a diverse range of investment strategies and protocols. A diversified portfolio can help to mitigate risk and potentially increase returns.

Consider fees: Yield aggregators may charge various fees, including platform fees, gas fees, and withdrawal fees. Be sure to understand the fee structure before investing and consider the impact of fees on potential returns.

Look for Transparency: Look for yield aggregators that are transparent about their investment strategies and protocols. The platform should provide clear information about the underlying assets and risks associated with investing.

IX. Conclusion

To recap, we have identified Yield Optimization, Cost Minimization, and Trade Automation as the 3 broad ways that DeFi Yield Aggregators help investors to maximize profits and benefit from a superior trading experience compared to TradFi. 

We also outlined Harvest Finance, 1 inch, and One-click Robo Advisor as some of the automated aggregator tools you can deploy to supercharge your DeFi portfolio profits today. 

Overall, it is important to take the time to research and compare different DeFi yield aggregators. By choosing the right platform for your needs, you can potentially generate consistent returns and build a diversified DeFi portfolio.

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Max Yampolsky

Max Yampolsky is a seasoned authority in the realm of crypto investing and blockchain technology, serving as the guiding voice behind his highly successful, #1 Google-ranked blog on web3 and token economics.

As the co-founder of a thriving AI startup and an algorithmic crypto trading firm, he translates real-world entrepreneurial success into invaluable insights for his readers.

Having immersed himself in the crypto space since 2017 and the DeFi arena since 2021, Max combines his comprehensive market understanding with a keen ability to communicate complex concepts with ease and clarity. His hands-on experience and thought leadership make him an invaluable resource for investors navigating the dynamic world of crypto investing.

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