The XBE Hive forms part of a family of DeFi protocols called “Complementary Yield Protocols”, so to properly understand how it works we need to look at its general category, and then in that context we can best unpack how the Hive operates in more detail.
Complementary Yield Protocols
Complementary Yield Protocols at their core aggregate user liquidity under a single-entry point before deploying it into underlying yield protocols.
This has several benefits to users:
- If done correctly this saves gas on LP token deposit fees and simplifies the process for new users to start their yield journeys
- It enables the complementary protocol to enhance yields with its own incentive rewards over and above the underlying protocol rewards
- It allows for new rewards models that incentivise audiences who normally would not be able to participate (for example creating referral rewards)
- It creates more predictable and sustained yield returns by averaging rewards out over time - absorbing peaks and troughs in the underlying protocol
In the case of the Hive, it can also provide a regulatory compliant and properly decentralised interface into yield for traditional finance players that want to engage with yield on more familiar terms.
The Hive Complementary Yield Mechanism Explained
There are 5 major steps involved in the functioning of the Hive Complementary Yield Mechanism.
1. Adding Liquidity to a supported Decentralised Reserve Account (Curve Pool)
- User adds liquidity of their choice to a supported Curve Pool and gets Curve LP tokens. At this point, the user should not select the "stake in the Curve gauge" option when depositing in Curve.
- The user is now exposed to the underlying pool risk - which in the case of Curve "stable" Pools (pools that are made up of entirely of assets of the same denomination, e.g. USD, or ETH, etc) is not nearly as pronounced as other Decentralised Reserves that use the x * y = k based AMM mechanisms.
2. Staking Curve Pool LP into associated Hive Vault
- User now stakes their Curve Pool LP token in the supported Hive Vault
- Alpha test focuses on MIM (USD) and cvxCRV pools - attracting both USD stablecoin and CRV holders
- Additional pools to be incentivised will include CVX, stETH, EURT, and IronBank - as these vault and strategy contracts are already deployed and audited on mainnet - but will only receive XBE rewards after alpha testing completes.
3. Vault Deploys LP per its Strategy into Underlying Protocol's Staking Contracts
- Whenever the Vault "Earns()" the Vault's Strategy contract takes any staked LP tokens and deploys them into the underlying protocol's staking contracts.
- This structure allows new strategy contracts to be deployed over time - meaning that strategies can be updated in future so that LP tokens can be deployed in alternative staking contracts
- This is where Audits, DAO multisig and Governance Proposal Voting becomes important, as community members should only vote for strategies to be implemented that have been properly third party audited and reviewed, as malicious strategies could put LP tokens at risk.
- Underlying protocol rewards are only earned on LP tokens that have been deployed by a Hive Strategy contract, LP tokens that are in the Vault are not productive for the Hive Vault until they have been deployed by a Hive Strategy - however LP tokens earn FROM the Hive Vault from the moment they are deposited (irrespective of whether they have been deployed by strategy or not).
4. Hive Vault Claims Rewards on Underlying Protocol's Staking Contracts and Distributes Aggregated Rewards over a 7-day window
- Because underlying rewards are only earned on LP tokens deployed by a strategy, they start out slow and build up with each claim by the strategy
- Claims on underlying rewards are executed whenever a user withdraws, or when the Vault "Earns()" (initially twice a day, then daily, depending on volume)
- For example - if you stake LP on day 1, and Vault claims on day 2, then the aggregate underlying rewards of 1 day will be distributed over the next 7 days to LPs in the Vault only from day 2
5. Kick-starting and Amplifying Rewards with Complementary Yield
- XBE Rewards provide the initial incentive to draw LP to the Hive Vault
- This model creates a yield environment that amplifies the rewards for all LPs:
- initial LPs gain more XBE (drawing in more LP) but proportionally less underlying rewards while the vault waits for claimed rewards to distribute
- later LPs gain slightly less XBE but proportionally more underlying rewards (they earn a share of the previous Vault claims, which continues to draw in more LP)
- This also increases reward APR when LPs withdraw – because the new claim automatically made with the withdraw adds to the underlying reward distribution for the next week, which would be then shared with fewer LPs
The XBE Protocol Incentives (and how they are funded)
For the XBE Protocol (including the Hive) to effectively operate, several incentive mechanisms must encourage various types of cooperative user participation to maintain the XBE economy.
- Sushi/Hive Vault XBE Rewards
These provide the initial incentive for LPs to stake in a Hive or Sushi Vault, and then continues to amplify Hive Vault rewards for LPs. These are allocated from the weekly inflationary XBE emissions according to the protocol emission weights.
- Hive Vault (Underlying) Rewards
These provide the main sustainable rewards for Hive Vault LPs and are generated by deploying LP tokens from the Hive Vault into an underlying yield protocol's staking contract to earn rewards, which are then aggregated and claimed back to the Hive Vault before being distributed to Hive Vault LPs.
- Referral Rewards
These provide the incentive for influencers and individuals to promote the Hive to their network. They are made up of 10% of the allocated Hive XBE Rewards PLUS 10% of the underlying rewards claimed by Hive Vaults - of which 7% is awarded to a user's direct "parent" (introducer), 2% to the "grandparent", and 1% to the "great grandparent".
- XBE Staking/Locking Rewards
These provide the incentives for XBE holders to stake their XBE tokens or lock their staked tokens to create veXBE. These rewards are made up of whatever share of the weekly new XBE emission weighting has not been allocated to a Vault PLUS 10% of the Hive XBE Rewards and 10% of the Hive Vault underlying rewards.
What is the benefit for other protocols in using the Hive?
The Hive makes it easy for other protocols to farm CRV, CVX, cvxCRV and other reward tokens together with XBE on their own protocol liquidity.
Hive provides a simple staking contract for other protocols to stake their Curve Pool LPs in and earn underlying yield in CRV, CVX, cvxCRV and other supported tokens according to the latest Vault Strategy, while earning additional XBE rewards as well.
Furthermore, the CRV and cvxCRV Hive Vaults provide an easy mechanism to get the best staking returns on these underlying reward tokens – so they earn yield on their rewards – not just on their original liquidity.
Referral rewards can also be configured to accrue to the other protocol’s treasury wallet, increasing their returns even more, with clear on-chain transparency and audit trail reporting to their community.
Finally, the multiple third-party security audits on the Hive contracts allow other protocols to leverage Hive Vaults without having to redesign the wheel themselves – so they can spend more of their time and resources on their own core protocol functionality.
Why is the Hive a great solution for Traditional Finance players?
Licensed fund and investment managers that work with client liquidity to earn returns for their customers can take advantage of the same benefits listed above for other protocols when using the Hive, with the clear benefit of being able to earn additional referral rewards.
The Hive Pro product for Licensed Service Providers has been designed to integrate perfectly with Hive Vaults.
This allows the capturing and reconciliation of customer instructions against on-chain deposits and withdrawals in a compliant end-to-end yield application, and updates investment positions accordingly – so that fund managers only need to verify and sign batched transactions.
By investing in detailed and proactive regulatory disclosures, the Hive Vaults and Hive Pro systems are working to create fully compliant “managed” onramps for traditional finance users into the world of decentralised yield.