Trainer Joe: Get DeFit — Yield Farming
Welcome to DeFit, with Trainer Joe
This is the 3rd of a 5 part series to help you bulk out your DeFit knowledge and get some serious kudos amongst the community
Those who train with Joe will be rewarded with an exclusive Discord badger of honor: ‘DeFit’
Today’s session will help you gain some serious knowledge about Yield Farming. Specifically, understanding what ‘Yield Farming/Liquidity Mining’ is, how you engage with Liquidity Pools on Yield Farming platforms, and lastly, understanding some of the specifics on the Trader Joe Platform.
🏃♂️Sets for the session
- Liquidity Pools
- Yield Farming
Yield Farming is essentially the process of generating interest, from your tokens. This can be done in a number of ways. The context of Yield Farming in this session will strictly refer to Liquidity Mining on Trader Joe, which is the process where users can earn passive income by depositing tokens into a smart contract-based Liquidity Pool. Users on Trader Joe can then also deposit their tokens into a Farm, to generate an additional source of yield.
🏋️♂️ Rep 1: Yield Farming is the process of generating interest from tokens
A liquidity pool is simply a basket that traders interact with to trade between the assets. A Pool will only consist of two assets, and these can be anything, such as $JOE and $AVAX. For any trade to be possible, there needs to be some $JOE and $AVAX in the Pool. This is taken care of by liquidity providers, who deposit the tokens into the Pool.
🏋️♂️ Rep 2: A Liquidity Pool is a smart contract that contains funds
How do Liquidity Pools actually work?
Liquidity pools use an automated market maker (AMM) algorithm that makes sure that the product of the quantities of the two supplied tokens always remains the same. On top of that, because of the algorithm, a pool can always provide liquidity, no matter how large a trade is. The main reason for this is that the algorithm asymptotically increases the price of the token as the desired quantity increases.
🏋️♂️ Rep 3: Automated Market Maker refers to the algorithm that facilitates the price adjustment for tokens that are combined in a Liquidity Pool
Liquidity Pool Tokens & Trading Fees
When liquidity is supplied to a pool, the liquidity provider (LP) receives special tokens called an LP token or (JLP Token: Joe Liquidity Pool) in proportion to how much liquidity they have supplied to the pool. When a trade is facilitated by the pool a 0.25% fee is proportionally distributed amongst all the LP token holders. The Trading Fees are added to the pool and accrue in real-time, Trading Fees are claimed by withdrawing your liquidity.
🏋️♂️ Rep 4: Depositing two tokens returns an LP (or JLP) token. This entitles you to share 0.25% of all trading fees in that pool
🏋️♂️ Rep 5: Trading Fees accrue in real time and are claimed by withdrawing your liquidity
Total Value Locked (TVL)
TVL is the aggregate liquidity in all liquidity pools on a platform. The more value that is locked, potentially highlights that more users are yield farming on the platform. TVL is therefore associated as an effective metric to compare the market share of different DeFi platforms.
🏋️♂️ Rep 6: Total Value Locked is an aggregated sum of all liquidity on a protocol
Benefits of Yield Farming
Interest earned in the form of APR (Annual Percentage Rate) refers to the amount of profit a user may gain from deploying capital to a farming, lending or liquidity pool. In essence, it’s an estimation of potential, future profits over a one-year period. Reassessed every 24 hours, high APR’s are often unsustainable over time and prone to recalibration, unless the pool maintains its demand. There are a number of elements that can impact a pool’s APR, including popularity, liquidity, and incentivization.
Example of Yield Farming returns
- User Deposits: $500
- APR: 15%
- Profit each year: $75
🏋️♂️ Rep 7: APR is an estimation of future profits over a one year period
🏋️♂️ Rep 8: APR is affected by a pool’s trading volume, liquidity and incentivization
What affects APR?
High Activity: An increase in trading fees will result in a higher APR and therefore higher returns.
Incentives: Token rewards for depositing assets, which will likely attract a greater number of investors to a particular pool.
Low Liquidity: Trading fees are spread over a smaller amount of liquidity which means that individual liquidity providers can expect high APRs.
The ‘pool weight’ is a representation of the amount of rewards a particular farm will receive. This is expressed as a ratio taken from the sum of all of the multipliers divided by the multiplier of a given pool.
Percentage Pool Weight: (Pool Weight / Sum of all Pool Weights) * 100
If all the pool weight multipliers on Trader Joe add up to 500X, then a 30X pool weight will receive 6% yield as a reward. Simply put, if a pool weight is set at 1X then that pool will receive 1 reward per block.
The higher the pool weight, the higher the APR. The Trader Joe team adjusts pool weights in order to incentivize the provision of liquidity to a particular pool. This means that a pool with high liquidity, which would usually have a lower APR, can be stimulated to produce a higher APR by increasing the pool weight.
🏋️♂️ Rep 9: Pool weight (multiplier) represents the volume of $JOE tokens being emitted into the farm
- Pool Weight: 2X
- Liquidity: 4.2M
- APR: 70.7%
- Pool Weight: 3X
- Liquidity: 4.3M
- APR: 104%
In this example, the liquidity of both pools are almost identical, however, their APRs differ considerably. Usually, the more liquidity in a pool, the lower the APR, however in this instance the pool weight of TRACTOR-AVAX (3X) is higher than JOE-AVAX (2X), resulting in a more favorable APR.
🏋️♂️ Rep 10: Pool weight is calculated by (Pool Weight / Sum of all Pool Weights) * 100
Congratulations — Session Complete 🥇
Now it’s time to flex your muscles and lock in those gains.
Take on the challenge and get DeFit.
Complete the Quiz to build your progress towards the DeFit badge of honor.
🧠 Good luck! : Quiz Link
If you need to catch up on previous Sessions
Session 1: Lending Part 1
Session 2: Lending Part 2
About Trader Joe
Trader Joe is a one-stop-shop decentralized trading platform native to the Avalanche blockchain. Trader Joe builds fast, securely and aims to serve the community at the frontier of DeFi. The long-term vision of the team is to make Trader Joe an R&D-focused platform for new DeFi primitives not yet seen on any blockchain.