Proposal:
Upgrade V3 Yearn vaults to allow them to be easily composed into other protocols & used by liquidity providers by building supporting smart contract infastructure that enable V3 Yearn Vault receipt tokens deployed into liquidity pools to be pegged to their vault redemption value.
Summary:
Yearn V3 receipt tokens currently do not maintain their vault redemption value when deployed into liquidity pools. Current arbitrage bot networks are not designed to make vault deposits/withdrawals & swaps.
As a result, V3 Vault receipt tokens do not trade well, or at all when deposited into a liquidity pool.
I am proposing Yearn to deploy open source smart contract infastructure to enable easy deployment of arbitrage bots built to profit from price discrepencies between all V3 Vault tokens LP value & vault redemption value.
Developing this functionality would allow V3 Yearn vaults to be deployed composably into liquidity pools and into other protocols. This would allow yearn vault tokens to be used similarly to wrapped staked derivative tokens such as wstETH.
Background
Existing arbitrage bot networks do not have the functionality to make swaps & vault deposits and withdrawls. As a result of this, yv tokens do not trade well, or at all, when deployed into a liquidity pool.
Current market demand for yield bearing derivative tokens like wstETH is at an all time high. Many liquidity providers are shifting to using yield derivative tokens in their liquidity pool positions. Additionally, many protocols are integrating liquid yield derivatives as the backing for their token and in multi-layered DeFi strategies.
Motivation:
Adding arbitrage automation for V3 Yearn Vaults will massively expand the utility of V3 Yearn Vaults by enabling yv tokens to be used by liquidity pools and protocols in a similar manner to wrapped staked yield derivative tokens such as wstETH.
As a result of this added utility, yearn vault TVLs would likely sky rocket.
Additionally, V3 Yearn arbitrage bots could be a major source of revenue for the Yearn Protocol and community.
Specifications:
Deploy an on chain contract factory generator to allow for the easy deployment of smart contracts with the functionality to automatically run a check on the LP swap value and vault redemption value of a specific yv token. Then calculate whether there is a price discrepency over the minimum thresheld that can be
set each time the swap function is called OR set upon contract deployment.
If the values are over the threshold, the bot then executes LP swaps, and either a Vault withdrawl or deposit, in order to profit from arbitraging the yv token liquidity pools against the vault redemption value.
The arbitrage swap bot can either hold its own tokens that it uses to make the swaps, or the caller of the swap function can provide the funds required to execute.
Either way, the arbitrage contract should provide a significant amount of the profit generated from the arbitrage to the contract caller.
In the case of the the contract holding its own funds, the threshold to execute a swap would need to be set on deployment.
In the case of the function caller providing the funds, they would set the minimum threshold each time the function is called.
The contract can also send a part of the profit of each trade to a Year Vault.
Possibly add the functionality for the contract deployer to also receive part of the profit.