Beaver Finance – Intelligent Yield Farming Platform with Impermanent Loss Hedged

Beaver Finance is a Single-Asset Intelligent Yield Farming platform which is the first in DeFi to integrate Liquidity Mining with the Option-based cutting-edge Hedging solution for Impermanent Loss. According to Beaver Finance officials, the much awaited platform will be launched in mid-November. Now let’s explore the secrets and excitements of the Beaver World.

1.     Introduction of Beaver Finance Protocol and the team behind it

Beaver Finance provides safe, carefree and high & real yield strategy for crypto holders, users can stake single-asset to participate in dual-asset yield farming achieving high-yield return on mainstream DEXs; and what tells Beaver apart from similar harvest platform would be Beaver hedges Impermanent Loss(IL) through a set of European Option Portfolio. Most mining aggregation platforms display the return rate without taking the hidden but also usually huge IL into considerations, while Beaver Finance tackles the IL headache by options to provide real profit rate of farming. 

There are two sections in Beaver platform, Liquidity Providers(LP) asset pools for mining and  Impermanent Loss Hedger(ILH) asset pools for hedging. Assets in ILH pool are used as principal for constructing options portfolio for hedging IL of mining positions from LP section. Assets staked in ILH pools are guaranteed lossless and those in LP pools are also being hedged, so LP users can gain actual yield returns without being offset by impermanent losses.

The founding team of Beaver Finance consists of Wall Street veterans as quantitative derivatives traders, scholars from renowned academic institutions, DeFi scientists as designers of multiple token economies, and a team of experienced developers from Silicon Valley. This world-class team is committed to solving the problems of  infamous impermanent loss and systematic risks in AMM mechanism, and creating the most secure and high-profit yield aggregation platform.

2.     Motivations of Beaver Finance

First of all, Beaver Team found that there’s still a huge market for depositing crypto assets. Many crypto holders cannot find a secure and efficient single-asset yield generating platform, while providing dual-asset liquidity for farming in DEXs is accompanied with huge uncertainties which are resulted from high volatility of cryptocurrencies and impermanent losses associated with AMM. Quite often, ILs even exceed mining profits generating a negative return eventually.

As shown above, uniswap are slipping from the TVL ranking and the fluctuation represents asset escaping during the dramatical trends of major cryptocurrencies. 

APR/APY is the “go-to” indicator for liquidity providers. However, those attractive high figure APYs displayed on DEXs or yield aggregators are all under the assumption of the undamaged principal, nevertheless, that is unrealizable for liquidity mining because of the Impermanent Loss. Currently no yield aggregator counts IL into their APR/APY, which gives investors the misinterpretation of final return when they collect farming tokens and principals, especially for newcomers who are hardly aware of the destructiveness of IL, they are surprisingly realize that without constantly pay attention on the exchange rate change and adjust the positions, the eventual APY are never as enjoyable as displayed on the platforms. 

So, one of the initial motivations of Beaver Finance is to solve the above “false APY” problem once for all. Since Beaver applies options strategies to hedge Impermanent Loss, mining principals are fully protected. The actual return rate is the same as displayed APY on Beaver, and investors can enjoy harvesting carefreely.

3.     Similarities and differences between Beaver Finance and other yield aggregators

Similar to platforms as Alpha Homora, Alpaca, etc, on Beaver Finance, users can stake single-asset to achieve high-yield return comparable to dual-asset farmings. Meanwhile, there are also distinctive features innovated by Beaver.

• Asset Allocation Engine: dynamically pairs equal-valued tokens from LP pools by algorithms for supplying liquidity on major DEXs, which enables users to automatically gain the high yields of dual-token LP farming in single-token staking mode. By contrast, Alpha Homora and similarities would add an extra swapping step to form the pair which would instantly cause depreciation of the asset and jump of exchange rate resulting in IL.

• Impermanent Loss Hedging Engine: supported by Asteria Finance Lab, protects LP assets of farming positions by constructing European Option Portfolios for hedging against IL. With ILH, Beaver Finance would be able to protect LP principal and provide real P&L rate for users on asset management operations.

4.     Competitive advantages of the Beaver Finance

Beaver has mainly 5 competitive advantages compared with other yield aggregators:

(1)  Simplicity

Beaver integrates multiple liquidity pools of major DEXs and provides dynamic APY updates, providing fully automatic and one-stop service of single-token staking + token pairing + LP supplying + yield farming + asset adjustment, which saves users from navigating among different DEXs and liquidity pools to conduct complicated mining operations.

(2)  High Yields

Compared with the low returns of single-token staking on DEXs or other yield farming protocols, built on a solid theoretical foundation and rich DeFi practical experiences, Beaver’s strategies optimize asset allocation efficiency and achieve high-yield returns comparable to dual-token farmings.

(3)  Lossless Hedging

Based on the Option Portfolio Hedging Module developed by Asteria Finance Lab, IL hedgers can enjoy returns of options market makers without any principal damages; while helping minimize IL on LP asset pools as well. Under comprehensive backtesting under multiple simulations, Beaver’s hedging model not only eliminates principal loss for ILH pools but also realizes stable returns.

(4)  Professional

Beaver’s financial team is composed of experienced Wall Street derivative quants and traders, researchers from reputable academic institutions, and technical team previously lead developing of multiple top DeFi projects. Hedging algorithms are built based on the solid theories of Carr-Madan Formula and classic Black-Scholes-Merton model, back tested in multiple scenarios to optimize the functionality and minimize user cost.

(5)  Security

System and asset security is the top priority of Beaver Finance: the financial models and investment strategies are repeatedly backtested by the professional team; smart contracts are coded and examined by security experts, and audits are conducted by top blockchain security laboratories. Preventative techniques are adopted for a series of security problems such as re-entrancy, arithmetic over/under overflow, default visibilities and floating points & precisions, etc.

5.     How do users participate in Beaver Finance?

Beaver Finance makes straightforward zero-based user experience as their target. In general, users can choose to be either or both two roles: Farmer and Hedger.

Farmer => LP Mining (LP) Section:

Beaver Finance would support cryptocurrency pairs with high yields and a level of safety on major DEXs. Users can choose any token pairs and deposit either asset into Beaver LP pools and leave the rest of work such as token pairing, LP supplying, and staking for mining for the platform to automatically exercise.

Hedger => Impermanent Loss Hedger (ILH) Section

The capital of ILH pools are used to hedge possible Impermanent Loss of LP mining positions. Option portfolios are constructed by rigorous mathematical models and automatic Delta Neutral hedging are also carried out simultaneously, which not only shield LP assets from IL but also ensures the stability of ILH pools.

6.     Beaver’s Impermanent Loss Hedging (ILH) Engine

Beaver hedges Impermanent Loss from liquidity mining through a set of European Option Portfolio supported by Asteria Finance Lab.

Mathematical Principle: Carr-Madan Formula

The basic concept is that for any return structure f(ξT) with respect to ξT that expires at time T, it can be realized by constructing a European Option portfolio with ξT as the target and expiration date T, under the condition of f(ξT) is second-order derivable, which is essentially a static investment strategy.

Don’t be scared by the above mathematical description, shortly put, it has been mathematically proved that the IL caused by X*Y=K model can be hedged by a series of reverse-direction options.

Upon this basis, the classic Black-Scholes-Merton option pricing model is applied to calculate the cost and hedging result:

During the backtests of three-year data (2019, 2020, 2021), the average cost is 0.7% and hedge completeness is 99.8% (blue line), compared with the unhedged asset loss (yellow line), the LP principal is almost lossless.

Beaver Team also conducted detailed backtestings on the principles staked in ILH pool, and according to the backtesting data, Beaver guarantees that single-token staking in ILH pool is lossless.