What is a DeFi Yield Aggregator and How Do They Work?
Compound interest is the most powerful force in the universe.
But in DeFi, that means a lot of transactions to harness the compounding.
Learn how DeFi yield aggregators solve this problem.
Key Takeaways
- As the number of different DeFi solutions grows, it becomes difficult to navigate their landscape and find the most profitable option for staking funds at every given moment.
- In order to withdraw the yield generated across different pools and protocols, users have to perform a lot of manual work. Also, they have to pay high transaction fees that reduce their APYs.
- Yield aggregators enable automated yield farming by forwarding liquidity from a single vault toward many different protocols. In addition, they help to find the best route in order to reduce transaction fees.
- Crypto aggregators are risky because they may fall victim to a bug exploit within any of the protocols they cover.
- Other downsides of DeFi aggregators include liquidation and impermanent loss risks due to the high volatility of the crypto market in general.
What is a Yield Aggregator?
In DeFi, yield aggregators, also known as auto-compounders, act as optimization platforms for maximizing profit via automated yield farming.
With the ever-growing popularity of decentralized means of making passive income, they represent a new stage in the development of this market.
With the introduction of liquidity pools, yield farming has made it possible to gain stable returns on crypto investments in a fully automated and transparent way.
In addition, the APYs that such solutions offer are much higher than those offered by banks and other centralized financial institutions.
At this, it comes as no surprise that the popularity of yield farming spiked in a blink of an eye. Yet, as the landscape of such solutions matures, investors come across another set of problems.
First, with the ever-growing number of DeFi protocols and liquidity pools, it’s become a challenging task to navigate them efficiently.
Next, different protocols come with different liquidity, fees, and other conditions. The larger their number, the more difficult it becomes to monitor them all.
What’s worse, the yields they offer usually are not set in stone as they change together with the market. At this, finding the most profitable pool for placing funds in every given moment becomes practically unrealistic.
Finally, to withdraw their rewards, investors have to manually perform the claims and pay gas fees on every step. Oftentimes these fees are so high that they depreciate a significant part of these earnings.
This is where yield aggregators step into the light.
They solve these problems by combining liquidity from a large number of different sources into a single interface. Similar to fund managers in TradFi that help investors manage their portfolios, yield aggregators make it possible to gain higher returns in a more efficient manner.
Continue reading the source article.
Originally published at https://www.liquidloans.io.
