DeFi projects usually require much liquidity for operating. Liquidity is limited in the industry and projects compete to attract it. Thus, DeFi projects are designed to incentivize liquidity providers - in the form of fees or token minting. These rewards depend on the user activity in these DeFi projects, hence the return for a liquidity provider is volatile.
Yield aggregator projects "aggregate" some of the options for liquidity providers and offer a few additional features and instruments:
1. They build "strategies" - special smart contracts responsible for:
- determining the way the yield will be generated (where, how, in which tokens)
- delivering liquidity to the final smart contracts where returns are generated
- withdrawing and conveying liquidity back to liquidity providers
- modifying risk/return profile (like take leverage for more risk/return by folding)
- maximizing returns by special transaction flows (to receive more rewards in additional tokens)
- optimizing return delivery (like selling reward tokens in pairs gradually)
- taking into account special situations (liquidation risk, emergency withdrawals).
2. They operate in a growth-only manner. Yield aggregators prefer not to take impermanent loss risks and avoid situations of negative returns. Thus, investments are usually accepted in LP tokens. In some cases a yield aggregator can offer additional options for single-side depositing - sometimes it is available for stablecoin pools with large liquidity (like stable swap pools on Curve).
3. They do compounding - rewards are reinvested hourly/daily to boost further returns. It is the main reason for using yield aggregators for most users. It is far more effective to reinvest in one transaction for all liquidity providers simultaneously - in most of the projects it is called "harvesting". However, it is not only the reinvestment but also the moment for some agents to collect fees on positive returns (strategy builder, the yield aggregator itself, harvest function caller).
Features described above are the backbone of any yield aggregator, but the promoted product may vary. Some of them show off yield aggregating as a core tool (like in Yearn Finance, Beefy Finance), others can promote other products to users leaving yield generation itself secondary (like OUSD offering their stablecoin or Idle offering fixed or leveraged rates in the form of tranches). These special product pivots will be excluded from our analysis.