Find out how the PONY Index collects high quality stablecoin yields from different blockchains, farming platforms, and stablecoins.
In contrast to traditional finance, there are plenty of attractive yield opportunities available in DeFi. This is not only the case for volatile assets but also for tokens with very small price swings such as stablecoins. Investors can find these yield opportunities on different chains, different platforms, and using different stablecoins. At times of record high inflation, DeFi is one of the few places left offering positive real interest rates.
In the following article we explain how the Passive Omnichain Net Yield (PONY) Index simplifies the task of finding and earning these stablecoin yields.
Rationale for the PONY Index
Over the last few months the demand for a simple low volatility strategy that focuses on yield generation was getting louder. Such a strategy, if implemented as an investable index, would offer a safe haven investment for both risk averse retail investors or DAOs that have to manage future liabilities. Furthermore, passive strategies like indices are also popular as simple long term investments.
Current stablecoin yield solutions are sub-optimal for a variety of reasons:
- It is very time consuming to track developments across chains, yield farming platforms and stablecoins.
- Bridging, staking, claiming and reinvesting across chains requires technical expertise.
- Frequent claiming and reinvesting of distributions in a diversified strategy is costly.
- Simple lending on Ethereum Mainnet lags other opportunities like providing liquidity or integrating other chains
- Undiversified yield farming suffers from concentration risk and volatile yields
The PONY Index is a Passive strategy and solves the above problems. Its Omnichain approach allows it to find better yield opportunities beyond Ethereum. Utilizing curated vaults allows users to get the Net Yield without all the work: Claiming, selling and reinvesting of incentives or other distributions is costly and takes a lot of time.
Goal of the PONY Index
The main features of the PONY Index are:
- Secure principal: The number one priority of the PONY Index is to minimize the risk of loss to the index notional.
- Attractive yield: The PONY Index seeks to provide a stable and competitive yield. Its goal is to beat “local” yield opportunities on Ethereum Mainnet such as simple lending.
- Single token: The index is investable and makes a single ERC20 token that tracks the index possible.
- Passive: The index methodology aims to balance the trade-off between yield and risk.
- Low cost: Pooling of assets through an index and utilization of curated yield farming vaults socializes large parts of the maintenance fees.
What is inside the PONY Index?
The index holds yield farming vaults that the index methodology selects and weights. These vaults run automated yield farming strategies using solely stablecoins as underlying: Either they provide liquidity in a pure stablecoin pool or deposit stablecoins in a lending protocol to earn trading and lending fees. In addition, in order to maximize yield the vault strategy will typically try to earn and reinvest incentives.
Therefore, through the vaults, the PONY Index is effectively holding stablecoins (and of course any incentive tokens the vaults may temporarily hold before selling and reinvesting).
How are the yield opportunities selected?
The selection of eligible yield opportunities is the core of the index methodology. Therefore, in order to be eligible for the index, yield opportunities have to pass a rigorous set of screens. In this process, the methodology considers all relevant aspects of yield farming.
The PONY Index methodology limits the universe based on the Total Value Locked (TVL). The blockchains also have to be connected to the Ethereum network and allow for efficient bridging.
Yield farming platform screening
Only platforms with transferable vaults, available “off the shelf” are eligible. The vaults have to already incorporate claiming, selling and reinvesting of any incentives or distributions. Only the yield net of fees is considered.
Stablecoin exposure screening
The underlying stablecoin has to be pegged to USD and either be fully collateralized with fiat (or cash equivalent) or over-collateralized with crypto assets. There can not be a no hidden dependency or backing to an ineligible stablecoin. Furthermore market cap and maturity of the project are evaluated.
Yield source screening
The yield earning vault strategy does not incur impermanent loss and does not put the stablecoin notional at risk. The yield source should have significant capacity to avoid quick dilution.
Risk score screening
Scalara uses Beefy’s Safety Score or mimics its calculation if not available.
How are final components selected and weighted?
All vaults that pass the aforementioned eligibility screens (chain, yield farming vault platform, stablecoin exposure, yield source, risk score) compose the selection list.
The index determines the final index composition and the respective weights by solving an optimization problem. Using an optimizer allows to find an optimal solution under multiple objectives while satisfying several conditions.
In short, the solution maximizes an aggregate score that is based on yield and size of the yield opportunity. The size of the yield opportunity is relevant to favor more sustainable yields. In addition, a concentration penalty tilts towards a more diversified basket with a stable yield. At the same time constraints enforce a feasible turnover at rebalancing.
How can users get exposure?
PONY DAO will implement the PONY Index as a single token. Expect more information to come out in the near future. You can stay up-to-date through:
- PONY Finance: Follow on Twitter or visit Website or join Discord
- Scalara: Follow on Twitter or visit Website
Summary: PONY Index provides exposure to high quality USD stablecoin yields across multiple chains, platforms, coins, and yield sources. The index simplifies this complex task into a passive strategy accessible on Ethereum.
Scalara, a subsidiary of DeFi Pulse, creates and maintains indices for a decentralized world.