DeFi strategy
Last updated
Last updated
This is a smart contract () without the risk of centralization that, on behalf of the user, places liquidity in DeFi protocols to generate returns. The detailed logic for interacting with user liquidity during fund placement is described .
Strategies can be simple, where user liquidity is straightforwardly placed in a protocol without intermediate actions, for example: depositing USDC in the lending protocol Compound on the Ethereum network to earn interest. Alternatively, strategies can be more complex. For instance, user-deposited USDC is converted to DAI, and then the DAI is bridged to the Base network and placed in a leverage strategy (DAI collateral, borrowing against this DAI, re-collateralization, and so on) in the Sonne Finance protocol.
Each DeFi strategy has a nominal value and consists of risk-building blocks that the user exposes to during fund placement, such as: blockchain, protocols, and assets.
For example, the DeFi strategy named [USD] Sonne Base Leveraged USDC has a nominal value expressed in USDC and includes the following building blocks:
Blockchain: Base
Protocol: Sonne Finance
Asset: USDC
Each strategy carries its own risks, as do the building blocks it comprises. Therefore, returns form a risk premium, leading to the inclusion in a particular Vault with a specific risk level.
In addition, the DeFi strategy describes how returns are generated. This could include interest rates from placing assets in lending protocols, trading fees from providing liquidity to pools on decentralized exchanges (DEX), incentive tokens issued by DeFi protocols to incentivize liquidity providers, and other sources.
The risks of the strategy, as well as the building blocks it contains, are minimized (but not completely eliminated) through a . Users must independently study the details of each strategy and its building blocks included in the Vault to make decisions about fund placement.