Yearn ARC - HackMD

<div align="center"> # Yearn ARC </div> > Aave Request for Comment ### Overview YFI tokens from Yearn’s treasury are deposited into {Aave} for the purpose of borrowing stablecoins {Aave} against it. The {aave} governance commits to a stabe and preffered interest rate {aave} for a period of five years. Yearn governance on the other hand commits to maintaining an LTV of >=50% throughout the period. #### Implementation Yearn Finance deposits >=1000 YFI and borrows stablecoins against it, such that a minimum of LTV of 50% is maintained for at period of time. {time_d}. In return, Yearn Finance is asking the Aave for a stable 3% interest rate (aave) for that duration. #### Rationale Yearn’s treasury controls high-value capital that warrants special treatment given the high interest rate that will be paid during the five year commitment. - This collaboration is a win-win for the token holders of both communities and further strengthens their cooperation. - The {Maker, Aave} lock-in a guaranteed and large yield from the large line of credit. - Yearn lock-in a predetermined interest rate thereby decreasing uncertainties around operational costs. ## YFI as a non-loanable collateral ### Aave Documentation [disabling lending on asset](https://docs.aave.com/developers/v/1.0/developing-on-aave/the-protocol/lendingpool#reserveusedascollateraldisabled) [source, LendingPool.sol](https://github.com/aave/aave-protocol/blob/9cf250b22d63b0c6a2accd9e0fe64b0b045557d8/contracts/lendingpool/LendingPool.sol#L142) ## Disabled Depositing reduces risk Currencies only enabled for depositing and borrowing (not usable as collaterals) present lower risk for the protocol. Collaterals are the assets of the protocol. To remain solvent, these assets must remain greater than the liabilities, the loans. Currencies which can only be used for borrowing should always be excessively backed by other currencies as the collaterals. The volatility of price can negatively affect the collateral which safeguards the solvency of the protocol and must cover the loan liabilities. The risk of the collateral falling below the loan amounts can be mitigated through the level of coverage required, the Loan-To-Value. It also affects the liquidation process as the margin for liquidators needs to allow for profit. The less volatile currencies are the stablecoins followed by ETH, they have the highest LTV at 75%, and the highest liquidation threshold at 80%. The most volatile currencies REP and LEND have the lowest LTV at 35% and 40%. The liquidations thresholds are set at 65% to protect Aave users from a sharp drop in price which could lead to undercollaterisation followed by liquidation. ### Will Move the following Equations to an appendix ## Liquidation Threashold  <img src="https://render.githubusercontent.com/render/math?math=%5Ctext%20%7B%20Liquidation%20Threshold%20%7D%3D%5Cfrac%7B%5Csum%20%5Ctext%20%7B%20Collateral%20%7D_%7Bi%7D%20%5Ctext%20%7B%20in%20%7D%20E%20T%20H%20%5Ctimes%20%5Ctext%20%7B%20Liquidation%20%7D%20%5Ctext%20%7B%20Threshold%20%7D_%7Bi%7D%7D%7B%5Ctext%20%7B%20Total%20Collateral%20in%20ETH%20%7D%7D"> ## Health Factor  <img src="https://render.githubusercontent.com/render/math?math=H_%7Bf%7D%3D%5Cfrac%7B%5Csum%20%5Ctext%20%7B%20Collateral%20%7D_%7Bi%7D%20%5Ctext%20%7B%20in%20%7D%20E%20T%20H%20%5Ctimes%20%5Ctext%20%7B%20Liquidation%20%7D%20%5Ctext%20%7B%20Threshold%20%7D_%7Bi%7D%7D%7B%5Ctext%20%7B%20Total%20Borrows%20in%20%7D%20E%20T%20H%2B%5Ctext%20%7B%20Total%20Fees%20in%20%7D%20E%20T%20H%7D"> Market risks have the most direct impact on the risk parameters: ## Utilisaation Rate  <img src="https://render.githubusercontent.com/render/math?math=U%3D%5Ctext%20%7B%20TotalBorrows%20%2F%20TotalLiquidity%20%7D"> ## Historical Utilisation Rate Since inception, across the assets of the Aave Market, full utilisation was reached only 1% of days since inception. The table below shows the Aave Market statistics on the maximum daily utilisation as at the 24th of November 2020. Statistic $\%$ of time $\begin{array}{ll}=100 \% & 1 \% \\ >95 \% & 2.8 \% \\ >90 \% & 4.6 \% \\ >80 \% & 11.4 \% \\ >50 \% & 26 \% \\ <25 \% & 52.6 \% \\ <10 \% & 38.5 \% \\ <5 \% & 28.7 \%\end{array}$ [*Historical Utilisation Rate, source Aave Documentation](https://docs.aave.com/risk/liquidity-risk/historical-utilization) ## Interest Rate Model  <img src="https://render.githubusercontent.com/render/math?math=%5Cbegin%7Barray%7D%7Bll%7D%0A%5Ctext%20%7B%20if%20%7D%20U%3CU_%7B%5Ctext%20%7Boptimal%20%7D%7D%3A%20%26%20R_%7Bt%7D%3DR_%7B0%7D%2B%5Cfrac%7BU_%7Bt%7D%7D%7BU_%7B%5Ctext%20%7Boptimal%20%7D%7D%7D%20R_%7B%5Ctext%20%7Bslope1%20%7D%7D%20%5C%5C%0A%5Ctext%20%7B%20if%20%7D%20U%20%5Cgeq%20U_%7B%5Ctext%20%7Boptimal%20%7D%7D%3A%20%26%20R_%7Bt%7D%3DR_%7B0%7D%2BR_%7B%5Ctext%20%7Bslope%20%7D%201%7D%2B%5Cfrac%7BU_%7Bt%7D-U_%7B%5Ctext%20%7Boptimal%20%7D%7D%7D%7B1-U_%7B%5Ctext%20%7Boptimal%20%7D%7D%7D%20R_%7B%5Ctext%20%7Bslope2%20%7D%7D%0A%5Cend%7Barray%7D"> ## Valuation Risk > source: aave documentation Yearn is an ecosystem of financial products governed by the YFI token. The smart platform offers different optimised strategies based on DeFi primitives such as Aave, gaining immense traction and attracting nearly a billion dollars of AUM in just over a month. The governance token YFI is distributed to users who provide liquidity for the various products. The token holders discuss strategies and vote on policies in the governance forum while the technical side is led by Andrey Cronje. YFI Smart contract Risk: B- The YFI smart contract was deployed on the 17th of July yet it already holds more transactions and holders than some other assets of portfolio. The simple ERC20 implementation with permissions only to the governance contract controlled by the YFI holders leads to a reduced technical risk YFI Counterparty Risk: B YFI is fully decentralised, its distribution to Yearn liquidity providers is among the fairest and most transparent. The community is already strong of 6,000 holders. YFI Market Risk: B- ## Comparisons Yearn.finance allocated its total supply of tokens within a week, which means that its market-cap-to-FDV ratio is equal to 100%. Curve, on the other hand, distributes 2 million tokens each day via liquidity mining, which will gradually inflate its supply to a maximum of 3.03 billion CRV — resulting in an extremely low market-cap-to-FDV ratio of 2.64%. | **Curve** | **YFI** | |------------------|------------------| | Volatility (30D) | Volatility (30D) | | 2.96 | 1.41 | | Volatility (90D) | Volatility (90D) | | 2.21 | 1.6 | | Volatility (1Y) | Volatility (1Y) | | 2.44 | 2.35 | | Sharpe (30D) | Sharpe (30D) | | 7.34 | 0.414 | | Sharpe (90D) | Sharpe (90D) | | 3.96 | 2.49 | | Sharpe (1Y) | Sharpe (1Y) | | 0.511 | 3.24 | *This is the asset's volatility calculated over the past 30 days of daily returns. *Volatility is defined as the annualized standard-deviation of daily returns. ## Calculation Specifics To calculate correct historically archived deposit rates we use the index based rate claculation. [source contract link](https://github.com/aave/aave-js/blob/6c74c6df3c9d86a652b3adbf9e285a00f8497f0c/src/helpers/pool-math.ts#L124) ```solidity export function calculateAverageRate(andyk, 4 months ago: • initial implementation index0: string, index1: string, timestamp0: number, timestamp1: number ): string { return valueToBigNumber(index1) .dividedBy(index0) .minus('1') .dividedBy(timestamp1 - timestamp0) .multipliedBy(SECONDS_PER_YEAR) .toString(); } ``` Rate: The rate is based on a utilization metric which represents the current rate at this point of time. *(POSIX Unix Epoch Time)* Index: The index keeps track of "growth" also incorporating things like the 'flash premium'. ### Acknowlegments - Wot_Is Goin_On - Daniel L. - Ali Atiia