Following the work on MakerDAO accounting and implications, here is an application to yield farming.
In accounting, the asset side is what you own and the liability side is how you finance that. The power of Maker is that it can add DAI to its liability and DAI has value (everyone can create coins but few can make them valuable).
Initially, Aave has some ETH on it (Aave issue aETH when you deposit ETH). This was done by a third party. On MakerDAO we print some DAI. Increasing both asset and liability by a coin you control is a free operation.
On the second step, we lend DAI on Aave, we get aDAI tokens.
On the third step, we borrow ETH from Aave using our DAI collateral. We now have ETH as asset but have to repay them somehow which is a loan materialized by the dETH part. While we still have aDAI on the asset side, most of it is blocked as collateral (not sure on the details but it doesn’t change the big picture).
For the final step, we add both the ETH and some new DAI to mint ETH/DAI LP tokens (equity of the pool).
Now the cool thing is that ETH price has no impact on MakerDAO solvency. If ETH value drop, the dETH part will drop of the same amount. Both aDAI and the Uniswap LP accrue fees which are revenues for Maker (on the liability side, only dETH accrue interest, but those are lower than the aDAI ones).
The only issue is that if ETH price change, so does the quantity of ETH inside the Uniswap LP. So we need to keep the quantity exposure of ETH on the asset and liability side the same (more or less). We also need to make sure there is enough DAI as collateral (not too hard to put x10 more). Quite sure it’s not impossible to solve. There will be a little bit of deviation (as the rebalancing will be discrete and not continuous), but most likely not much.
An alternative is to lend the ETH on Alpha Homora (but the yield is lower and protocol risk higher).
Therefore, the only main risk is protocol risk (Aave/Compound and Uniswap). I consider it low (as we will have vaults for Uniswap at 1% SF and Compound).
While this is safe and lucrative, it works from an accounting perspective but how to implement that in a smart contract is an open question.
Quite sure a $10M investment in both smart contracts will not change the economics too much and we can expect a 20% yield, i.e. $2M per year for almost no risk and no increase needed of the surplus buffer.
What we need to aim for is to have matched books in terms of risk on the assets and liabilities side. This is modern banking.
Does that makes sense to you or is it too far from Maker roots?