Diversified Multi-Strategy Yield Aggregators

Also known as DeFi valts

6 May 2024

Blog Diversified Multi-Strategy Yield Aggregators

DeFi vaults are a way to get yield with:

  • High risk adjusted APY 
  • Diversification 
  • ETH on ETH returns
  • Anonymous self custody

You get all that without having to do the DeFi heavy lifting of;

  • Researching
  • Formulating and implementing money lego strategies
  • Rebalancing positions and reinvesting gains

Background: Single-Strategy Yield Aggregators

In the beginning we had to manually build our own DeFi strategies. This was complex, risky and difficult to keep track of. One pain-point was reinvesting gains for compounding when fees were high. To fix this we got single-strategy DiFi yield aggregators, offered by protocols like: 

We simply deposit ETH and the yield aggregator automatically executes the strategy optimally. This gets us increased rewards due to:

  • Special deals struck between the yield aggregator and the DeFi protocols
  • Bulk savings like transaction batching
  • Shitcoin incentives from the aggregator itself

To track deposits and realize rewards we get tokens representing our share in the pool of funds that is invested into the strategy. The yield goes into the pool and increases the value of the tokens. The yield aggregator takes a fee which is offset by the increased rewards we get.

Add Diversification: Multi-Strategy Yield Aggregators

The next level is to diversify our risk while maintaining ease of use by combining multiple DiFi strategies into a single token. And so we get multi-strategy yield aggregators. 

These are sometimes called vaults, however not everything in DeFi that calls itself a vault is a multi-strategy yield aggregator and not all multi-strategy yield aggregators call themselves vaults. They could also be called indexes or pools.

The vaults work in the same way as single strategy DeFi yield aggregators with the tokens and rewards and the vault provider taking a fee. The extra services multi-strategy yield aggregators provide include:

  • Automatic rebalancing between strategies
  • Adding, removing or adjusting strategies
  • Due diligence on the protocols included

These DeFi investments provide high ETH on ETH (or ETH-pegged) yield which is diversified and offers extremely good risk adjusted returns. They are anonymous and self custody, so you maintain your privacy and control of your funds!

As a bonus some also offer points or shitcoin rewards, which can be converted to ETH.

The Biggest and Best ETH DeFi Vaults

I have researched protocols that are on ETH mainnet and are ETH denominated. However if you are looking for vaults on ETH L2s or stable denominated vaults, just check those offered from the same providers listed below.

I only include highly liquid options. Liquidity is important in 2 ways; firstly that the vault can absorb a very large new deposit without reducing the APY, and secondly that large withdrawals can be made quickly, easily and permissionlessly.

For full up-to-date details and current APYs visit the apps themselves. If you only want to try one then I recommend Etherfi Liquid. But for diversification you can invest in all 4.

Etherfi Liquid Vault

The biggest player in the space combines ETH validator yields, EigenLayer restaking yields and DeFi yields to give the highest APY as well as shitcoin bonuses. Etherfi’s Liquid Vault is built on the battle tested tech of Sommelier’s contracts and is largely run by the same team. Insurance is available from Nexus Mutual.

APY: 20%
TVL: $453.3M

Deposit assets

  • eETH
  • wETH
  • weETH

Protocols 

  • Aave
  • Balancer
  • Convex
  • Curve
  • Gearbox
  • Morpho Blue
  • Pendle
  • Uniswap

Fees

2% platform fee

Sommelier Real Yield ETH Vault

This vault is structurally similar to Etherfi Liquid Vault and is in fact the genesis of it. The difference is that the vault consists of LSTs on DeFi, so does not include any restaking rewards or associated points. That also makes it lower risk than Liquid, as does the fact it has diverse underlying assets.

APY: 12%
TVL: $39.3M

Deposit assets

  • wETH

Protocols 

  • AAVE
  • Compound
  • Morpho
  • Uniswap

Fees

  • 1% platform fee
  • 20% performance fee 

Instadapp ETH v2

A nice feature of Instadapp ETH v2 is that you can deposit vanila ETH rather than having to convert it to something else first. I wish Etherfi and Sommelier would do the same. V3 is coming soon with some nice improvements and additions and will aim for 10%-20% APY.

APY: 9%
TVL: $89.3M

Deposit assets

  • ETH
  • stETH

Protocols 

  • AAVE
  • Compound
  • Fluid
  • Lido
  • Morpho
  • stETH
  • Spark

Fees

  • 20% performance fee 
  • 0.05% exit fee

Index Coop hyETH High Yield ETH Index

This vault is set to launch on June 10 2024. The team have a good reputation and their other indexes seem well run.

APY: ~20%

Deposit assets

  • ETH
  • USDC
  • wstETH
  • Others to be announced

Protocols 

  • Across WETH
  • Instadapp ETH v2
  • Pendle PTs

Fees

  • 0.95% platform fee

Others

Yearn is a big player in the space however they are mostly focused on stable vaults. The multi strategy ETH vaults have a low APY of around 5%. The ETH vaults with high APY are in single strategies like “Curve DOLA-FRAXBP Factory”. Still they are worth checking to see if any of their offerings suit you. 

Mozaic looked good but they have paused operations due to an inside job theft! (crypot is never boring). When they re-launch vaults they will be worth taking a look at.

Risks

Here are some of the risks to consider when investing in DeFi vaults. All risks can be mitigated by diversification through investing in multiple DeFi vaults.

Impermanent loss or liquidation risk

This is mitigated by the diversification of strategies within each vaults. It’s unlikely any of the strategies in the vaults will suffer impermanent loss or liquidation but even if one does, the damage will be limited to only that stratagie’s portion of the total funds in the pool. 

Depeg risk

Everything in Etherfi’s Liquid vault is in weETH. If weETH depegs it will be a problem. Likewise everything in Instadap ETH v2 is in stETH. Sommelier’s Real Yield ETH vault mitigates this risk by using multiple assets:

  • wETH
  • stETH
  • rETH
  • cbETH

Historically depegs in assets like these have almost always corrected themselves and in fact offer a discounted buying opportunity. 

Smart contract risk

In one sense vaults diversify your invested funds and lower the risk by spreading funds out over multiple protocols and strategies. However in another sense they centralize your risk in that all funds go through the vault’s smart contracts.

This is a bit like in TradFi if you own several diversified asset types but you hold them all through the same broker, are you really diversified? You can mitigate this by diversifying your investments across multiple different vaults.

What’s next? Aggregator Aggregators

If you know how DeFi works then you know what the next step is. For a comprehensive range of investments and better diversification we need a token which combines multiple leading vaults. This would be a “diversified multi-strategy ETH yield aggregator aggregator”. If it included the 4 vaults listed above that would give you yield from around 20 different strategies and protocols! If it’s done well, I would buy it!

Gentleman James

Gentleman James: New money trash connoisseur

Gentleman James
New money trash connoisseur


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