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What is the APY Cloud on Flare Finance?

The APY Cloud is defined by the Flare Finance team as “the first user governed dynamic yield aggregator” which provides their DeFi platform with sustainable yield in perpetuity. Governance voting via the YieldFin (YFIN) and YieldFlare (YFLR) tokens allows Flare Finance users to set the minimum and maximum acceptable yield rates for the governance staking pool. A series of business logic is triggered if the platform-wide yield rate falls outside of those bounds, which is set for 5% – 35% APY at launch. The protocols built into the APY Cloud will attempt to ensure a healthy economy within the Flare Finance ecosystem. The focus to maintain this health is to maximize over time the governance tokens value and deliver consistent yield to users. In effect, the APY Cloud provides the Flare Finance ecosystem with a decentralized, programmatic advisor. Instead of relying on reactionary policies by centralized entities in traditional finance, this advisory protocol will have built in monetary policy aimed at maintaining long-term health and value on the platform.

Parameters of the APY Cloud

After the minimum and maximum governance APY thresholds have been set by YFIN and YFLR holders, the excess threshold is calculated by increasing the maximum APY by 20% [35% max APY * (1 + 20%)], which is a governance parameter set to this rate at launch. This results in an excess threshold set at an APY rate of 42%. Additionally, the governance pool yield rates are derived from the yield generated on a per year basis by the product suite on Flare Finance. In essence, the governance staking protocol will allow users to lock up their YFIN and YFLR to earn yield via the fees delivered to the APY Cloud from the FlareX, FlareLoans, FlareMutual, FlareWrap, and FlareMine products. The action of governance staking allows the user to share in the profits of the Flare Finance ecosystem.

Once the excess threshold has been set, the APY Cloud logic determines if there is enough ecosystem earnings to stay above the minimum governance staking APY. This is calculated by dividing protocol earnings by the total value locked (TVL) in the governance pool. For example, there would need to be $5M in product fees available for a TVL of $100M to meet the minimum APY threshold of 5% at launch for the ecosystem to be in a healthy condition. If the governance pool APY is above the minimum threshold, the pool will continuously deliver protocol fees allocated to the APY Cloud until it moves outside of the APY thresholds. The same calculation can be applied to the other extreme situation, where there is a relatively low TVL in comparison to protocol earnings spiking the governance pool APY to rise above the 42% excess threshold set at launch.

It is important to note that the APY Cloud is establishing a form of monetary policy in order to manage and reward the relationship between TVL and protocol earnings. The Flare Finance ecosystem will be at its healthiest when reaching the excess threshold as high yield will support governance token value and proper usage of the Flare Finance product suite. If too much YFIN and YFLR is locked up in governance staking, this will result in reduced yield for governance staking and product usage. In the opposite case when not enough YFIN and YFLR are locked up in comparison to protocol earnings, yield distributions will be not be fairly distributed between governance staking and the product suite. This sums up the stated goals of the APY Cloud, which are to support overall ecosystem health through long-term governance token value and yield.

APY Cloud Monetary Features

The programmatic policies to guide Flare Finance mandates of sustainable yield and governance token value takes shape in three different forms depending on optimal to suboptimal conditions throughout the Flare Finance ecosystem. These are termed and defined as follows:

  • Stressed Distributions take form in the release of YFLR from the APY Cloud reserves to bring the governance staking yield back above the minimum APY threshold.
  • Bond Distributions promote open price support during severe stressed distribution periods, which offer guaranteed minimal yield for locking up of governance tokens.
  • Excess Distributions occur when the excess threshold for governance staking yield is exceeded enabling a boosted rewards period for the Flare Finance product suite.

40M of the 110M YFLR are being allocated to the APY Cloud’s reserve pool to provide ecosystem support during downturns in the system’s economy. The YFLR in this reserve pool is distributed when the trigger for stressed distributions hits. A stressed distribution period starts when the governance staking yield rate falls below the minimum governance APY threshold. YFLR will be distributed to cover some or all of the deficit in governance staking rewards dependent on how much is needed over a given period of time. Additionally, considerably more value would need to be locked in the governance pool than earned via network fees for this policy to activate. Stressed distributions are a method to maintain ecosystem health and prevent value drain by offering back up yield to maintain the proper incentives in the governance staking pool. 

Bond distributions activate during a time of stressed distribution. The bonding period allows YFLR holders participating in governance staking to indefinitely lock their YFLR in exchange for BondFlare (BFLR) at a 1:1 price ratio. BFLR represents YFLR governance pool rewards, price appreciation, and special bonding rewards for any holder.  Users may opt out of a bonding period which requires seven days notice before their YFLR is unlocked again. Bonds are designed to incentivize locking up of YFLR to create a supply shock that could boost the network into an Excess Distributions period in which BFLR holders would benefit from rewards and price appreciation. This is why the purchasing of BFLR is considered to be a high risk/high reward position.

Excess distributions occur when the Flare Finance economy is in an optimal state. This time period triggers when the excess threshold is exceeded for three consecutive months. The saved excess YFLR will be distributed at a 10% of the total savings at the time of the trigger and be delivered via yield bearing Flare Finance products like FlareX and FlareLoans over a three month period. If the governance staking yield falls below the excess threshold for a given month, then the excess distribution finishes distributing boosted rewards for the remainder of the quarter. 


APY Cloud Reality

Ideally, the Flare Finance ecosystem maintains a healthy balance between the TVL and the earnings/participation in the Flare Finance product suite, which could be termed a “sweet zone”. Market conditions would need to be rather bearish on the platform for the stressed distributions to activate and “depression” level conditions for the bond distributions to start. Additionally, the yield earned from the Flare Finance products would need to be very lucrative for the excess threshold to continually hit. The APY Cloud is a novel approach to programmatic and proactive monetary policy within a DeFi ecosystem. Its design is meant to buffer the ecosystem in the worst of times, while boosting it in the most bullish of conditions.