Do you remember how I goosed returns in the first play in my playbook? In a nutshell we redeposited borrowed funds on the Aave dapp to increase interest earned and rewards. (Here is the article if you want to review the details.)
This works fine but why stop there? Couldn't we borrow even more and then redeposit more and then borrow again and redeposit even more? You sure can as long as you carefully monitor the health of the loans and, when it comes time to unwind the positions, take care not to trigger liquidation.
And while we are at it, we could revisit the Aave dapp every few hours and claim the rewards and swap them for even more assets to further the whole process of depositing and borrowing. Compound interest would be maximized as long as we update our account a few times a day. Or we could let a smart contract do it all for us.
Here is the Beef
Enter Beefy Finance. The process outlined above describes what the Beefy Finance Dapp can do for you. An optimized smart contract maximizes the effect of the Aave rewards by turning them from simple interest to compound interest on top of handling all of the borrowing and redeposits and so forth that I described above. All you have to do is make a deposit and later you can withdraw some or all of your assets after they have enjoyed a healthy bit of growth via compound interest.
Beefy Finance calls this smart contract a 'Simply Vault' and it is just one of several offerings on the site. When you deposit into the vault your assets are changed into tokens that represent a share of the vault in much the same way as we saw with the mStable 'Save' dapp. If you wish you can make these tokens visible in your metamask wallet as I described in this article, but there is generally no point to doing so. When you withdraw from the vault the dapp will find those tokens and redeem them whether or not they are visible in your wallet.
So given that you own the tokens representing your share of the vault, your funds are not really locked as you might suspect with a name like "Vault". Still the name makes sense as there is a small fee associated with depositing and withdrawing funds and so, like the mStable 'Save' dapp, you don't really want to use these vaults as a general account for parking your trading funds. Instead you should treat it more like a bank savings account.
Rock's DeFi Play #5 - Save Assets in a Beefy Finance Simple Vault
The Beefy Finance dapp is a little busy at first glance. Once you connect to you wallet and select the Polygon Network it gets a bit easier to deal with but there are still a large number of vaults to wade through. To fix this, specify "Single Assets" under "Retired Vaults" in the filters section near the top. I don't know what 'Retired Vaults' means here, but the option restricts the view to 7 vaults with 6 of them marked as "Uses: Aave". It is these 6 vaults that we care about for this article.
Select anywhere inside the box for the asset type that you want to deposit. Some new fields appear. Set the amount to deposit using the slider or by typing in a number. Since this is the first time using this token type with this smart contract, you will be asked to "APPROVE" first. Select that and confirm and it will approve your deposit up to the amount that you entered. (If after approving and before depositing you increase the number of tokens to deposit, it will ask you to APPROVE again. Try to avoid that waste of transaction fees.)
Now use the "DEPOSIT" button and then confirm the transaction in the wallet popup as per normal. The app does not give good feedback about transactions that are in the "pending" state so use the "Activity" view in your wallet if you want to watch while the transaction is still pending. Once completed the displayed balance in your wallet will be reduced and the amount deposited shown on the right side will be increased.
Don't panic if the number deposited is slightly smaller than what you put in. Some vaults have a small deposit fee up to 0.05% to discourage people who are tempted to do rapid switching between Vaults. Also don't panic if you notice the deposited amount go down by a tiny amount at some point. This is also normal as the smart contract periodically pays for swaps and performs deposits and borrows and the fees for all of these transactions are spread out to everyone in the pool of assets within the vault. Come back in a few hours and you will see that the deposited amount has increased.
Use the WITHDRAW or WITHDRAW ALL button to reclaim your assets. Again there is a small fee up to 0.1% to discourage frequent asset flipping. Speaking of fees, Beefy also retains 4.5% of the rewards generated by the pooled assets in the Vault and these are divided up between various stakeholders in the project. The bottom line is that the displayed APY is the actual projected APY after all fees are deducted and that is as truthful as you can get notwithstanding the variable nature of the interest rates and rewards that are generated by the underlying Aave dapp.
What's the Matter with Matic?
The only annoyance I have had so far with Beefy Finance happened the first time that I deposited MATIC into the Simple Vault. I was depositing 50 MATIC to test the system and bizarrely the confirmation window from Metamask showed a transaction error had occurred and that the gas fee was 50 MATIC! I hit 'reject' but the deposit proceeding anyway and worked fine. I reported the problem to Beefy and they apparently knew that strange things like this could happen occasionally when you deposit tokens that are native to the platform such as Ethereum on the Ethereum network, BNB on Binance Smart Chain or MATIC on Polygon Network. They told me not to worry and I calmed down about it when I was able to confirm that the mooAaveMATIC tokens created by the transaction were indeed in my wallet. A subsequent deposit of additional MATIC in the same vault worked without a snag.
Risks and Rewards
The small glitch I encountered highlights the fact that DeFi is young and the rewards, which can be impressive, are not without risk. You may have heard of the recent hack that drained money from PancakeBunny on the Binance Smart Chain. Could something like that happen on Polygon? Sure. However it is unlikely to happen on single asset Vaults like the ones we highlighted in this article although smart contract bugs can occur anywhere. Soon will see explore dual asset pools and then we shall see that they ramp up the risks and the rewards to another level. We will need to handle them with particular care.
That is it for this article. By audience request I have started exploring Bridges to and from Polygon and so look for that post soon. We will also look at Curve and a few more projects before doing an extended dive into liquidity providing and then head out to do some harvest farming.
Image Credit: Photo by DreamLens Production from Pexels
As always, nothing in this or any other article in this blog should be treated as financial advice. DeFi is risky and so only treat it as entertainment and use assets that you don't mind losing entirely.