Inverse Finance is a relatively new DAO established in December 2020 that is building an ecosystem of financial products. It is working on two innovative and unique products:
DCA Strategy Vaults
Passive no-loss investment in any token by following a Dollar-Cost Averaging strategy using stablecoin yield.
In simple terms: a way to efficiently buy a volatile token (e.g. ETH) using yield generated by depositing your dollars (e.g. DAI) without the possibility of losing your deposit to market conditions.
Capital efficient lending, borrowing and synthetic assets — known as Anchor Protocol and the DOLA synthetic/credit stablecoin.
In simple terms: Lending your assets (e.g. ETH) in return for dollars (e.g. DOLA — a synthetic/credit stablecoin) that you can use elsewhere to earn yield.
NOTE: This article is for informational purposes only and should not be considered financial advice. The author is not a financial advisor. See bottom of page for full disclaimer.
What is DCA and Why is it Important?
Before we start, let’s take a moment to understand what DCA is and why it’s important. In a nutshell:
“Dollar-cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset’s price and at regular intervals.”
By using DCA the investor benefits from an asset’s price fluctuations over time. By removing the decision making from the purchase process, it is possible to get a good average price that generally results in a better outcome over trying to ‘pick’ the right time to buy. Risk is further reduced as purchases are typically small and frequent as opposed to a single large purchase which is badly timed.
A disciplined investor can use this strategy manually to build their portfolio, or they can use a protocol like the Inverse Finance DCA vaults to do it for them.
Why Use Inverse Finance DCA Vaults?
The Inverse Finance vaults are a convenient option for the passive investor. They are incredibly simple to use:
- Deposit your stablecoin — enter the vault.
- Withdraw profits — claim earnings.
- Withdraw stablecoin — leave the vault.
NOTE: There is no need to claim earnings until you are ready to exit the vault.
The vault uses the total deposits for generation of yield and periodic (DCA) purchasing of the target asset (known as harvesting). It also covers the cost of gas to execute those operations for all deposits collectively in the vault, saving those costs for the individual investor. This is the advantage of using the DCA vaults — they are capital efficient.
However, using the vaults is not without risks. The contracts governing the functionality are not professionally audited (although the value of doing so may be questionable). Bugs, hacks, attacks are all possible and could result in a loss of funds. Proceed with caution.
How do the Inverse Finance DCA Vaults Work?
There are currently 4 vaults and each vault periodically DCA buys a single volatile asset (ETH, wBTC, or YFI). The APY is shown for each vault and usually fluctuates upon harvest.
A single USDC vault is included to support investors preferring to use USDC. The rest are DAI vaults.
Each vault has an underlying strategy. The strategy is the mechanism the vault employs to earn yield. Currently all vaults are using a Yearn.Finance V2 strategy, which means the deposited funds are in turn deposited into Yearn’s V2 vaults. They in-turn have their own underlying strategy to generate the yield. The yield returned by Yearn V2 vaults is the same asset type of the vault (DAI or USDC).
Every 3 days or so a harvest occurs on the DCA vault. That is an operation executed on the blockchain by Inverse Finance to claim and process any yield earned from the Yearn V2 vault. When the yield is returned, a 10% fee is taken out and paid to Inverse Finance. The remaining yield (DAI or USDC) is used to purchase the volatile asset (e.g. DAI -> ETH) via Uniswap. The final step is distributing the volatile asset proportionally to the depositors in the vault, based on the size of their deposit, otherwise known as their vault share.
How to use the Inverse Finance Vaults
The following is a step-by-step guide to using the vaults. It is assumed that the reader is familiar with getting fiat into a crypto wallet (like MetaMask) via fiat on-ramps such as Coinbase.com or Gemini.com.
NOTE: Inverse Finance’s source code is NOT audited. Use at your own risk.
Step 1 — Connect Wallet
Go to Inverse Finance and click on Connect Wallet. Grant permission to Inverse Finance to connect to the wallet.
NOTE: This does not give Inverse Finance the right to withdraw the funds in the wallet. Additional confirmations are required in order to do that.
Step 2 — Deposit Into the Vault
Click on the title of the desired DCA vault to expand the section. In this example we will use the DAI to ETH vault. The Deposit tab should be selected by default.
Enter a DAI amount, or click on MAX to deposit all DAI in the wallet. Click on the Deposit button when ready.
A wallet prompt will pop-up asking for confirmation of the deposit transaction and corresponding gas fee in ETH. Check the details and confirm the transaction.
Once the transaction is written to the blockchain and confirmed the deposit is complete.
All deposits into the vault result in a “receipt” token which is sent to the connected wallet. This represents the amount deposited. In this example the returned token is inDAI->ETH with an amount of 100, representing the 100 DAI that was deposited.
Step 3 — Verify the Deposit
It is possible to verify the deposit by clicking on the Withdraw tab. A refresh may be required to update the page.
NOTE: Each time a browser refresh is done the wallet must be reconnected.
Another way to confirm the deposited amount is to look in the wallet for the “receipt” token as described in the previous step.
Step 4 — Withdraw Profit
Every 3 days or so the vault strategy will harvest the yield and distribute profits to the depositors. To see accumulated profit click on the Claim tab.
Available profits are shown in ETH. Profits may be claimed at any time or left in the vault until withdrawal. They do not expire.
To claim available profits click on Claim WETH or Claim ETH, depending on the desired return token type. A wallet prompt will pop-up. Check the details and confirm to complete the transaction. Once the transaction is written to the blockchain and confirmed the claim is complete. The profits will appear in the wallet.
Step 5 — Withdraw From Vault
Withdrawal from the vault is possible at any time. Click on the Withdraw tab.
Enter a DAI amount, or click on MAX to withdraw the deposited DAI in the vault. Click on the Withdraw button when ready.
A wallet prompt will pop-up asking for confirmation of the withdraw transaction and corresponding gas fee in ETH. Check the details and confirm the transaction.
Once the transaction is written to the blockchain and confirmed the withdrawal is complete. The DAI will appear in the wallet and the corresponding “receipt” token is removed in exchange.
NOTE: Withdrawal does not remove profits. Don’t forget to claim any remaining profits after withdrawal.
Inverse Finance no-loss DCA vaults are a niche product that offer excellent capital efficiency and flexible target asset options. Their usage is simple and they are a solid option for utilizing stablecoin reserves in a financially effective manner.
Disclaimer and Declaration
This article is for informational purposes only and does not constitute professional or financial advice. The author does not warrant or guarantee the accuracy, integrity, quality, completeness, currency, or validity of any information in this article. All information herein is provided “as is” without warranty of any kind and is subject to change at any time without notice. The author disclaims all express, implied, and statutory warranties of any kind, including warranties as to accuracy, timeliness, completeness, or fitness of the information in this article for any particular purpose. The author is not responsible for any direct, indirect, incidental, consequential or any other damages arising out of or in connection with the use of this article or in reliance on the information available on this article. This includes any personal injury, business interruption, loss of use, lost data, lost profits, or any other pecuniary loss, whether in an action of contract, negligence, or other misuse, even if the author has been informed of the possibility.
The author is a member of the Inverse Finance DAO and is a holder of its governance token, INV.