How is yield generated?
Understand more on how the APY is generated.
Return Finance acts as a bridge between the traditional financial system and Decentralized Finance (DeFi). Our strategy involves providing liquidity to so-called Automated Market Maker (AMM) protocols. Аll funds deposited into the Return Finance application are provided as liquidity on Curve and utilize boosted CRV rewards on Convex Finance, a yield optimizer for Curve’s liquidity pool. This gives our depositors the ability to gain a high Annual Percentage Yield on their savings.
Our service converts all deposits into USDC (United States Dollar Coin), a stablecoin that is a 1:1 representation of the United States Dollar, and is fully-regulated. This makes the entire process of conversion and tracking a lot clearer.
Annual Percentage Yield (APY) is a measure used in DeFi to express the annualized rate of return or interest earned on an investment or deposit. It takes into consideration how often the interest is reinvested or added back to the principal amount. By factoring in compounding, APY provides a more accurate representation of the actual return on an investment compared to a simple interest rate.
Curve (CRV) is widely recognized as one of the biggest and most popular platforms in DeFi due to its emphasis on stability and composability rather than volatility and speculation. Based on automated market makers (AMMs), the protocol offers a highly efficient way to exchange tokens while maintaining low fees and low slippage.
In order to ensure lower fees for the liquidity providers who supply the pools with tokens, Curve is only accommodating liquidity pools made up of similarly behaving assets. The protocol incentivizes the liquidity providers (LPs) to participate, by integrating with external DeFi protocols and delivering rewards in the form of CRV tokens and interest.
The Curve protocol is governed by its ERC-20 token called CRV, which enables CRV token holders to suggest and participate in voting for modifications to the platform. Providing liquidity to specific Curve liquidity pools is a means to earn CRV tokens.
Voted modifications to the Curve protocol may involve adjusting fees, modifying fee allocation, introducing new liquidity pools, and altering yield farming incentives. Holders of CRV tokens are able to cast their votes to approve or reject a proposal by staking their CRV tokens. The voting power of a CRV token increases with the duration of its staking period.
Convex Finance (CVX) is another decentralized finance platform that provides boosted staking rewards on the Curve protocol and acts as a yield optimizer for CRV token holders and Curve liquidity providers.
Automated market makers (AMMs) form an integral part of the DeFi landscape, enabling the trading of digital assets in an automatic and permissionless manner. They replace the traditional buyer-seller market model with liquidity pools, where users contribute crypto tokens to determine the price based on a constant mathematical formula.
Liquidity pools can be customized to suit various objectives and have become a vital tool within the DeFi ecosystem. AMMs represent a novel financial instrument exclusive to Ethereum and DeFi, which operates independently, is always available for trading, and does not depend on conventional buyer-seller interaction.
This pioneering trading system embodies the principles of Ethereum, crypto, and blockchain technology, as it is free from any centralized control, and allows anyone to participate and create new solutions. Other traditional assets like stocks, gold, and real estate rely on the traditional market structure for trading.
Decentralized exchanges (DEXs) on Ethereum faced a liquidity challenge before the advent of AMMs. With a small number of buyers and sellers on the platform, it was difficult to find enough people willing to trade regularly, given the complexity of the interface.
AMMs resolved this challenge by creating liquidity pools and incentivizing liquidity providers to supply them with assets. The more assets a pool holds and the more liquidity it has, the easier trading becomes on decentralized exchanges. On AMM platforms, users trade against a pool of tokens known as a liquidity pool, instead of trading between buyers and sellers.
Essentially, a liquidity pool is a shared pot of tokens whose price is determined by a mathematical formula that can be optimized for different purposes. Anyone in possession of any type of ERC-20 tokens and with an internet connection can become a liquidity provider by supplying tokens to an AMM’s liquidity pool.
Liquidity providers earn a fee for providing tokens to the pool, which is paid by traders who interact with the pool. In recent times, liquidity providers have also been able to earn yield in the form of project tokens through a process known as "yield farming."
These pools follow a simple mathematical formula that determines the price of tokens, and by tweaking the formula, liquidity pools can be optimized for different purposes.
The most commonly used formula is:
x * y = k
This formula keeps the pool in constant balance, where the total value of one asset in the pool will always equal the total value of the other asset.
It ensures that prices stay in balance and return to a relatively accurate market price, incentivizing traders to exploit price differences between the AMM and outside crypto exchanges until the prices are balanced again. The constant formula is the unique feature of AMMs, and it determines how they function.
Last modified 14d ago