Before we get started, this is not a recommendation or endorsement to buy any token mentioned. DeFi Dad disclosed his team at 4RC invested in the BarnBridge seed round and still holds a BOND position. The following tutorial does not require holding the BOND token.
This week, I was looking forward to potentially highlighting PancakeSwap LP farms recently launched on the new L1 Aptos, but in the interest of pursuing the most sustainable risk-adjusted yield, instead we’ll discuss a new yield on the popular Arbitrum L2, using a familiar protocol for fixed income: BarnBridge.
Back on October 5th 2022, we explored how BarnBridge V2 redesigned a simpler, novel mechanism for users to more seamlessly earn fixed yields. BarnBridge V2 aims to offer fixed rates that are sustainable, with fixed income positions that can be borrowed against on Aave and FiatDAO to get secondary liquidity and leverage a position. In V2, the Barnbridge DAO acts similar to a whale in PoolTogether who deposits stablecoins and gives up the yield earned via a yield source such as Aave, to further subsidize fixed interest earned by lenders.
In other words, the yield in BarnBridge V2 pools comes from yield earned in Aave (and soon Velodrome!) during the last epoch. Then, the cumulative yield earned during the preceding epoch, is redistributed to the epoch of depositors/lenders going forward. The result of this design allows for depositors to bid on the yield to be distributed each Epoch.
Here’s a quick overview of how BarnBridge V2 fixed transforms a variable rate source of yield into a fixed rate using the existing DAI (Aave) 30d pool:
- Deposit: During the Deposit period, users can deposit a token such as DAI and essentially bid on the pool of yield sourced from last epoch (4500 DAI above) that will be earned over the next 30-90 days. Each deposit further dilutes the fixed yield rate for the upcoming Epoch. The yield rate usually drops until the Deposit period is over.
- Withdrawal: Next, deposits are halted and we enter a 24-hour period called Withdrawal where anyone can withdraw their deposits without penalty. Each withdrawal will further raise the fixed rate for this Epoch. Less DAI bidding on a 30-day DAI pool, means less money competing for the Epoch yield of 4500 DAI. The yield rate may rise until the Withdrawal period is over.
- Let’s assume a lender is dissatisfied with a projected fixed rate of 14% for depositing DAI for 30 days. They would likely withdraw DAI during the Withdrawal period, which would subsequently raise the interest rate for those remaining in the pool this epoch.
- Epoch: Lastly, the Epoch kicks off, and in this example above, DAI deposits are locked until the end of the term (30 days), and lenders begin earning a proportional amount of the 4500 DAI yield based on how much DAI they deposited. Meanwhile, their DAI is deposited into Aave, earning a pool of interest to power the next BarnBridge epoch, which lenders will be able to bid on, in order to set a fixed rate in the upcoming epoch.
Today, I’ll show how I can deposit DAI into this Aave-powered 30-day pool on Arbitrum L2 to earn a projected fixed rate of 14% APR* for a term between December 23, 2022 until January 22, 2023. I might also qualify for a future ARB airdrop on Arbitrum L2, but it’s not…
DeFi Dad is one of the earliest power users of DeFi, having worked with early Ethereum startups going back to 2018, including Zapper.
