If you are new to cryptocurrency and decentralized finance (DeFi), you may have heard of 'yield farming' or 'staking' as ways to generate passive income. But with so many platforms and complex strategies, it can seem overwhelming. This is where ATV vaults from Aarna (app.aarna.ai) come in. These vaults are designed to automatically optimize your income by placing your assets in the best available options across various DeFi platforms. Let’s break down how they work in simple terms.
What are ATV vaults?
Imagine you have a smart piggy bank that not only holds your money but also lends it out for interest, reinvests profits, and adjusts its strategy to maximize your returns — all without your involvement. This is essentially what the vault does on quad bikes.
These vaults are specialized smart contracts (self-executing computer programs on the blockchain) that take your deposited assets (such as stablecoins or other cryptocurrencies) and utilize them on various DeFi lending platforms. The goal? To maximize your income with minimal effort on your part.
How staking works in ATV vaults
When you deposit assets into the ATV vault, the system automatically stakes (or lends) a portion of these assets to external DeFi protocols. This process is called yield aggregation, where the vault automatically finds and allocates your funds to the most profitable yield-generating options across multiple platforms. Here’s how vaults work and how they do it:
Ethereum (mainnet)
Ethereum is the most well-known blockchain for DeFi, hosting some of the most authoritative lending platforms. On Ethereum, ATV vaults aggregate liquidity across three main protocols:
Aave: Aave is a popular decentralized lending and borrowing platform where users can earn interest on their deposited assets.
Compound V2: an earlier version of the Compound protocol known for its simple lending and borrowing mechanics.
Compound V3: the latest version of Compound offering increased efficiency and flexibility.
By distributing your assets across these platforms, the vault can provide more favorable interest rates and diversify risks, ensuring optimal returns for users.
Arbitrum
Arbitrum is a Layer 2 network built on top of Ethereum, offering faster and cheaper transactions. In Arbitrum, vaults deploy assets using various protocols:
Aave: Similar to Ethereum, Aave on Arbitrum offers competitive lending rates.
Compound V3: the latest version of Compound optimized for operation on Arbitrum.
DForce: a comprehensive DeFi platform offering lending, borrowing, and yield farming opportunities.
Morpho: a protocol that enhances lending efficiency by directly matching lenders and borrowers.
Dolomite: a lending and borrowing platform focused on providing liquidity to the Arbitrum ecosystem.
This multi-protocol approach ensures that your assets are deployed in the most profitable places available on Arbitrum, allowing users to achieve maximum returns.
Sonic
Sonic is another blockchain ecosystem where vaults operate. Here, the strategy is somewhat more advanced. First, assets are placed in Aave, and then these assets (specifically aUSDC) are supplied to Pendle LP pools. Pendle is a platform that allows users to trade yield-bearing tokens, adding an extra layer of income to the base yield from lending on Aave. This unique approach from Sonic allows for not only the base yield from lending on Aave but also additional yield potential through trading fees and providing liquidity in the Pendle ecosystem, offering a more sophisticated and potentially more lucrative strategy.
Mechanics of bidding and canceling bids
Understanding how assets enter and exit these positions is key to understanding the efficiency of the system.
Staking: how your assets are distributed
When you deposit assets into the ATV vault, the system does not immediately stake everything. Instead, it follows a predetermined strategy based on the interest rate (let's call it x%). Here’s how it works:
During cumulative swaps:
A 'cumulative swap' is a periodic event during which the vault rebalances its assets to optimize yield. During this event, the vault places x% of its assets in lending protocols (e.g., Aave or Compound).
The remaining (100 - x)% stays in the base ATV contract, which serves as the vault's main treasury. This ensures that some assets are always available for withdrawal or other needs.
Why this matters:
By staking only part of the assets, the vault allows you to avoid locking up all your funds in lending protocols. This flexibility ensures faster withdrawals and more effective liquidity management.
Canceling bids: returning assets
When you decide to withdraw your funds (this is also called redemption), the vault must remove from sale (or return) the portion of your assets that was lent out. Here’s how it works:
During redemption or the next withdrawal of funds:
If you request a withdrawal, the vault first calculates what portion of your assets is staked (x%) and what portion is available from the base contract ((100 - x)%).
The system then withdraws x% of the necessary amount from external lending protocols and obtains the remaining (100 - x)% directly from the vault's treasury.
Why this design?:
This approach ensures that the vault does not have to withdraw large amounts from lending protocols every time someone withdraws funds. This reduces transaction costs and speeds up the withdrawal process.
It also means that the vault can continue to earn income from the remaining staked assets, keeping your overall yield high.
Rewards and NAV: tracking your earnings
As your assets are staked in lending protocols, they generate rewards such as interest or additional tokens. These rewards accumulate within the vault and affect its overall value. The total value of the vault minus any liabilities is divided by the number of shares to arrive at the net asset value (NAV). NAV is a key metric that shows the value of your share in the vault at any given time.
Emergency withdrawal: a safety mechanism
Even the most reliable systems can face issues. To manage risks such as smart contract vulnerabilities or sudden market downturns, ATV vaults include emergency withdrawal features. These features allow the vault to quickly withdraw assets from lending protocols when necessary, ensuring the safety and liquidity of your funds.
Why this matters for you
For a newcomer to cryptocurrency, the idea of manually managing multiple lending platforms, tracking yields, and adjusting strategies can be daunting. Aarna vaults (app.aarna.ai) simplify this process by automating the entire yield generation process.
