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How do the vaults work?
Vaults use complex smart contract strategies to automate yield farming, and grow a users assets much faster than traditional yield farming methods. Traditionally a user deposits LP tokens into a yield farm, is rewarded with a reward token, and must harvest/sell the reward tokens to add them back into liquidity pools to auto-compound their investments. Vault smart contract strategies can deposit a users assets, harvest their rewards, trade half and add back to liquidity, at least every 4 hours, increasing the users earning power tremendously.
To understand why this is important, you must first understand the difference between simple interest (APR) and compound interest (APY).
- Simple interest (APR) is calculated on the deposits that never change.
- Compound interest (APY) is calculated on the deposited amount and also on the accumulated interest of previous periods, and can thus be regarded as "interest on interest."
Simple Interest = P × i × n where: P=Principal i=Interest rate n=Term of the loan
Compound Interest = Compound Interest= ( P ( 1 + i ) n ) − P Compound Interest= P ( ( 1 + i ) n − 1 ) where: P=Principal i=Interest rate in percentage terms n=Number of compounding periods for a year
To show how much of a difference this can make lets look at an example;
Pancakeswap CAKE-BNB LP farm
As you can see, Pancakeswap is currently paying out 141.0% APR on their CAKE-BNB LP farm.
Jetfuel Finance CAKE-BNB vault
Jetfuel Finance's vaults are able to increase the return on investment to a remarkable 1,283.59% APY, which is 9 times larger than Pancakeswap's yield farm offers, by auto-compounding a users assets routinely.
Auto-compounding every 4 hours, is automatically handled by the smart contracts in each vault, however because the wallet address that tells the smart contract to run the auto-compound strategy is rewarded with .5% of the harvest in wBNB, there is an incentive for the community to increase the frequency of the auto-compounds to a pace faster than every 4 hours. Whoever hits the "Harvest" button must pay the gas fees to run the strategies script, however they are then rewarded with wBNB to cover their gas fees. Depending on when the script was last ran, this can be profitable for the community.