#6: Yield Farming in the Defi world with Julien Bouteloup & Graham Nelson Artwork

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The Crypto Explorer - by Sygnum Bank AG

#6: Yield Farming in the Defi world with Julien Bouteloup & Graham Nelson

January 14, 2022 • Aliya Das Gupta • Season 1 • Episode 6

What is yield farming? Why might this be a game changer in managing your money? In conversation with Julien Bouteloup (Founder of StakeDao) and Graham Nelson (Defi at Sygnum) we look at yield farming in the world of Defi, diving into questions like:

1. How is the yield actually generated? what opportunities exist beyond simple lending pools?

2. People are able to make higher yields using inefficiencies in the market - am i already too late to the game?

3. Does this have the potential to harm to average retail clients? How do retail users coexist with Powerusers & degens?

5. With the recently sky-high transaction fees, how can defi go to the masses? Whats the easiest way to get started?

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Aliya Das Gupta 00:06

Hello and welcome to the Crypto Explorer, a podcast by Sygnum Bank, designed to bring you closer to the world of crypto and to the future of finance. I'm your host Aliya Das Gupta. And today I'm going to be speaking with Julien Bouteloup, who is dialing in from France I believe. And Graham Nelson who is Sygnum's resident Degen. Pleasure to be speaking to both of you today, and very excited for the conversation we're going to have about yield farming and why it might be an interesting thing for everyone to explore. But before we dive into it, maybe let's just have a quick round of introductions. Julien, would you like to go first?

Julien Bouteloup 00:43

Hi. So thanks for having me. And I watched the previous episodes, and they're really great, very good initiative, and really good content. So yeah, my name is Julien Bouteloup and I've been in a space for quite some time, early in the Bitcoin, Bitcoin space and then ether ecosystem and now more into defi and everything it is touching - crypto in general.

Aliya Das Gupta 01:13

Perfect. And Graham?

Graham Nelson 01:15

yeah, I'm Graham. I also got maybe not too as early as Julien to crypto but I started around 2016. When my background is mainly traditional finance, worked a few years there, but it was mainly doing blockchain stuff with the traditional finance building custody solutions, and then moved to Switzerland, continued doing custody for institutions for crypto, and then moved over to Sygnum to be the I guess, the resident degen. Now that I'm being referred to the new name.

Aliya Das Gupta 01:42

Yeah, exactly. Cool. Um, I mean, I only want to ask both of you when you got started in crypto, or how you got started, because the story is very, very long ago. And but maybe still, it's

Julien Bouteloup 01:55

still really still really early days, for the disruption.

Aliya Das Gupta 02:01

Yeah, no, of course, that's true. But maybe we start dive already into the main topic for today. So maybe Julien, could you give me a really simple explanation of what is yield farming, and let's go from there.

Julien Bouteloup 02:16

Yeah, so um, yield farming in decentralized finance. So defi is where you are incentivized to put liquidity in, in different different defi products. For example, if you provide liquidity in the lending market, such as Aave, or an auto market maker, like Curve, what the protocol will do, they will incentivize you to not leave the protocol. And depending on how much liquidity you provide into that protocol, you get rewards and those rewards, usually in in the inflation, usually quantified in the inflation of the protocol. And what yield farming across this industry, what yield farming will do, they will tend to jump between different protocols that are providing them the best APY. And that's why you see a rush on the protocols level and also different projects that are trying to provide the best APY and trying to produce APY's that are 50% or 200%. And what we recently seen across different bounds, are projects where those APY are really, really, really high. And how they pay those APY, it's, as I mentioned, 99% comes from the inflation of the protocol. So the protocol is is minting tokens, native tokens, and then they send those native tokens to the people that are providing the most value for them.

Aliya Das Gupta 03:47

But these native tokens then are also very much prone to the volatility of the market, right? Like you don't really have an idea of what you're earning only in percentages of your initial liquidity that you've provided.

Julien Bouteloup 04:03

Yeah. So you have like, protocols such as Curve or like, StakeDao like protocol where they do both, they provide the APY in native tokens plus on top of it, like native utility, for example, if it's a lending market, the fees will go to the lenders and those actually are in trusted value because they quantify as USD in US dollars. And for example, on Curve depending on how much volume you get into those different pools of liquidity as a trader, you will get 50% of the fees that are being charged on top of those automatic making, trading for example, you get 50% of four groups and then this is how we call it as, for example if the project is making, lets say Curve, which is like a stable coin of the market maker, if it's making between 500 million USD and a billion US dollars a day, if it's charging five or four bps on top of it, that you can actually make sometime between 250k- 500k USD at the most. And those actually amount of cash will go into people providing liquidity. And on top of it, the protocol will also issue a native token to make sure that those people don't leave the protocol. And don't go into all the yield farming products that are offering better yield with the APY. Yeah, it's true, APY is usually quantified in native token. And depending on the volatility of the market, you might actually sometime not get those huge APY, but they are still really high. So like, 100%, 50%. So even if the protocol collapses by 2x, as well as the token, in order for you to lose money over one year, but then that's true. It's quantified in native assets.

Graham Nelson 06:08

No, I think Julien did a really good job at explaining yield farming, I think you'll find it's not too far away from what we do in traditional finance space today. And you know, if a bank offers a better interest rate you're moving your capital across to where the best interest rate is, or the lower custody fees, and or where you hold your shares or securities. But obviously, it's given more power to the user, right, and the yield farming and the decentralized finance space, you're in full control of where you want to move the funds to how you want to move them across. And what you'll farm based on the APY, and you can move it if there is a better APY somewhere else. And it really is in the context of farming, right? You're just trying to find the most yield you can out of your assets.

Aliya Das Gupta 06:46

Sure. I mean, I mean, so most people kind of approaching the space might have an idea that ah okay, there is like a lending pool, I put some of my USD into this. And maybe I earn a better percentage than I would earn in my bank account, right. But as I understand yield farming can actually get way more complex than this. And there are many protocols such as, you know, convex and StakeDao that are out there doing much more complicated things, and therefore also with much higher APY's, and maybe a simple example. Yes. Okay. I kind of understand that. But the next step further what's step two, in the journey?

Julien Bouteloup 07:24

Yeah, as we mentioned before. Defi is just basically duplicating what traditional finance used to do - all the different products that we building, I am almost all the same. The difference right now is the technology is the stack, the protocol stack, how those things can actually be accessible by anyone, and built by anyone. Also, the profits that the protocols are making, are actually 100% distributed back to the LPS. So the people that providing liquidity, I mean, in traditional finance, people are providing liquidity to the bank, they usually like don't get... they get less than 1%, from what the money is making for the bank. But then on top of it, we have very complex products that are being built. We mentioned auto market maker, we mentioned lending market. But now we have options, we have futures. As said, all those different products are from traditional finance, we've been simply copying them and then deploying them in the decentralized finance. But then the difficulties for users to ... retail don't actually, they don't necessarily understand those different concepts, and they don't really understand how to use the different protocols. So projects such as convex, Stake DAO, Yearn, whatever, what are you doing, they actually building strategies that will try to balance across different yield farming strategies across different protocols that are providing those different APY , for example, a project that recently came on the market that is building a stable economy, Angel, those guys are now providing incentives for pushing people into the pool of Euro, so then they can mint Euro, and with collateralization in US dollars and other assets. But joining those different products is quite difficult. And then at the same time, what you want for the users is you want to build strategies where the long term or medium term, they don't lose the capital. So what you can do, you can build like systems such as options or futures, where they can either hedge themselves, and at the same time leverage the positions. So what we building is like building a strategy that will try to automate the entire pipeline from depositing those assets into different different protocols, and then compounding over time. Then those users don't actually need to understand what's going on as a technological stack. And they also don't need to understand what are the different manipulation that they need to do on a on a daily basis on a weekly basis, for example, like harvesting, earnings. Also, because we pull all the capital into one pool, it's usually cheaper for the user to use the strategies, because what we do is like, we only send the funds when we have enough capital, and the transaction where we pay, for example, 1000 USD or 500 US dollars per transaction, the transaction cost, well, this 500 US dollars is divided by the amount of capital that we pool in the same place. So for the user its completely transparent. It's cheap. I mean, cheap, depending on which network you're talking right now, mainly, Ethereum is very big for whales, and people that have a lot of capital, because transactions cost between 50 and 100 USD ago. So it's not like for small depositors. But now we moving into layer two, into different blockchains where it's easier.

Graham Nelson 10:49

Yeah I think I think the biggest you know, it goes to what I think we were going to talk about what we want to talk about it just what Julien's talking about is, you know, we have the power users, these guys who invest in StakeDao strategies, or Convex strategies or Yearn strategies, you have the degens who maybe do it themselves, because they believe that they want to be more control and want to pay the fees away. But then you still have the retail users. And I think that's the biggest challenge we have today is how are these retail users entering into the market even even Convex or StakeDao to retail users are still difficult to use, because they need to download Metamask or use a Ledger, you know, stores seed phrase somewhere. And this whole setup is quite high cost, it's quite complicated for somebody who doesn't understand it. And getting access to these yields is quite difficult for that kind of user. And I think there's still a huge gap in the market there in terms of how to bridge that world to, like, let's say bring the power users and Degens also the retail users into that into that world to get access to these yields, because the strategies are there, and they're doing it in traditional finance. But they'll obviously want more yield on the assets. And they can't do it. Because for them downloading Metamask and a seed phrase and moving funds across, it's just too complicated. It's just not there for them yet.

Julien Bouteloup 12:03

It's that's exactly what I think we're the only one I mean, StakeDao on the market that are trying to make it super easy for retail. So we don't ask, they can login using email. And then the entire thing is processed using like a Cloud HSM or like using an other way of storing the keys in a decentralized way. But we do an academy we build a platform for people learning about all the different ways of accessing, defi. And if you look at StakeDao where you can connect to email, you can buy and you can sell assets. And you can also invest in different strategies but we don't use like those very complicated terms; Like CRV or like like, like those long words that mean that you deposit it in such an LP and and you get this token and we're trying to very abstract away the complexity of of defi for normal users. And that's what twhat StakeDao was built for, as a retail, it was Stake Capital, and State Capitol was providing services to institutions and businesses. And then retail was asking how can we join defi? Could we join those different projects? And I agree that retail, what we're talking about is retail using defi, at the moment its not really retail, it's more actually developers, more people that are... the learning curve is pretty high. And as soon as they get into it the they represent the portion of population that I wouldn't call retail... the retail are people that will use the banking system will use an application or mobile. And they will not actually need to understand what is blockchain, What is crypto, and then we'll just apply it to different products that give them return of investment or specific features and returns,

Graham Nelson 13:50

I would be really interested to get your point. The markets crazy at the moment there are hundreds or 1000s of defi apps popping up right across multiple chains, layer twos. How does the user now navigating this world know who to trust? Where do they go? Like what is your opinion and how you navigate crazy APY's versus actual security and safety? And let's say like StakeDao is known in the market, but you know, there might be one tomorrow that's offering 10,000 APY on your ETH so that's obviously attractive. How do you navigate it?

Julien Bouteloup 14:23

I mean that's that's what we created Rekt news. it's it's underground, the dark side of defi where we investigate all the different exploits and things that are happening in a defi space and we try to provide the users news and also like for them to understand that defi might be attractive and but a huge proportion of defi is risk, because it's awild, wild west and all those products that are popping up with huge APY, 90%, or maybe 99% of those, because there's so many products that I would say they're fraud, a scam, and they will harm users. So I think it's very important for you that the... try to look at who's behind the project, but not like some fake profile pictures on the on the landing page, really like, investigate, go to the Twitter account and see who's backing up the project, who's involved with the project. And then also the product, if you're given like huge APY for no reason, that's probably because someone is trying to play you. So it's a it's a world that is not regulated, there is not regulated, it's like, back then in the 80s, when the beginning of traditional finance, and then this is exactly what we currently experiencing, and regulation will, will catch up at some point, right now. Yeah, as people look at Rekt.news, look at all the platform that are trying to teach how to basically get involved in defi, and also use products that have been here for quite some time. It's, it's not necessarily like 100%, a way of saying that the project is secure. But if your project is holding 500 million or a billion US dollars in assets, and has been moving into the space with maximum security, and not necessarily just trying to be the first one and trying to be the most genuine, then you should stick to it, because it's better to getting like, for example, getting to the strategy that is doing the job is making those rewards is making those APY and then for the long term, you will win rather than trying to chase short term cash grab or greediness, because at some point, you will get wrecked. And then it will be really painful.

Aliya Das Gupta 16:56

Yeah, I mean, that's a really interesting point, right? Like, both those topics that you kind of covered, because on one side, a lot of the user journey is still quite technical. And like you're saying, there are some tools out there that are making it easier. But I would argue it's being made easier by from the lens of someone who is a pure Degen, and which means it might not be as easy as you think it is. And then and carrying forward from that. Also, in terms of having the sorts of more trustworthy news news sites, like of course, like you mentioned, Rekt, I think there's Cryptopanic that a lot of the people in the space are using, these are still not really a sources that are well known outside of the Degen community. And I think finding this bridge is kind of the the key to bringing this mass retail inflow. How do you see this potentially happening?

Graham Nelson 17:50

Well, I think, you know, we've discussed it at Sygnum quite a bit. And you know, Sygnum is the first digital asset bank, right, we did the custody for, let's say, one of the first banks to do crypto custody. And so obviously, we have all the assets under management, and really to give our clients now access to these yield markets, and, you know, clients, maybe are degen, some of them, but some of them also just bought into the crypto market because they want to potentially do some investments. And so I think we really have the opportunity to make something really easy and simple to use for our clients. Yeah. That's the plan is to see how we can remove the entire complexity from the client to sort of bring it in something that they're familiar with, when they're looking for yield on the assets. And maybe that expands to more advanced use cases, but I think we grow with our clients as they start to learn more about the space and have a demand for different products in that space.

Julien Bouteloup 18:40

So right now, we're talking to I mean, the people that are involved in defi are 1% of people that maybe have knowledge of how to use them very well, and try to understand like meta mask and all these things. But I truly believe that a company like like you guys are doing Sygnum, will basically be the one that can reach billions of users in the coming years because the banking industry, it's where retail, on daily - on a daily day, they can they can spend their capital, buy stuff and live a life on a daily basis. So it will be the only way for for this society to actually jump into into blockchain industry. And then having said that what we tried to do, we were the first one to mention this a couple months ago last year, but what's happening now on defi is what I call layer three. And layer three is the concept of because now we are like layer one main main application, main blockchains, and then layer two where you would add like all those layers to like a blockchain being built on top of Ethereum, but the complexity right now is like, how do you jump between different blockchains in different application, for example for for speed, for privacy, for interoperability, and those different things is very complex. And you have to spend a lot of money in bridges, you have to spend, like, you have to monitor all the different assets across all the different blocks. And so what we're doing is like, we actually are getting into this metaverse of all many different blockchains. And each of those different blockchain, you have different application in the market like automarket makers, options, futures, and those different things are still be able to talk to each other. So what's happening is now we have projects that are building on top of it where you will, as a, as a, as a client, or as an institution, or as someone that is building a defi project, they will just need to communicate to an API. And then the API will just talk to all those different blockchain and different applications. But as a user, you will never actually know if you found on that specific blockchain such as Solana Ether, and Polkadot avalanche, and then you will just be okay, I want to access a lending market with that specific percentage, I want to do a swap of different assets. And this will just be like a default, and it will do it will do the job. But then behind the scene, you will have many different ... like a DEX aggregator, such as paraswap, but it will be built for the entire application side.

Graham Nelson 21:30

Yeah, I fully agree with that. I think if you look at it today, if you use your online banking, you don't know if it's React or Angular or Java back end or, you know, GO back end, you just use the application and, and at the end of the day, that experience should just be seamless to you, you just care that you put an input in and you get the output as expected back out. And I agree with the same with Julien, that's view is that I think in a year, two years, maybe sooner, we'll see this cross chain world where as a user, you just interacting like an API or a straight application, and the liquidity is managed for you across multi chain where the best yield is... I think I'm pretty excited for that world. And I think we've seen guys like Aave who are focusing on cross chain Liquidity Markets, and I think that will just grow. And I think Aave you know, I think once they've done it, many will follow, right, as we've seen, as many have tried to copy across multiple chains. And I think, yeah, I think there's it's a start, and I think it's going to grow rapidly now over the next 6 -12 18 months, as more of these layer twos come into the market. And the cheaper fees, right. That's, I think, the real hunt at the moment.

Julien Bouteloup 22:36

And also what, for me, what's more exciting is the quantitative aspect, algorithmic trading on all those different things, because then it means it means more arbitrage, more liquidations, and also for some people, more exploits and then finding all the different things. So we this is the only way that will .... like arbitrage liquidation market makers are explored. This is the only way if we have a lot of different activity in those different verticals. This is the only way to bring safety to defi and this will happen. Even if we like it or not this will happen. But yeah, it's exciting.

Aliya Das Gupta 23:15

And I mean, Aave as you said it's going a little bit into separate... working on different chains. But is this also like a larger trend that you're seeing with other applications? Yeah,

Julien Bouteloup 23:24

Sure. at Curve. We also like doing this going across, across layers is one of the priority that has been has been over the past past few months. Because defi is moving fast. And you you have different projects, different blockchain in the industry, and obviously, they are all capturing different market shares, and they all have different TVL. So not jumping into different projects, needs to be like fully analyzed, and then also in the short or medium term.

Aliya Das Gupta 23:59

Yeah, I mean, it's really interesting that we're moving into this space where you said, like, we've got this multi chain universe that's emerging. And then also like these nicer front ends that enable more retail users to work with it even when there is especially because right now, it's still quite requires quite a lot of technical know how but as these retail users even come in, how are they supposed to coexist with.. I don't know, you know, the degens and the power users because these guys are interacting with the smart contract on a daily basis. Does a retail user like me stand a chance?

Graham Nelson 24:32

I'll have a go at that one. I mean, I think, I think they will have a chance because, you know, if we look at traditional finance, to be able to do these kinds of things, it's limited to like the trade finance desk, right or structured finance. And these are the guys who have access to the capital and do all the cool stuff in the market and the traditional finance market and as a retail user now, you know, you start on Aave, you deposit some funds and you get the A-token derivative back now for some reason, you can actually use that a token in the in the secondary market, you can go trade it, you can go and deposit it into curve to earn additional fees associated with it. And so like the retail user will come in, they'll start on the one item. And then they'll start to realize the additional use cases that are being done. And I think there's, there's so much brain power in the market today that are tweeting about it, that are writing articles that are building products and services that the retail user can come in. And once they really get that foundation of setting up a hardware wallet and securing it, they can do it right. They just got to start small like we do with everything, you start small. And you start to really realize the benefit of what these products can do, you can start to build and you start to realize that you're doing exactly what traditional finance is doing. But you don't actually have access to the markets to do it. Yeah. And that will just grow. And I think it'll take time.

Aliya Das Gupta 25:53

But the potential for harm, like what's the risk involved for them, like playing in the same field as someone who's an expert? You're, you're a little bit placed riskily, no?

Graham Nelson 26:03

Yet? It's a it's a good question, right. And I think but you got to navigate the risk, right, and obviously, the risk versus the reward. And if you're going to Aave at 4%, for USDC, the risk is relatively to be low for you to let's say get taken out by a degen user. But if you start now using a more complex Protocol, or something that yields a lot higher, and maybe you don't understand, then risk is higher, I mean that I guess it always goes to the fundamentals. If you don't understand what you're doing, or what you're investing in, you shouldn't be doing it. I think once you get an understanding, then maybe that's how you protect yourself a bit more from the Degen users. But we all try and it's risky in a way. Right? you see the yields, and I think also getting wrecked is part of the learning curve. That's what I think is that that's what I've learned when I've got wrecked. I've learned more, right, once you get wrecked, you're a bit more wiser to to what you're going to do.

Aliya Das Gupta 26:57

Right. And Julien Yeah.

Julien Bouteloup 27:01

I mean, I would say that if you have time to learn and understand those different concepts, I would, I would say this is like, like a free school. Free education like like, like you learning, if you have time, and you have a job on the side, or even like on the evening, early morning, you can, you know, navigate through get to all the different concepts that will reshape society. So obviously, depends like your time, if you have energy, and you can spend, some time... some people don't have time to actually navigate to all the different things. So if you are like that , then I would, I would suggest that you play with those different products on the ecosystem. And then if you don't, then you should probably use products that are building on top of this economy and will make sure, I mean, their priority is to bring security and, and then bring the best of what defi can offer. So I really, really believe that it depends on your risk appetite, and depends on if you have time to learn all the different concepts. Then also, it's really important that obviously, you should never invest money that you're not willing to lose. Because defi is is ... it can be pretty dangerous.

Graham Nelson 28:32

And I think we're also in a position now, much better than where we were 12 months ago to actually do this, right. So like, you know, I would recommend to somebody maybe onboard onto polygon. And then you can play with $10 $20, if you wanted to, you know, your transaction fees are really low. And it's a nice environment where you can play around with all the applications, you can put a small amount, where a year ago, maybe on Ethereum. Ethereum was the only one that you could really use all the applications with it. And it was too expensive as an entry cost. And that's what I think it's nice about these layer twos that are coming up. It's it's really giving an option now for the retail users to come in at really low customer transaction fee, and play with $10 $20 which is much safer, right? You don't you're not making a $20 trade on uniswap and paying $500 for instance. You're doing a $20 swap and it costs you a couple of cents. Yeah. And I think it's also a good way to learn as using these layer twos in the lower fees to get access to it.

Aliya Das Gupta 29:31

Yeah. I mean, you came ahead of my next question, which was .. Thanks Graham! Which is really to say that yeah, even if I wanted to go out and play in the market right now it does cost me 300 bucks to make a single transaction which is very much outside the retail appetite. But you know, playing with layer twos, I think there's there's an opportunity there to at least, even if not access all of the products, at least too get a taste of what it means to move your stuff around in the in the defi world and how the different sorts of yield products can work. But, Julien, what would your advice be to a person who's starting out tomorrow? They've got 100 bucks, they go into Polygon, what should they do?

Graham Nelson 30:17

It doesn't have to be polygon, right, Julien may have another option for them

Julien Bouteloup 30:23

So you are now as we mentioned before, you have now different way of participating in defi and not get rekt on gas cost. And this obviously, it's outside of mainnet, It's outside of Ethereum. Unfortunately, because Ethereum is still migrating into proof of stake. And then will offer the same kind of scalability, gas efficiency, and all the things on the side. Well, yeah, it's possible. And we're trying to do the best to provide this information to users. And, yeah, that's it. Cool.

Graham Nelson 31:03

No, I think Julien is great, right. And I think, you know, if a customer or client can also get access or into the spaces, I think some of the exchanges are building on ramps into these layer two. So if you're, I don't know, but I think it's like Binance or some of them you can deposit directly into the chain like Avalanche, that's also an easy opportunity for them to move in and get funds and start playing around with it. But I think that Julien says things like StakeDao, the avalanche strategy, it's really easy for everyone to get into what I think

Aliya Das Gupta 31:33

Wow, this is a really good deep dive into it. And I think it's probably as much time as we have. perfect. No, thank you both so much for joining me on the podcast today. For our listeners, if there's any nice topics that you think we should cover, or someone who you think would be an interesting guest to have, please write into podcast@sygnum.com and until next time, Ciao!