Yearn <> Notional Integration

TLDR:

Yearn has allocated 15,000,000 USDC and 15,000,000 DAI to fixed-rate lending strategies on Notional. Yearn is using Notional's fixed rates to boost and stabilize their returns while also making them less dependent on DeFi token prices.

We are proud to work with the yearn team and offer the best platform for fixed-rate lending to all protocols built on Ethereum. We look forward to deepening our partnership with Yearn and building more together in the future.

Introduction:

Fixed rate lending is a new and growing sector within DeFi that offers attractive returns and opportunities. Today, users can lend USDC or DAI for as much as 8.5% fixed. In the four months since launch, Notional V2 has attracted ~$450M in TVL and has executed ~$325M in total loan volume.

Why fixed rates:

Yearn is utilizing the fixed interest rates available on Notional to generate returns that are much higher, less volatile, and less dependent on DeFi token prices than the returns their strategies previously offered.

This blog post analyzes historical returns of one of Yearn’s largest vaults, yvUSDC, and quantifies the benefits that fixed rate lending could bring to this vault by simulating returns assuming 35% of the capital in yvUSDC had been dedicated to fixed rate lending.

Allocating 35% of yvUSDC capital to lending fixed on Notional from June 2021 to December 2021 would have improved returns by ~24% and decreased the volatility of returns by 35%.

What is yvUSDC:

yvUSDC is one of Yearn’s largest vaults, and it produces most of its returns by allocating capital to the “GenLevCompV3” strategy. This strategy deposits USDC on Compound, borrows USDC against it and redeposits that USDC on Compound. This “recursive lending” allows the yvUSDC vault to maximize the amount of COMP incentives that it earns. The strategy will then sell the COMP it accrues for USDC and reinvest it into the strategy.

This strategy can produce significant returns with little risk of loss. But its returns are volatile because they depend on the level of interest rates on Compound as well as the price of the COMP token that the strategy earns as an incentive. As the following analysis shows, these dependencies have become increasingly problematic recently as interest rates have fallen across DeFi along with DeFi token prices.

Historical analysis:

The following is a chart of the annualized daily returns of Yearn’s yvUSDC vault from June 2021 to December 2021. The results have been smoothed by taking a rolling 5 day average of each day’s annualized return.

Mean daily return: 5.89%
Standard deviation: 2.71

The returns are volatile and strongly correlated to the price of COMP. Here is the same annualized return chart overlaid on the price of COMP over the same period of time.

There’s a clear correlation between the vault’s returns and the price of COMP. In general, when COMP prices fall the vault’s returns fall. When COMP prices rise, the vault’s returns rise. This is to be expected given the yvUSDC vault’s reliance on the levered Compound strategy, but it’s not ideal. Yield aggregators like Yearn would prefer to offer users strong, risk-adjusted returns that don’t depend on a rising market for DeFi tokens.

Benefits of fixed rates:

Incorporating fixed rates could enable Yearn’s yvUSDC vault to deliver returns that are higher, more stable, and less correlated to the price of COMP. Here’s a simplified simulation showing how the same period of time would have looked if the yvUSDC vault allocated 35% of its assets to fixed rate lending at a 10% interest rate.

Mean daily return: 5.89% -> 7.33%
Standard deviation: 2.71 -> 1.76

The modified returns represent a substantial improvement upon the realized historical returns. The mean modified daily return is ~25% higher than the historical daily return and the standard deviation of the modified daily returns is 35% lower than the historical daily returns. This strategy modification produces returns that are higher, more stable, and less vulnerable to declines in the price of COMP.

This chart shows how the value of 100 USDC deposited into the yvUSDC vault in June compares to the value of 100 USDC deposited into the yvUSDC vault if it had earned these modified returns.

In this six month time period, 100 USDC deposited into the modified yvUSDC vault would have earned $3.72 in interest vs. the $2.93 earned by the unmodified vault.

Conclusion:

Fixed rates create a brand new design space for DeFi yield generation strategies. The strategy outlined here only scratches the surface of the role that fixed rates can play in sophisticated yield strategies. There’s lots of room to create in this space, and the rewards for cultivating this untouched part of DeFi will favor the early adopters and builders.

The Notional Team