The field of decentralized finance (DeFi) continues to expand, dismissing a lot of speculative notions that last year’s advance was a bubble-like move.
According to data from DeFi Pulse, the total value locked in various DeFi protocols exceeds $17.8 billion – an increase that continues in the new year of 2021. Leading the way are some established authorities in the field, though newcomers are also starting to play an important role.
However, over the past few months, the cryptocurrency market has entered a state of parabolic advance, causing severe volatility across the board. While the changes so far have been mostly positive, this volatility exposes certain risks to liquidity providers (LPs), perhaps the biggest of which is impermanent loss.
That said, DeFi Yield Protocol (DYP) brings forward an interesting concept that tries to tackle the challenges of substantial volatility and lower the risks for LPs as they play an integral role in the future development of the entire field.
What is DYP Protocol?
DeFi Yield Protocol, as the name suggests, is a new protocol that attempts to change the way people earn through liquidity on Ethereum.
One of its primary focuses is to defy the argument that DeFi is a space where whales have the power to control the network. In all fairness, this is a strong argument, highlighted by a few events in the recent past.
Back in September, one DeFi protocol that gained tremendous popularity was Sushiswap. It promised to provide a solution for Liquidity Providers better than that of Uniswap, which is so far the established market leader when it comes to decentralized exchanges. However, at one point, the developer sold all of his tokens, causing mayhem across the board and crashing the price of the native token in an instant.
To prevent this, DYP has integrated an anti-manipulation feature that ensures that all of the pool rewards are automatically converted from DYP to ETH at 00:00 UTC. The system would automatically distribute the rewards to all of the LPs.
In essence, this feature is aimed at providing network fairness to all participants as no whale should be able to manipulate the prices of the native DYP token to their advantage.
How Does it Work?
In order to maintain the price stability of the DYP token, the smart contract will automatically convert the DYP rewards to ETH at the time stated above. However, if the price of DYP is affected by more than -2.5%, then the maximum DYP amount that doesn’t affect the price will be swapped to ETH.
The remaining amount will remain and will be distributed with the rewards of the following days. In seven days’ time, if there’s still undistributed DYP rewards, the protocol’s governance will vote whether the remaining DYP will be distributed to the token holders (assuming an appropriate slippage tolerance of -2.5%) or it will be burned. Keep in mind that all burned tokens are also removed from circulation.
This is also a solution to reduce the risk of impermanent loss. It’s a grave challenge that riddles the DeFi space because when token prices are severely reduced, this impacts liquidity providers, causing them to incur substantial losses.
According to the official website, the DeFi Yield Protocol staking dApp is already live, and it enjoys a TVL of around $46 million at the time of this writing.
One of the scheduled events for the first quarter of 2021 is the launch of the DYP Earn Vault. This is an automated yield farming contract that will allow each user to deposit a particular token, for which the protocol itself will automate yield farming strategies by conveniently move the funds between the most profitable platforms.
From the generated profits, 75% will be converted to ETH and distributed to liquidity providers, while the remaining 25% will be used to buy back the protocol’s governance token and add liquidity.
The challenges of whale manipulation and impermanent loss are among the most serious in the nascent DeFi space.
Solutions such as DeFi Yield Protocol are aimed at handling those problems and making the space more accessible to a larger pool of users. At the same time, its solutions are also intended to automate the yield farming process, providing optimal returns for liquidity providers, which are the cornerstone of the industry.