Upon providing liquidity to a pool, LP tokens can then be staked in Crop Circles, more commonly referred to as yield farms. Each Crop Circle on the protocol corresponds to a liquidity pool (e.g., HBAR-DOV) and receives weighted token emissions from the farm contract. Farming helps improve the capital efficiency of assets by utilising idle LP pairs to generate yield. Note that users are still collecting swap fees on their staked liquidity.
In addition to gas fees, the protocol charges a $0.25 deposit fee for staking LP tokens in Crop Circles.
In this section, we will cover the process of yield farming.
Figure 1. Yield Farming. Note that rounded numbers were used in the calculations.
Consider a liquidity provider who stakes 119.93 $AAA-$BBB ssLP tokens in a Crop Circle containing 880.07 ssLP tokens. It follows that the Crop Circle now contains 1000 ssLP tokens, and the liquidity provider has a ~12% ownership. This Crop Circle receives 317.0 SAUCE / min; therefore, the LP earns 317.0 * 0.12 = 38.03 SAUCE every minute.
The Farm Base APR is calculated as follows:
Where W is the weight of emissions to a Crop Circle; P denotes price; E denotes rate of emissions in seconds, where E(SAUCE) = 4.80454 SAUCE/s and E(HBAR) = 1.08348 HBAR/s; and 31536000 is the annualization factor.
Note that, as additional Crop Circles are added, emissions to existing Crop Circles will decrease due to reweighting.
The Farm Base APY assumes earnings are reinvested once per day. It is calculated as follows:
The Farm Total APR, or the actual APR earned by yield farmers, is the sum of the LP Reward APR and Farm Base APR:
The Farm Total APY is the sum of the LP Reward APR and Farm Base APY:
There will be no lockup period for staking LP tokens in Crop Circles, however, there will be a game-theoretic LP staking mechanism, i.e., an option to timelock LP tokens in Crop Circles. Users who stake LP tokens without the lockup period earn the standard rates dictated by the protocol. Users who decide to lock up their tokens for a period of time (e.g., 3 months) can unstake early if they so choose, however, this early withdrawal comes at a penalty of the interest accrued in the form of SAUCE. This penalty is paid out on a constant basis (minute by minute) to other users who have locked their LP tokens. Once the lockup period has ended, users who have kept their LP tokens staked will claim their SAUCE and reap significantly higher farm rewards. In essence, this model creates value from market behavior rather than from an underlying change in the protocol. It's a voluntary game - a game of chicken between bulls and bears.
For example, say Alice stakes 100 LP tokens with no timelock, while Bob and Claire each stake 100 LP tokens for a 3-month lockup period. Alice can unstake at any time without incurring a penalty. Claire decides to withdraw her LP tokens from the Crop Circle early, and in doing so, suffers a penalty (e.g., 50% of her SAUCE accrued via farm rewards). Bob keeps his LP tokens locked for the duration of his term. Claire's penalty is paid directly to Bob.
- Alice earns the standard rates dictated by the protocol.
- Bob earns the standard rates dictated by the protocol plus the penalty from Claire.
- Claire earns the standard rates dictated by the protocol minus the penalty from unstaking her LP tokens prematurely.
The proposed penalty on the SAUCE accrued via farm rewards must be high due to the fact that users who do not lock their tokens can manually compound their rewards (i.e., use the SAUCE they receive via farm rewards to mint additional LP tokens, which can then be staked), whereas users who do lock their LP tokens will not have this option. Farm rewards are proportional to the duration of the lockup period and the penalty remains constant, as more users are expected to unstake their LP tokens prematurely from a 6-month lockup period versus a 2-week lockup period.