Aave Strategies

Published on: 08.10.2021

Yield Yak now offers one-click leveraged farming strategies for Aave’s Avalanche markets. These strategies optimize your single-asset deposits, automatically compound your returns, and save you time.

Aave strategies are available now on Yield Yak for all supported assets: AVAX, WETH, WBTC, DAI, USDC, USDT and AAVE.

Earn Yield. Explore Aave farms on Yield Yak.
Good Bridging. Easily move funds from Ethereum to Avalanche using the Avalanche-Ethereum Bridge.

Aave Incentives for Lending and Borrowing

Aave is a lending product originally developed for Ethereum and recently brought to Avalanche, where it already secures more than $2.5B. Users who lend funds to Aave are eligible to receive interest payments by borrowers.

On top of native lending returns, Aave offers additional incentives through the Avalanche Rush program. Aave pays both borrows and lenders in WAVAX incentives. For most assets today, borrowers are paid to borrow because the incentives are worth more than the cost of borrowing.

Borrowing Incentives > Interest (Aave Markets)

In such conditions, Aave users may use low-risk leveraged lending strategies to maximize their APY. Yield Yak helps optimize these strategies and saves time.

Yield Yak Strategy

YY uses leveraged farming which repeatedly lends and borrows the same asset. By doing so, YY earns the incentivized APY on deposits plus the incentivized APY on debt.

This is considered a low-risk leverage strategy because both lending and borrowing use the same asset, meaning the risk of liquidation is significantly easier to manage without exchange rate volatility.

Leveraged Position Example

DAI has a 75% collateral factor, meaning borrowers can borrow up to 75% of the deposits and lend them again. Rolling up a hypothetical leveraged position:

Deposit 100 DAI, borrow 75 DAI

Deposit 75 DAI, borrow 56 DAI

Deposit 56 DAI, borrow 42 DAI

Deposit 42 DAI

After four steps, the original 100 DAI is now leveraged. The deposits are worth 273 DAI with 173 DAI worth of debt.

This position earns the incentivized lending APY on 2.73x the original deposit, plus 1.73x of the incentivized borrowing APY

Compared to just depositing the original 100 DAI, this represents over a 3X return.

YY may leverage up to seven times. However, a lower leverage target provides benefits: at today’s TVL, going past four leverage steps has a low relative impact to the additional gas consumed. And by saving gas, YY enables more frequent reinvests which compound incentives faster and reset positions to their target leverage.

When to Avoid Leverage

There are two scenarios where leverage should not be applied to today’s strategies:

The collateral factor of an asset is 0%, meaning it is not possible to borrow
The net borrowing APY turns significantly negative and the impact of a leveraged strategy is diminished.

YY may modify target leverage, meaning changing market conditions are automatically reflected in the yield for users.