⚙️Introduction to Automated Vaults

We're proud to introduce a brand new class of products to Alpaca Finance — Automated Vaults (AV). These are vaults that run complex strategies for you, similar to an on-chain hedge fund. AVs have gone through a series of iteration to improve its performance and adapt it to fit the changing market environment and compatibility with the new ecosystem innovations. Automated Vault is now in its third iteration (AVv3), with the main improvement from AVv2 being an integration with Concentrated Liquidity (CL) DEX such as UniswapV3.

We currently have two strategies for Automated Vaults, which are the Market-Neutral Strategy and the Savings Strategy.

Market-Neutral Strategy A pseudo-delta-neutral leveraged yield farming strategy where you can yield farm high APY pairs while minimizing your risk by hedging out market exposure. The Automated Vault eliminates the majority of market risk by farming targeting a neutral exposure for the vault. Or if we put it in alpaca language: high yield and low risk.

Savings Vault Strategy A 1xLong strategy similar to lending or staking the base crypto asset(ETH, BTC, BNB, etc.) but earns higher APYs than lending or staking because the underlying capital is deployed to earn yield in high-leverage yield farming positions with no liquidation possible. The Automated Vault achieves this by optimally borrow a combination of assets to target a 1xLong exposure, and rebalancing them for you to eliminate liquidation risk.

Notes on AV's exposure: In the short term, the exposure in an AVv3 could appear more "extreme" than what it used to be on the previous versions of AV. This is simply due to the nature of how CL DEX works. When the asset price moves to the edge of the LP range, the LP position ends up with almost one asset in its position (and completely in 1 asset when it's out of range.) This behavior is in a stark contrast to the UNIv2 where the exposure shift slightly as price move because you are providing LP from 0 to infinity. Hence, there could be a period where the vault's exposure deviate from the target depending on the market condition and the manager's strategy at the time.

🚩AVv3’s Key Features

Variable Leverage: In AVv2, we can set a fixed target leverage for a vault — i.e., 3x and 8x. However, this is no longer be the best approach given the nature of concentrated liquidity DEX. As a CL DEX already improves capital efficiency of the LP position, AVv3 can already achieve higher yields with lower leverage. AVv3 can have variable leverage and can flex up or down depending on the market condition.
All on-chain Tx: In AVv3, we will perform all the necessary swaps (rebalance, hedging, etc.) directly on the DEX. This is different from AVv2, where the swap is done via a fixed-price swap with a discount through the repurchasing method. This change will improve the transparency and operational safety of the vault.
Auto-hedging: A simple rebalancing / hedging rules when price moves beyond the price band proved not to be profitable, which was demonstrated by the first version of our automated vault. In contrast, in AVv3, the Vault Manager leverages many data points including historical prices and various economic factors to develop signals which can determine, with a high probability, which market regime we are currently in (trending or range bound; will there be a reversion, etc.) Based on this information, the hedging algorithm would be executed accordingly.
No liquidation risk: AVv3 is integrated with the AF2.0 Money Market and is whitelisted to borrow assets from the lending pool without the need to post collateral. This is possible because AVv3 smart contract is designed for a specific purpose of yield farming, and the assets borrowed can only be deployed into the specified targets - i.e. farming pool. Hence, the deployed assets itself can act as collateral. We have multiple guardrails in place to ensure the farming position cannot take excessive risk. For example, we have set a max leverage for each vault such that the manager cannot borrow additional assets beyond the threshold. Moreover, once a debt ratio of the vault hits a set threshold, we have a system in place to deleverage the vault by taking 25% of the vault's assets to pay down debt.
Modular Design: AVv3 is designed to be much more modular than its predecessor; each transaction is now separated into its own function. In AVv2, when an investor makes a deposit into the vault, there are actually many actions that get bundled and executed together in the background. A better approach would be to separate all actions into their own functions. With this approach in AVv3, we will have the flexibility to only execute the necessary actions when required. For example, assets will no longer need to be deployed into an LP position at the same moment they are deposited. They can now be deployed in batches at a more appropriate time based on the vault’s logic. This also results in a lower gas cos for users when interacting with the vault.
Auto-compounding: To maximize the yields for our farmers, compounding the yield farming tokens - e.g., BSW, CAKE, MDEX, etc., earned from the two LYF positions in this strategy will be auto-compounded for you, maximizing the yields and reducing position maintenance even further.
No lock-up: You are free to deposit and withdraw at any time.
No minimum position size: You can open AV position at any size.
No swap fees to invest: You are able to invest in Automated Vault without having to pay for swap fees. Normally, users would have to swap their assets to invest in the liquidity pool (the amount required to swap will be determined by the initial deposited assets); however, in AVs, users can deposit a stable asset in Market-Neutral vault (volatile asset in Savings vault)

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Last updated 7 months ago

🚩AVv3’s Key Features

Variable Leverage: In AVv2, we can set a fixed target leverage for a vault — i.e., 3x and 8x. However, this is no longer be the best approach given the nature of concentrated liquidity DEX. As a CL DEX already improves capital efficiency of the LP position, AVv3 can already achieve higher yields with lower leverage. AVv3 can have variable leverage and can flex up or down depending on the market condition.

All on-chain Tx: In AVv3, we will perform all the necessary swaps (rebalance, hedging, etc.) directly on the DEX. This is different from AVv2, where the swap is done via a fixed-price swap with a discount through the repurchasing method. This change will improve the transparency and operational safety of the vault.

Auto-hedging: A simple rebalancing / hedging rules when price moves beyond the price band proved not to be profitable, which was demonstrated by the first version of our automated vault. In contrast, in AVv3, the Vault Manager leverages many data points including historical prices and various economic factors to develop signals which can determine, with a high probability, which market regime we are currently in (trending or range bound; will there be a reversion, etc.) Based on this information, the hedging algorithm would be executed accordingly.

No liquidation risk: AVv3 is integrated with the AF2.0 Money Market and is whitelisted to borrow assets from the lending pool without the need to post collateral. This is possible because AVv3 smart contract is designed for a specific purpose of yield farming, and the assets borrowed can only be deployed into the specified targets - i.e. farming pool. Hence, the deployed assets itself can act as collateral. We have multiple guardrails in place to ensure the farming position cannot take excessive risk. For example, we have set a max leverage for each vault such that the manager cannot borrow additional assets beyond the threshold. Moreover, once a debt ratio of the vault hits a set threshold, we have a system in place to deleverage the vault by taking 25% of the vault's assets to pay down debt.

Modular Design: AVv3 is designed to be much more modular than its predecessor; each transaction is now separated into its own function. In AVv2, when an investor makes a deposit into the vault, there are actually many actions that get bundled and executed together in the background. A better approach would be to separate all actions into their own functions. With this approach in AVv3, we will have the flexibility to only execute the necessary actions when required. For example, assets will no longer need to be deployed into an LP position at the same moment they are deposited. They can now be deployed in batches at a more appropriate time based on the vault’s logic. This also results in a lower gas cos for users when interacting with the vault.

Auto-compounding: To maximize the yields for our farmers, compounding the yield farming tokens - e.g., BSW, CAKE, MDEX, etc., earned from the two LYF positions in this strategy will be auto-compounded for you, maximizing the yields and reducing position maintenance even further.

No lock-up: You are free to deposit and withdraw at any time.

No minimum position size: You can open AV position at any size.

No swap fees to invest: You are able to invest in Automated Vault without having to pay for swap fees. Normally, users would have to swap their assets to invest in the liquidity pool (the amount required to swap will be determined by the initial deposited assets); however, in AVs, users can deposit a stable asset in Market-Neutral vault (volatile asset in Savings vault)