Improving The Liquidity Provider Experience in Yield
As a part of Yield’s work to improve the user experience, we are adding a new feature for our liquidity providers. Users can now choose between two different strategies for providing liquidity in our app: “Buy And Pool”, and “Borrow And Pool.” This article explains what these options are and how to decide between them.
The Yield Protocol incorporates a new class of tokens called fyDai. To provide a simpler user experience, the Yield application deals in Dai exclusively, and the holding of fyDai is not immediately obvious. Behind the scenes, borrowing Dai is actually achieved by borrowing fyDai and immediately selling it for Dai, while lending Dai is achieved by buying fyDai for a particular series.
Buying and selling of fyDai is done in YieldSpace pools which are automated markets similar to Uniswap markets. Liquidity providers provide two assets — Dai and fyDai of a particular series — to a YieldSpace pool and receive back liquidity provider tokens.
To make things easier for you, the Yield App automates the process of obtaining fyDai when you add liquidity. You can simply specify an amount of Dai that you would like to use to provide liquidity, and the App handles the details of obtaining fyDai and providing the liquidity. This permits you to provide liquidity to a Yieldspace pool by just providing Dai.
You have two options when providing liquidity in the Yield App: “Buy And Pool”, and “Borrow And Pool.”
Buy and Pool
The “Buy and Pool” strategy is best for users that are adding smaller amounts of liquidity, and for which the amount of gas spent is very important.
The “Buy and Pool” strategy automates the process of buying fyDai from the YieldSpace pool itself and pooling back into the same pool along with the appropriate amount of Dai.
While this strategy is cheap on gas, it has a downside of impacting the current interest rate for that series of fyDai. This means that the cost of adding liquidity is relative to the size of your operation and the liquidity of the pool. This strategy only permits adding Dai to the pool up to the maximum amount of fyDai available to purchase in the market.
Borrow and Pool
The “Borrow and Pool” strategy is best for users that are adding significant amounts of liquidity to a pool, to the point where they would impact interest rates significantly if using the previous strategy.
The “Borrow and Pool” strategy automates the process of borrowing fyDai using Dai. The Dai and fyDai are then deposited into the appropriate YieldSpace pool. When adding liquidity using this strategy, you will not impact the current interest rate for the chosen series. This strategy permits adding as much liquidity as desired. The downside is that this strategy requires more gas than the alternative.
Choosing a strategy
When choosing between the strategies, the right strategy depends on your particular situation. Of the two strategies, the “Buy and Pool” strategy may result in minting more liquidity provider tokens for the same amount of provided Dai. This is because the “Buy and Pool” strategy can buy the tokens for less than 1 Dai each, while the “Borrow and Pool” strategy must provide 1 Dai for each fyDai borrowed. However, when using the “Borrow and Pool” strategy, some Dai is paid in fees after trading with the market, and the market impact may result in impermanent loss.
Due to the fact that the “Buy and Pool” strategy uses less gas and may result in minting a greater amount of liquidity provider tokens (resulting in greater returns if held to maturity), the Yield App recommends that most users use the “Buy and Pool” strategy.
If you have any questions about providing liquidity to Yield Protocol, please reach out to us on our Discord.
