DeFi Yield Aggregation: Maximizing Returns in Decentralized Finance
An exploration of yield aggregation strategies in DeFi, covering the architecture, risk management, and implementation considerations.
Anil Dabas
Software Engineer
Yield aggregation is one of the most practical applications of DeFi composability. Instead of manually moving funds between protocols, aggregators automate this process to maximize returns. Let me share insights from building one.
What is Yield Aggregation?
Yield aggregation involves:
- Monitoring yields across multiple DeFi protocols
- Automatically allocating funds to highest-yielding opportunities
- Compounding rewards to maximize returns
- Managing risk through diversification
Architecture Overview
┌─────────────────────────────────────────────────┐
│ Yield Aggregator │
├─────────────────────────────────────────────────┤
│ Strategy Manager │ Risk Engine │ Executor │
├─────────────────────────────────────────────────┤
│ Protocol Adapters Layer │
├─────────────────────────────────────────────────┤
│ Aave │ Compound │ Curve │ Yearn │ ... │
└─────────────────────────────────────────────────┘
TypeScript Implementation
Protocol Interface
interface YieldProtocol {
name: string;
address: string;
// Get current APY
getAPY(): Promise<number>;
// Get total value locked
getTVL(): Promise<bigint>;
// Deposit funds
deposit(amount: bigint): Promise<TransactionReceipt>;
// Withdraw funds
withdraw(amount: bigint): Promise<TransactionReceipt>;
// Harvest rewards
harvest(): Promise<bigint>;
}
Strategy Manager
class StrategyManager {
private protocols: Map<string, YieldProtocol>;
private allocations: Map<string, number>;
async rebalance(): Promise<void> {
// 1. Calculate optimal allocation
const optimal = await this.calculateOptimalAllocation();
// 2. Determine required moves
const moves = this.calculateMoves(this.allocations, optimal);
// 3. Execute withdrawals first
for (const move of moves.filter(m => m.amount < 0)) {
await this.protocols.get(move.protocol)!
.withdraw(BigInt(Math.abs(move.amount)));
}
// 4. Execute deposits
for (const move of moves.filter(m => m.amount > 0)) {
await this.protocols.get(move.protocol)!
.deposit(BigInt(move.amount));
}
this.allocations = optimal;
}
private async calculateOptimalAllocation(): Promise<Map<string, number>> {
const protocolData = await Promise.all(
Array.from(this.protocols.entries()).map(async ([name, protocol]) => ({
name,
apy: await protocol.getAPY(),
tvl: await protocol.getTVL(),
riskScore: this.assessRisk(protocol),
}))
);
// Risk-adjusted return optimization
return this.optimizeAllocation(protocolData);
}
}
Risk Management
Risk Factors to Consider
- Smart Contract Risk: Has the protocol been audited?
- Protocol Risk: TVL trends, team reputation
- Market Risk: Impermanent loss for LP positions
- Liquidity Risk: Can we exit positions quickly?
Risk Scoring
interface RiskAssessment {
contractRisk: number; // 0-100
protocolRisk: number;
marketRisk: number;
liquidityRisk: number;
}
function calculateRiskScore(assessment: RiskAssessment): number {
const weights = {
contractRisk: 0.4,
protocolRisk: 0.3,
marketRisk: 0.2,
liquidityRisk: 0.1,
};
return Object.entries(weights).reduce(
(score, [key, weight]) =>
score + assessment[key as keyof RiskAssessment] * weight,
0
);
}
Gas Optimization
Gas costs can eat into yields significantly. Strategies include:
Batching Transactions
async function batchHarvest(protocols: YieldProtocol[]): Promise<void> {
const multicall = new Multicall({ ethersProvider: provider });
const calls = protocols.map(p => ({
target: p.address,
callData: p.interface.encodeFunctionData('harvest'),
}));
await multicall.aggregate(calls);
}
Optimal Harvest Timing
function shouldHarvest(
pendingRewards: bigint,
gasPrice: bigint,
estimatedGas: bigint
): boolean {
const gasCost = gasPrice * estimatedGas;
const rewardsInEth = convertToEth(pendingRewards);
// Only harvest if rewards > 2x gas cost
return rewardsInEth > gasCost * 2n;
}
Auto-Compounding
The power of compound interest in DeFi:
async function autoCompound(): Promise<void> {
// 1. Harvest all rewards
const rewards = await harvestAll();
// 2. Swap rewards to base token
const baseAmount = await swapToBase(rewards);
// 3. Redeposit
await rebalance();
// Log APY improvement
console.log(`Compounded ${formatUnits(rewards)} tokens`);
}
Challenges and Solutions
Impermanent Loss
For LP positions, track IL and factor it into return calculations:
function calculateNetReturn(
lpReturn: number,
impermanentLoss: number
): number {
return lpReturn - impermanentLoss;
}
MEV Protection
Use private mempools or flashbots to avoid front-running:
const flashbotsProvider = await FlashbotsBundleProvider.create(
provider,
authSigner
);
Conclusion
Building a yield aggregator taught me that DeFi is as much about risk management as it is about maximizing returns. The best aggregators balance yield optimization with robust risk controls.
The composability of DeFi means we can build sophisticated financial instruments, but it also means risks can cascade across protocols. Always factor in the full risk picture when chasing yield.