In the world of cryptocurrency, a yield optimizer is a tool used to increase profits by finding the best combination of investments. This could mean finding the right mix of coins to provide the best return on investment. By using a yield optimizer, you can maximize your profits.
There are a variety of yield optimizers available on the market, and each has its strengths and weaknesses. However, all yield optimizers share one common goal: to help you make more money with your investments.
If you're interested in using a yield optimizer to boost your profits, it's essential to research and choose a tool that fits your needs. With so many options available, there's no one-size-fits-all solution.
While this is meant to be a sequel to my Ethereum for Beginners post, I won’t be using any examples from that blockchain. Today, I’ll be explaining this process using examples from my favorite blockchain: Fantom. Let’s get started.
Table of contents
What Is a Yield Optimizer? What Are its Goals?
A yield optimizer is a software tool that helps cryptocurrency investors automate the process of earning interest on their digital assets. By connecting to various exchanges and protocols, a yield optimizer can help users take advantage of the many different interest-bearing opportunities available in the crypto markets.
The goal of a yield optimizer is to maximize returns while minimizing risk, by automatically monitoring the market for the best interest rates and executing trades on behalf of the user. In addition to earning interest, a yield optimizer can also help users minimize fees by automatically reinvesting earnings into new opportunities with lower rates.
By automating the process of earning interest on digital assets, a yield optimizer can help users maximize their returns and take advantage of the many different opportunities available in the crypto markets.
What Are the Benefits and Risks?
There are several benefits to using a crypto yield optimizer. First, it can help investors diversify their portfolios and reduce their overall risk. Second, it can automate the investment process, making it easier and less time-consuming for investors. Finally, it can provide access to sophisticated investment strategies that would otherwise be unavailable to individual investors.
However, there are also some risks associated with using a crypto yield optimizer.
Using a yield optimizer is exposing your funds to additional smart contract risk. As an example, let’s say you have funds in an FTM-BOO pool on Spookyswap. It pays out 52% APR at the time of this writing.
You can withdraw your LP tokens, take them to a yield optimizer, and get a boosted APR. Your original investment is now spread out between two different protocols instead of just one. If something were to happen to either project, you could lose everything.
However, some of these yield optimizers are just as solid, if not more so, than the DEXs they optimize. It’s all about finding the right projects that work for you. Let’s dive into how they work a bit more.
Understanding Liquidity Provider Tokens
Before adding LP tokens to a yield optimizer, the first thing we need to do is truly understand what we’re getting into as an investor. It all starts with Project A, which, most of the time, is going to be a decentralized exchange (DEX).
Using our FTM-BOO example from above, how do we go from tokens in our wallet to entry into the liquidity pools?
The first step is to swap whatever tokens you have into an even 50-50 split. Most protocols require this kind of ratio, though it’s important to mention not all of them do. Don’t worry. There will be an article written soon about those kinds of exchanges. It should look like this:
To create $200 worth of LP tokens, you need to have $100 in FTM, the native token of the Fantom network, and $100 worth of BOO, the Spookyswap token. Step two, create the liquidity provider tokens from the two assets.
The third step is to add these LPs to the corresponding liquidity pool. In this case, the FTM-BOO pool. Because we’re going to be using a yield optimizer, we will skip this step and take our LP tokens elsewhere, which is Project B.
Pro-Tip: Some DEXs use a zap function for added convenience. If you want to use a yield optimizer, make sure this is turned off, or else it will automatically add your LPs to the corresponding pool on that particular DEX.
How Do Yield Optimizers Work?
There are a couple of different ways that yield optimizers help investors boost earnings. The most common is the Beefy Finance method.
Beefy is one of the best and probably the most well-known optimizers. It’s a multichain project with an anonymous team of incredibly gifted developers. You add your LP tokens to one of their pools, then they sell off the profits on your behalf, buy more of the LPs, and restake them into their pool.
In the case of Beefy, the same LPs that would get you 52% APR will bring in just over 60% on Beefy Finance, which is a pretty decent boost. If you go to another yield optimizer project, called Liquid Driver, you’ll receive 59% and instead of being rewarded in BOO or having the project reinvest for you, they pay you in their token LQDR.
To make all of this even easier, I’ve provided some charts. Here’s the traditional method of yield farming with a DEX:
Traditionally, investors have not had much faith in farm reward tokens. However, in the last year, many projects have gone to work creating sustainable ideas to make their tokens more attractive. Two of the most notable are governance tokens, which allow farm tokens to be turned into governance tokens that do a variety of things, and the Curve ve locking model.
Do plenty of research into your farming tokens to see if there is long-term value before you dump them for stables. However, if it’s a high conviction play, dumping the farm tokens for more LP of your favorite pools has the potential to increase your rewards without having to lock or worry about governance.
Now let’s take a looks at the Beefy model:
When you use Beefy, your LPs are not locked and there is no penalty for removing the tokens from their vault. But the longer you leave them in there, the more the LPs you’ll get.
This is an excellent strategy for people who don’t particularly care about farm rewards and have more interest in a safe place to stash tokens they like while gaining a great interest rate on them, all with a hands-off investing approach.
The Liquid Driver model is a bit different. It farms for you, as yield optimizers do. But instead of gaining more LPs, you receive the LQDR token at a higher interest rate than what you would receive from Spookyswap, and Liquid Driver keeps the BOO farming reward. This BOO goes into xLQDR, which is this protocol’s revenue-sharing vault.
xLQDR is an example of the ve staking model I mentioned earlier. You lock tokens up for a set period of time and receive a basket of all the rewards that investors can use to farm on their protocol. Here’s a quick look at what a two-year lock gives you at the time of this writing:
If you’re not interested in locking up your LQDR, there are several other ways to participate if you’re bullish on the project.
- FNFTs - I mentioned these in my NFT post a while back. Financial NFTs allow tokens to be locked in an NFT. In this case, it’s a way to take an illiquid asset and add liquidity to it. You get all of the benefits of xLQDR, but you can sell the FNFT on the secondary market.
- cLQDR - Wrappers for LQDR are becoming quite popular, and cLQDR is just one option. It auto compounds the rewards on your behalf in exchange for both the auto compounding and adding liquidity to the asset; you’re charged a 12.5% fee. On top of the other features, cLQDR can be used as collateral and you can borrow against it.
- Farming - If you love the project and farm with it, you can always drop your LQDR of at a dex and use it as liquidity to farm other tokens. You can also just hold it. You can dump it. There are plenty of options that don’t involve locking, which is part of the reason this protocol is so powerful.
Let’s take a look at a flowchart to see how it works with a visual aid:
How to Choose the Best Option for You
Beefy and Liquid Driver are just two examples. There are tons of other yield optimizers with different models to help their users maximize returns.
So how do you go about finding these projects?
First, not every yield optimizer is on every chain. This is where good ole Defi Llama can come in handy. Go to your chain of choice and start reading up on the top protocols. Or you can search by category and click on Yield. I’ve taken the liberty of doing this for you. Click here.
Secondly, you can follow the steps I laid out in a recent post about researching crypto projects, which will likely yield (See what I did there?) some good results as well.
In my opinion, it really boils down to just a few things:
- How bullish you are on the underlying assets or the yield optimizer token
- Smart contract risk
- The community
Using Liquid Driver as an example, if you love the community, think the LQDR token has a lot of upsides, appreciate what the developers are doing, and feel the smart contract risk is worth it – It’s going to be a good project for you.
On the other hand, if you see a bunch of red flags, then stay away. Don’t chase APR. It rarely ends the way you want.
The Takeaway
Just like in real life, if you want to farm, you will get your hands dirty. Jump into some projects, feel out the community, and figure out what you do and don’t like. Most importantly, figure out why you like or don’t like them.
This will help you to realize a process that will eventually become profitable. You’ll be able to sniff out innovative protocols from a mile away and learn how to take yield and turn it into more yield.
Thanks for stopping by and reading today’s post. If you have any questions, feel free to leave them below.