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What Is Tulip Protocol? - Introductory Guide To The Rebranded "Solfarm"  Yield Aggregation Homestead

 

By Nerly Shammah May 19, 2023

 

Tulip protocol is a Solana-based yield aggregation platform with auto-compounding vault strategies. Previously launched in April 2021 as "Solfarm", Tulip protocol unlocks diverse DeFi opportunities including robust yield farming, lending, and leveraged farming.

 

 

As noted via all relevant documentation, Tulip leverages Solanas' low-cost and highly efficient blockchain infrastructure to build auto-compounding vaults that benefit from Solanas' network build-up. 

 

 

What Is Tulip Protocol?

 

Tulip protocol is more than a yield farm, it is an integrated leveraged farming, lending, and auto-compounding DeFi platform, providing DeFi users with "risk-reward" investment products.

 

It is essential to understand that yield aggregators leverage "third-party" services to enhance the revenue within their own ecosystem. So, Tulip protocol is no different as it simply scans the DeFi space on Solana for the best yield products which it optimizes for increased APY for its users. 

 

For example, Tulip's strategy vault is a structured yield vault that enables individuals to access diverse yield products or strategies under a single asset deposit, this includes lending optimization strategies and the ability to boost yield income via third-party partnered services like Friktion. 

 

Understanding The Tulip Protocol 

 

The structure of Tulip, especially based on its documentation can get a bit tricky to understand, but it's no different from many other DeFi protocols only that it attempts to enable yield farming of investment products such as leveraged products and lending positions. The use of the word "strategies" is simply a representation of a particular type of liquidity pool(LP). So when it's called a leveraged yield strategy, it's simply a liquidity pool(LP) set up with leveraged tokens balance.

 

It is important to note that leveraged strategies offer higher returns on investment but also higher amounts of risks as though they function on certain trading perimeters that aim to return up to 3x of the regular returns on investment(ROI). Lending vault strategies are based on the activities within the lending markets on the Tulip protocol and typically attract value from interests from borrowers on the protocol.

 

Different Types Of Yield Products On the Tulip Protocol Includes Lending, Strategy Vaults, Auto Vaults, Concentrated Liquidity Vaults, and Leveraged Yield Farming(LYF).

 

Each of these mentioned yield products attracts different forms of interest payments based on the complexity of the product and the risk factor from the open markets. For example, strategy vaults are low-risk investments that attain revenue from lending yield whilst concentrated liquidity vaults are a medium-risk yield product with primary income streams being token emissions and trading fees.

 

Here's a breakdown of Tulip's yield products showcasing its risk factor, deposit type, and its income streams. source: Tulip docs.

 

It is important to note that regardless of the displayed "low risk" products in the image above, all DeFi investments are "high risk" given that they are mostly not regulated and also exposed to exploits as the smart contracts are open source and often without a flaw. Take precautions investing in anything discussed on this page or any other DeFi protocols as you stand a chance of losing all your capital.

 

Understanding Tulip's Yield Products

 

Concentrated Liquidity Vaults: to understand how these vaults accrue value, you must first understand what concentrated liquidity means. You see, the way automated market makers(AMM) DEXs match trades via its liquidity pool(LP) powered exchanges is not a very straightforward function, in fact, it follows a zero-to-infinity formula which greatly impacts fees earned on trades and potentially results in high price slippage if the liquidity isn't sufficient in the pool. 

 

That said, concentrated liquidity being added to the equation enables liquidity providers to choose their desired price range in which their liquidity may be used up by the pool instead of the default zero to infinity. For example, take for instant bitcoin is worth $1000 each and paired with a stablecoin worth $1 each. With legacy liquidity structures, the smart contract would use the available liquidity to facilitate trades from 0 to infinity, but with concentrated liquidity mechanisms, liquidity providers may set "price ranges" for which they want their liquidity concentrated. So a liquidity provider may choose to set $1 to $900, this would mean that at prices below $1 dollar and above $900, the smart contract would not make use of the liquidity provided but only when prices match those within these ticks. 

 

This effectively allows liquidity providers to choose how their liquidity is used up, so, essentially deciding how the markets move and thus, the fees earned. All of these make concentrated liquidity vaults on Tulip protocol a medium-risk investment with a potentially sustainable income. 

 

"Concentrated Liquidity Strategy Vaults are a hybrid strategy and auto-compounding vault built to assist in the management of Concentrated Liquidity Positions. This vault assigns a specific price range (displayed), automatically rebalances to reduce divergent loss, and auto-compounds trading fees and rewards.^[1]"

 

Tulip leverages Orca Whirlpools for its concentrated liquidity vaults as it offers high capital efficiency. The risks involved with this include smart contracts risk - potential exploit as with any DeFi platform, counterparty risk - this has to do with potential changes in services of the third party that provides these investment products, and divergence or impermanent loss - this has to do with the changes in the prices of the assets deposited in a pool which could significantly affect how much is received by the depositor upon withdrawal request. 

 

Strategy and auto vaults: as previously mentioned, Tulip's strategy vaults host multiple yield strategies that can all be leveraged with a single asset deposit. The vault's main revenue stream is lending, thus, it is low risk as it optimizes lending strategies to generate income for the users in the pool. 

 

In addition, the vault token has more utility due to the partnership with Friktion which allows users to earn more by depositing their vault tokens into Friktion's yield strategies for a boost. 

 

That said, auto-compounding vaults typically auto-compound Raydium or Orca farms, swapping the token emissions into more LP, adding to a user's investment over time. Users typically get tokens every 5secs and harvesting takes place every 10 mins. However, some security structures limit users from hopping in and out of the pool at random but for a fixed minimum duration of 2 hours or some penalties will follow each withdrawal. 

 

Lending products: Tulip protocol offers an impermanent-loss-free investment via its single asset lending reserves where individuals can deposit single assets and earn yields with low risks. Currently supported assets include USDC, USDT, RAY, SOL, mSOL, SRM, BTC, whETH, ETH, DFL, ATLAS, POLIS, TULIP, REAL, CAVE, SAMO, ORCA, GENE, COPE, ALEPH, SLRS, LIKE, MEDIA (no farm), SNY (no farm) with a 10% fee on any interest earned.

 

Leveraged yield farming: with tulip's protocol, users can deposit a minimum of $50 and farm yields at a 3x leveraged. Although the protocol handles the entire process of buying the required asset pair to deposit into the tulip protocol's vault, the outcome of the investment entirely depends on the market trend. This investment product carries high risk and it is important to thoroughly assess its functions.

 

Essentially, Tulip protocol aims to vastly offer DeFi investment opportunities to users in a simple way that does not require much involvement from individuals. 

 

How Is The Tulip Protocol Governed?

 

They are currently about 109 members in the Tulip DAO who vote on protocol changes, although, core changes are managed via multi-sigs, they are plans to bring the entirety of the protocols governance on-chain with token holders having the access to influence changes within the ecosystem.

 

What Is The TULIP Token?

 

The TULIP token is designed to govern the Tulip protocol upon the deployment of the on-chain voting system. Token holders will be able to influence things by staking TULIP and receiving sTULIP, an on-chain representation of "vested TULIP" which can be used by users to decide on matters like Platform Fees, Treasury Usage, Protocol Improvements, Pool Reward Weighting, and Value Accrual.

 

That said, TULIP token holders can currently stake their tokens and use the sTULIP received to earn yields on the Tulip protocol. sTULIP takes 2 weeks to unstake, however, individuals can decide to unstake instantly for a charge totalling 10% of a user's total stake.

 

Why the name Tulip? 

 

According to a medium article^[2], It is a play on the Tulip bubble in Europe in the Middle Ages and also the fact that cryptocurrencies have often been referred to as a Tulipmania bubble by outsiders. In addition, the team may just love the sight of tulip farms well cared for by their owners. 

 

The previous name "Solfarm" was derived from the combination of "Solana Farming Protocol", a rather obvious one but was changed in October 2021 to Tulip Protocol.

 

To learn more about Tulip Protocol, see their official website tulip.garden.