<div align="center"> # Yearn ARC </div> > Aave Request for Comment - [Yearn ARC](#yearn-arc) + [Overview](#overview) - [Implementation](#implementation) - [Revolver](#revolver) - [Rationale](#rationale) * [YFI as a non-loanable collateral](#yfi-as-a-non-loanable-collateral) + [Aave Documentation](#aave-documentation) * [Disabled Borrowing reduces risk](#disabled-borrowing-reduces-risk) * [Risk Mitigation](#risk-mitigation) - [Liquidation Window](#liquidation-window) + [Will Move the following Equations to an appendix](#will-move-the-following-equations-to-an-appendix) * [Liquidation Threshold](#liquidation-threshold) * [Health Factor](#health-factor) * [Utilisation Rate](#utilisation-rate) * [Comparison to existing assets](#comparison-to-existing-assets) + [Historical Utilisation Rate](#historical-utilisation-rate) * [Interest Rate Model](#interest-rate-model) * [Valuation Risk](#valuation-risk) * [Comparisons](#comparisons) + [Calculation Specifics](#calculation-specifics) + [Acknowledgments](#acknowledgments) ### Abstract 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 stable and preferred interest rate {aave} for a period defined in the “Revolver” section. #### Implementation Yearn Finance deposits >=1000 YFI and borrows stablecoins against it, such that a minimum of LTV of 50% is maintained for a period of time. {time_d}. In return, Yearn Finance is asking the Aave for a stable 3% interest rate (aave) for that duration. | Key | Value | | --------------------- | --------------------- | | Reserve Factor | >5% $RFACTOR <10% | | Liquidation Threshold | 85% | | Liquidation Bonus | 5% | | LTV_minimum | 50% | | LoanAmount | 1mm > $AMOUNT < 10mm | | Basis points | 375 | | Time_d | Months | #### Rationale Yearn’s treasury controls high-value capital that warrants special treatment given the high interest rate that will be paid during the course of the credit terms. - This collaboration is a win-win for the token holders of both communities and further strengthens their cooperation. - The lock-in is a guaranteed as well as large yield for the large line of credit. Through a new potential vault class Yearn will enable reduced liquidation uncertainty through a new incentivized process without the need for any protocol or contract changes. See section “Liquidation Window” - Yearn lock-in a predetermined interest rate thereby decreasing uncertainties around operational costs. - Through the Yearn Ecosystem, Aave will be able to draw additional loan originators, while also reducing liquidation risk through the Yearn Liquidation Window. By adopting this proposal, not only will the unavoidable issues of reducing the need for capital inefficiencies in the required collateralization ratio be significantly reduced, it will also secure significant improvements that go beyond the ‘faster, better, cheaper, incremental improvements that have been seen usually. ## YFI as a non-loanable collateral There are 3 main sections to this proposal Disabling borrowing Identifying risks for both originator and lender Solving the issues of risks and explaining why disabling borrowing provides additional opportunities for Aave. ### 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 Borrowing reduces risk Assets that are only enabled for depositing and borrowing (not usable as collaterals) present lower risk for the protocol. Collaterals are the assets of the protocol. For Aave to remain solvent, these assets must remain greater than the liabilities, the loans. Assets that can only be used for borrowing typically are over collateralized in order to offer a 'buffer' to mitigate against default risk. The volatility of price can negatively affect the collateral which safeguards the solvency of the protocol (Aave) 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%. ## Risk Mitigation Manually maintaining sufficiently high collateral-to-debt ratios is infeasible in times of high market volatility. This exposes a borrower to high liquidation risk. Traditionally the accepted solution has been to supply a sufficiently high amount of collateral (over collateralization). It so follows that as more collateral is supplied, the higher the opportunity cost to the borrower of not being able to allocate these funds elsewhere and generate earnings from them. ## Liquidation Window We suggest a solution to this problem that does not involve any protocol upgrades. Yearn shall provision a new vault to act as a “Liquidation Window”. This Liquidation window acts as a facility in which open market operations can be funded and deployed quickly. Open market operations are in essence transfers to subscribed users who wish to protect their positions from becoming under collateralized. In essence it acts as a ‘liquidity refill’. So, by accepting deposits which can be employed to generate earnings until they are needed as a collateral to ‘top up’ on Aave’s users, they are afforded The “liquidation window” generates a return for depositors (LP’s) , while protecting borrowers of over-collateralized loans against becoming liquidable. Liquidity providers (LPs) may deposit funds into asset-specific pools in exchange for asset-specific “yaTokens” [3] . Vault deposits are employed in two ways: 1. Redemption for the underlying asset: funds in a vault may be used as reserve[4] collateral, ready to increase collateral-to-debt ratios on subscribed borrow positions When collateral top ups occur, a fee is charged on the increment and subsequently distributed amongst the LPs for the vault of the underlying collateral asset. 2. A variable amount of the deposits in each vault is allocated via Yearns ecosystem of strategies to generate additional yield via big brains[5]. The generated yield by a vault s strategy is ultimately diverted back into the vault and thereby distributed amongst the vault LPs. *Subscribed meaning users who have purchased or otherwise enrolled into the liquidation window programme. [3]. Example would be DAI for yDAI or DAI for aDAI [4] Reserve collateral is those deposits used in the transactions that recollateralize under collateralized positions of subscribed users. [5] Only the biggest need apply. Market risks have the most direct impact on the risk parameters: ## Comparison to existing assets ### 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) ## Valuation Risk > source: *Aave documentation* **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 decentralized, 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-** ## Asset Risk Comparision 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. ## Summary @FIXME ###### Disclaimers Yearn Finance is an ecosystem of financial products governed by the YFI token. The smart platform offers different optimized strategies based on DeFi primitives such as Aave. [www.yearn.finance](https://yearn.finance) The information in this document is intended for informative purposes only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Yearn Finance does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Yearn Finance’s systems, services or products. ## Appendix ## Utilisation Rate <!-- $$ U=\text { TotalBorrows / TotalLiquidity } $$ --> <img src="https://render.githubusercontent.com/render/math?math=U%3D%5Ctext%20%7B%20TotalBorrows%20%2F%20TotalLiquidity%20%7D"> ## Interest Rate Model <!-- $$ \begin{array}{ll} \text { if } U<U_{\text {optimal }}: & R_{t}=R_{0}+\frac{U_{t}}{U_{\text {optimal }}} R_{\text {slope1 }} \\ \text { if } U \geq U_{\text {optimal }}: & R_{t}=R_{0}+R_{\text {slope } 1}+\frac{U_{t}-U_{\text {optimal }}}{1-U_{\text {optimal }}} R_{\text {slope2 }} \end{array} $$ --> <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"> ### Calculation Specifics To calculate correct historically archived deposit rates we use the index based rate calculation. [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'. ## Liquidation Threshold <!-- $$ \text { Liquidation Threshold }=\frac{\sum \text { Collateral }_{i} \text { in } E T H \times \text { Liquidation } \text { Threshold }_{i}}{\text { Total Collateral in ETH }} $$ --> <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 <!-- $$ H_{f}=\frac{\sum \text { Collateral }_{i} \text { in } E T H \times \text { Liquidation } \text { Threshold }_{i}}{\text { Total Borrows in } E T H+\text { Total Fees in } E T H} $$ --> <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"> ### Acknowledgments - Wot_Is Goin_On - Daniel L. - Ali Atiia