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Farmee: Turbocharging points farming and boosting Pendle LPs

June 10, 2024

In conclusion

Let’s face it. How many times have you been farmed in a bid to make some returns off the protocol you so diligently use?  

Oh, maybe not diligently. Maybe you’re just another degenerate protocol Dothraki, spreading your Arakh (a crescent moon-shaped blade resembling a farmer’s sickle) to grab those precious protocol governance tokens without knowing how on-chain governance works.

But here’s the thing, mate! We don’t blame you. The tune has no option than to sound if the piper plays the flute — the protocols know what they want — and you? At best, you’re the domino effect of their marketing ploys!

Points after points… season after season… the status quo of the farming era is such that users are richer in points than in actual magic internet money.

For the farmers who restaked their liquid staking receipts (LSTs) across various restaking protocols, they received points and liquid restaking tokens (LRTs) in return.

The later you restaked your LSTs, the fewer points you’re likely to accrue, leaving the only way to get more points is to restake a lot more in terms of size.

More so, as the points market for these restaking protocols attained full maturity, shortening the horizon towards an impending airdrop and token generation event (TGE), a frenzy set in. And one can envisage that farmers would want to explore other methods of accruing more points, such as shorter-term and more leveraged points farming.

This is where Pendle Finance comes in: offering the ability to leverage points farming, as we can see with this user leverage farming Ethena using Pendle Finance:

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However, as hype slowly trickles down to find a balance, so does the yield associated with providing liquidity for point trading on Pendle.

For example, at the top of the point market, point traders made an average of 60% in returns while LPs earned up to 40% in yield. At the moment, these numbers have more than halved, with point traders earning an average of 20% on their leveraged points and LPs earning an average of 10%.

As the yields start to correct and market participants start heading for the exits, the few savvy individuals will have their eyes on Smilee.

Doing as they always do, supercharging your yield through elegant and simple DeFi primitives, Smilee is entering the arena to turn things up a notch.

In the next few paragraphs, we will discuss Smilee’s new primitive, how it works, and its benefits.

Smilee’s remedy: Farmee

When we introduced Smilee in our previous article as a protocol pioneering decentralized volatility products (DVPs), we did so by showcasing how the team innovates new trading primitives around existing ideas and practices. At the jump, Smilee introduced  impermanent loss volatility trading through its patented liquidity-to-volatility engine (LTVE) — a conceptual component of the Smilee protocol implemented at the smart contract level.

Smilee’s DVPs function due to the LVTE and its bonding curve, which allows users to measure and price the risk of any token, single or pair.

For the impermanent gain DVP, the Earn vault uses a pair of assets and recreates a synthetic DEX position. It focuses on the risk of impermanent loss, captured by the volatility of the prices between the pair.

This time, Smilee is once again creating a DVP: Farmee, which focuses on isolating the risks of leveraged farming points and the price of their underlying assets. Thanks to Smilee’s extreme composability, this can be done by building on top of Pendle’s LPs, thereby creating another layer of yield and bringing more capital efficiency to the space.  

How it works

Smilee will create or deploy a single asset, the “Earn” vault, using Pendle’s LPs as underlying assets. The vault will be created using eETH and will later include other LRTs as well as USDe.

The asset will then be decomposed of its risk, which, in this case, is the point value of the asset as well as the price, using Smilee’s bonding curve.

The vault will then be opened to deposits in ETH, eETH, or directly in Pendle LP eETH. Deposits and withdrawals will be enabled at two roll epochs, occurring weekly at exactly 8 p.m. UTC on Mondays and 8 a.m. UTC on Fridays.

The protocol will assign the points based on vault utilization such that traders will earn points for utilized parts, and unutilized parts will remain for LPs if the utilization falls below 100%.

In terms of distribution, it’ll be similar to that of Pendle (X points times multiplier), where half of the points will remain in the Earn vault for the LPs as mentioned above, and another half of the points will be distributed to point leverage buyers with an expiry period fixed at the end of an epoch.

To be a lot more specific as to how this will function on Pendle, LRT liquidity providers can queue deposits in ETH, eETH, or directly in Pendle LP eETH. They (LPs) will also queue withdrawals during the epoch, which will be executed at the roll epoch and earn premiums paid by traders, bid-ask spread from the bonding curve, and points.

The benefits to this abound: LPs will be able to retain Pendle's yield and earn additional yield from selling points at high leverage, as well as Smilee's additional rewards.

On the other hand, Point traders can enter and exit the eETH leverage point product at any time, with up to 2,000x extreme leverage. They can also make extra profits by exiting early if the risk (the price of points) has increased during the epoch. Farmee will allow traders to swiftly adjust their farming strategies based on incoming news and the expected value of points.

The Ecosystem Effects/Use cases for Farmee

The effects of Smilee’s utilization of its LVTE to create a risk-free market for point farmers and increased yield for Pendle LRT liquidity providers are quite significant.

For example, this will create a price reference for points, allowing Smilee to be a source for the price of points sold in ETH and USDC.

Smilee’s structure will enhance Pendle's efficiency, laying the groundwork for an integrated derivative market for liquidity restaked tokens (LRTs). This market will allow for trading and insuring against LRTs' interest rate movements through Pendle and against LRTs' price movements through Smilee.

These markets will be crucial in the mid-to-long term due to:

1. The broader adoption of LRTs as assets for collateral, decentralized exchange (DEX) pools, derivative pools, perpetual contracts, and more.

2. The ecosystem is maturing, and AVS strategies and slashing mechanisms are fully operational, leading to noticeable differences between various LRTs.

LRTs face unique risks and dynamics compared to liquid staking, with various AVS leading to unpredictable performances and introducing new risks. In this context, the Smilee solution provides several benefits:

First, it allows the onboarding of more users and liquidity by offering insurance options against excessive risk or market stress. For example, holders of Pendle PT-eETH can hedge their positions in certain scenarios to reduce overall risk.

Second, it attracts traders who want to leverage bets on the price dynamics of LRTs. For instance, a trader might bet that the Ether.fi AVS strategy will outperform Renzo's, or Renzo's TGE (Token Generation Event) allocation will fall short of expectations.

Third, Smilee facilitates arbitrage to keep LRT market prices aligned with their "fair" prices during liquidity imbalances. An arbitrageur, for example, can hedge risk by unstaking a large amount of ETH from one LRT, restaking it in another, and then swapping or depositing on DEXs (Decentralized Exchanges) to align prices.

Lastly, it increases DEX liquidity. Smilee's delta hedging process drives volume to DEXs, subsequently boosting DEX pool fees. This process benefits the overall ecosystem by enhancing liquidity and stability in the market.

Concluding Thoughts

With two exciting DVPs, “Impermanent Gain and Farmee,” Smilee’s team is fast becoming notorious for shipping some of the best extreme leverage degenerate products in DeFi.

Farmee is even more exciting as it creates a balance or an equilibrium between farmer agitation and the protocols’ timing: the time frame between the conversion of points to tokens.

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