Active Yield Funds generate aim to generate returns by lending pooled assets through various DeFi protocols. A Managing Farmer is assigned to each fund to identify and deploy capital to the best investment-quality strategies and manage a weekly rebalance. During the weekly rebalance, weekly profits are converted to the base currency and credited to users' balances. For example, if you deposit 5 ETH to the ETH fund, you will receive 5 stackETH, and after a rebalance you might see an increase to 5.053 stackETH in your wallet. You could then exchange stackETH 1:1 with ETH.
The Managing Farmer and the DAO for the most part aim to focus on time-tested yield strategies in order to offer investment-grade exposure to DeFi.
There is inherent smart contract risk in anything built on Ethereum and the Active Yield Funds leverage third-party protocols. While they may be audited, this is not a 100% guarantee of safety.
Some strategies may borrow through protocols like Compound in order to seek competitive APY. This introduces liquidation risk if a sudden price move occurs. At the time of writing, the only fund with a whitelisted borrow strategy is the WBTC fund. This fund is using WBTC collateral to borrow ETH, which significantly lowers the issues of flash-crashes with stable coin borrowing. The funds will be at least 2.5x collateralized.
The risks involved with investing in this (and any!) blockchain applications are numerous. Each protocol may rely on numerous third party protocols and contracts. Investors with low risk/reward profiles should not invest. Please ensure you fully understand the risks involved before investing. And diversify!
Gains from yield farming are credited to investors through a weekly rebalance. So as to avoid the possibility of arbitrageurs depositing right before a rebalance, profiting from the rebalance, and then withdrawing their assets, a 7 day linearly decreasing lockup on deposits is enforced by the Active Yield Fund smart contracts.
For example, if you deposit 14 ETH, after one day 2 ETH are unlocked; after 3.5 days, 7 ETH is unlocked; after 7 days, all ETH is unlocked.
The Managing Farmer maintains a portion of the funds in the base currency to allow for withdrawals at any time. The current target is around 10% of the fund's AUM. On the off-chance that there is demand to withdraw more than 10% of assets before the typical weekly rebalance, the Managing Farmer will have to do an early rebalance. In this case, funds remain secure but a small delay is possible.
During the first week after launch, the DAO Council will manage appointments and variables so as to ensure that everything is working as intended. After a week, control will be passed to the Stacker Ventures DAO to approve all whitelist additions/removals, appoint or remove farmers, and change variables such as fee structure. The DAO Council will retain the ability to remove a farmer or whitelisted strategy but the variables changes and whitelist additions must go through DAO governance.
Many checks and balances on the Managing Farmer have been build into the Active Yield Fund smart contracts.
The Managing Farmer must adhere to a strict whitelist of protocol-specific functions, limiting the scope of management to only strategies that have been closely vetted by members of the Stacker Ventures DAO. A 7-day review process provides ample time to vet new proposed strategies and for investors to monitor possible future approved strategies if they wish. The DAO's Due Diligence Committee will review every whitelist addition to ensure no strategies are added that introduce attack vectors.
A maximum reported gain per rebalance is set at 1%, limiting the amount of gains a malicious farmer could report if a strategy loophole was found. As the managing farmer receives a 10% performance fee, the amount they could profit from a malicious rebalance report would be 1%*10% = 0.1% -- significantly less than they could receive over the mid to long-term by acting honestly. In addition, the frequency or reporting gains is limited to once every 24 hours, giving the DAO plenty of time to remove a Managing Farmer for farming dishonestly.
The DAO may remove or replace a Managing Farmer through a vote if the farmer is not performing well. In an emergency senario, farmers, whitelisted contracts, or token approvals to contracts can be revoked instantly by the Stacker Ventures DAO Council multisig. The multisig cannot add farmers/contracts/approvals to the whitelist, these always must be passed via a decentralized and trustless DAO vote.