Hey everyone! It's been a long time since I've made a post on here but by popular demand, here I am back to write an article on how multiplier rewards work on CubFinance and thus all BSC/ETH DeFi platforms.
I may use the term "Dens" and "pools" interchangeably
This is not investment advice, please treat this as education at best
What do the multipliers mean?
We've all seen them, a nice 40x on the CUB-BUSD LP, or a much lower a 1x on some of the stablecoins, but what does it all mean? Does it mean you get 40 times more rewards for staking in the CUB-BUSD LP? Not quite... it's actually theoretically possible to get a higher yield from a lower multiplier, and it all depends on the total value locked (TVL).
In short, the multiplier is simply the proportion of the inflation per block that is allocated to that pool. Every provider of that pool will earn a portion of the inflation, proportional to their value locked in this pool.
Some Calculations
This is where some people may get lost, but I'm hoping I can explain it in a way we can all understand!
For Cub Finance, the sum of all the multipliers across farms and pools add up to a total of 140. Therefore, for each multiplier you see next to a pool, you will earn 1/140 of the total inflation which is currently 3 Cub per block (each block is 3 seconds).
In the example above, the DAI Den has a 1x multiplier, so all contributors to the DAI pool will earn 1/140 of 3 Cubs every 3 seconds, which essentially just means 1/140 Cubs per second.
1/140 Cubs per second yields us a total of 225,257 per year, which is approximately equivalent to $850k per year right now. Given there is $80k in liquidity, if we earn $850k per year with $80k liquidity, that's around 1063% APR, which is almost exactly the same as the site's calculation (we have used a lot of rounding thus a slight margin is expected).
When This Knowledge is Useful?
For the most part, the APR is enough to make a somewhat educated decision regarding where to stake, but knowing how the multipliers work may become very important for whales. For example, assume I have $50k, where should I stake my value?
It's easy to think we should just dump it all in the DAI pool since it has a higher APR, but if we put $50k into there at once, the USDC pool will actually have a higher APR (I'll let you guys work out why). In practice, to optimize our deposit, we should want all the Dens to have the same TVL * multiplier value. In this situation since both multipliers are the same (x1), we would want the exact same liquidity in both Dens to optimise our return.
Of course, this is assuming we live in an efficient market with 0 transaction fees and 0 harvesting fees. Accounting for all of that makes things a lot more tricky so for now, we will just assume the above.
Lastly, this is also assuming other traders are rational. We may have done everything we can to optimize our returns but what if a whale just comes in and dumps all their funds in the Den you have all your funds in? Your APR will drop significantly! Do you pull out to reinvest in other Dens and cop a 4% fee or do you just suck it up?
A Warning on These APRs
They are lies!! It's impossible to sustain such high APRs for a long period of time, so never get baited into thinking you can park your funds in these pools or Dens long term for a nice profit, it's almost always more profitable to be moving your funds around constantly, but of course that takes time, effort and risk.
Please feel free to leave any comments, questions or suggestions.
I will likely do a whole series of posts on DeFi as it is something I am quite interested in so feel free to follow me if you're interested in learning more! I'm also taking suggestions on what else you would like to learn about :)