yvUSD Secret Sauce: Leveraging Stablecoin Yields

well... Not a secret because we are telling you all about it.

yvUSD uses a Morpho flashloan to reach the exact target leverage in a single step. The core logic in _lever() calculates the position size:

targetCollateral = (equity * targetLeverageRatio) / WAD
targetDebt       = targetCollateral - equity

The strategy borrows the exact flashloan amount needed (targetDebt - currentDebt), converts the full sum to collateral, supplies it to Morpho, and borrows against the new position to repay the flashloan. Because the entire operation is atomic, the position either reaches the target leverage or the transaction reverts — there is no half-built state. Slippage is bounded by a single configurable parameter. Capital starts earning at the full leverage ratio immediately, with minimal execution cost eating into returns. Withdrawals work the same way in reverse. The strategy flashloan-deleverages to free up the requested capital, so users don't need to manually unwind anything.

Reward compounding is where tokenized-looper, and Yearn strategies in general, creates substantial value for depositors. Morpho markets often distribute MORPHO token rewards via Merkl. Without automation, these rewards sit unclaimed — earning nothing. The tokenized-looper turns them into additional leveraged yield automatically.

Every time the Yearn keeper calls report(), the internal _harvestAndReport() function executes three steps in sequence:

function _harvestAndReport() internal override returns (uint256 _totalAssets) {
    _claimAndSellRewards();
    _lever(Math.min(balanceOfAsset(), availableDepositLimit(address(this))));
    _totalAssets = estimatedTotalAssets();
}

First, _claimAndSellRewards() collects any accrued MORPHO rewards and sells them through an auction for the base asset. Then _lever() takes every idle token, including the freshly converted reward proceeds, and deploys them into the leveraged position at the target ratio. Finally, the strategy reports its updated total assets, which increases the vault's price per share (PPS).

The key insight is that rewards don't just get reinvested — they get amplified by the leverage ratio. If the strategy earns 0.5% annually in MORPHO rewards and operates at 3x leverage, the re-levered rewards contribute approximately 1.5% to the effective APY. That's three times the value compared to simply holding the reward tokens or reinvesting them without leverage.

This compounding happens automatically in every report() call. Over a year, the difference between "claimed, re-invested, and amplified at leverage" versus "sitting unclaimed in a Merkl contract" compounds into a meaningful APY gap — especially in markets with significant MORPHO incentives.

A leveraged position drifts as market conditions change. If the collateral appreciates relative to the debt, leverage drops and the position under-earns. If the collateral depreciates, leverage rises and liquidation risk grows. The tokenized-looper handles this with a rebalancing system designed to act only when the math says it's worth it.

The _tendTrigger() function implements a multi-condition gate:

function _tendTrigger() internal view override returns (bool) {
    if (_isLiquidatable()) return true;                // Emergency: always rebalance
    if (currentLeverage > maxLeverageRatio) return true; // Safety ceiling: always rebalance
    if (block.timestamp - lastTend < minTendInterval) return false; // Cooldown: 2 hours
    // Only rebalance if leverage drifted outside the buffer band
    if (currentLeverage > targetLeverageRatio + leverageBuffer) {
        return _isBaseFeeAcceptable();  // ...and gas is below 200 gwei
    }
    if (currentLeverage < targetLeverageRatio - leverageBuffer) {
        return _isBaseFeeAcceptable();
    }
    return false;
}

The strategy rebalances only when all of the following are true:

• Leverage has drifted outside the buffer band. With a 3x target and 0.25x buffer, the strategy tolerates leverage between 2.75x and 3.25x. Small fluctuations within this range are ignored: they cost more to correct than they're worth.

• Gas is acceptable. The maxGasPriceToTend parameter (default: 200 gwei) prevents rebalancing during gas spikes. A rebalance that costs $200 in gas to recover $50 of yield improvement simply doesn't execute.

• Enough time has passed. The minTendInterval (default: 2 hours) prevents rapid-fire rebalances during volatile periods where the position might oscillate around the buffer boundary.

• There's enough capacity. The strategy checks that there's sufficient deposit capacity and flashloan liquidity before attempting a rebalance, avoiding wasted gas on transactions that would fail.

When rebalancing does trigger, the LooperKeeper contract batches multiple operations: liquidity reallocation via Morpho's PublicAllocator, reward claims, and the actual tend. This further reduces overall gas costs. The result is that leverage stays within a tight range of optimal without bleeding yield to unnecessary gas.

Yearn is verifiable DeFi, so we can verify everything onchain. Every looper strategy in Yearn has a target leverage ratio, a max leverage ratio, and a current leverage ratio that keeps the strategy within reasonable limits. You can query the values directly from onchain data, or take a shortcut and use this Python script to pull the data for you.

The tokenized-looper doesn't operate alone. It's one of several strategies inside a Yearn V3 vault, and the vault itself runs a continuous optimization loop to maximize aggregate yield across all of them. This is the core idea behind Yearn vaults: a vault continuously shifts capital across a set of strategies in order to find the highest yield opportunities for depositors.

Yearn's Debt Allocation Optimizer (DOA) is a Python system that runs offchain to calculate ideal allocations. It checks APR data for each strategy and determines the optimal allocation for total vault yield. The results are written onchain via setStrategyDebtRatio() on the DebtAllocator contract, which stores the target allocation for each strategy.

Yearn's keeper system runs continuously. When the DebtAllocator indicates that a strategy's actual allocation has drifted from its target, the keeper calls update_debt() on the vault to move assets. This is the mechanism that actually moves assets to match the target specified by the debt allocator on a frequent basis.

This vault-level optimization runs continuously alongside the strategy-level automation described above. The tokenized-looper maximizes yield within its allocated capital. The DOA maximizes yield across all strategies by deciding how much capital each one gets.

The tokenized-looper turns a passive deposit into an actively managed leveraged position without any active management from the user. This is a new direction for Yearn, which has often stuck with tried-and-true less complex yield strategies. But leveraged strategies now offer users a host of benefits:

• Simple and efficient leveraging with flashloans

• Rewards that compound with leverage

• Automatic leverage management to avoid drift

• Yield optimization between strategies

The user experience is simple: deposit your USD-pegged stables into yvUSD and watch the yield roll in as the strategy leverages, compounds, and rebalances on your behalf. Let the complexity live in the contracts, not in your manual operations.

See more data about yvUSD and deposit here.

yvUSD uses a Morpho flashloan to reach the exact target leverage in a single step. The core logic in _lever() calculates the position size:

targetCollateral = (equity * targetLeverageRatio) / WAD
targetDebt       = targetCollateral - equity

The strategy borrows the exact flashloan amount needed (targetDebt - currentDebt), converts the full sum to collateral, supplies it to Morpho, and borrows against the new position to repay the flashloan. Because the entire operation is atomic, the position either reaches the target leverage or the transaction reverts — there is no half-built state. Slippage is bounded by a single configurable parameter. Capital starts earning at the full leverage ratio immediately, with minimal execution cost eating into returns. Withdrawals work the same way in reverse. The strategy flashloan-deleverages to free up the requested capital, so users don't need to manually unwind anything.

Reward compounding is where tokenized-looper, and Yearn strategies in general, creates substantial value for depositors. Morpho markets often distribute MORPHO token rewards via Merkl. Without automation, these rewards sit unclaimed — earning nothing. The tokenized-looper turns them into additional leveraged yield automatically.

Every time the Yearn keeper calls report(), the internal _harvestAndReport() function executes three steps in sequence:

function _harvestAndReport() internal override returns (uint256 _totalAssets) {
    _claimAndSellRewards();
    _lever(Math.min(balanceOfAsset(), availableDepositLimit(address(this))));
    _totalAssets = estimatedTotalAssets();
}

First, _claimAndSellRewards() collects any accrued MORPHO rewards and sells them through an auction for the base asset. Then _lever() takes every idle token, including the freshly converted reward proceeds, and deploys them into the leveraged position at the target ratio. Finally, the strategy reports its updated total assets, which increases the vault's price per share (PPS).

The key insight is that rewards don't just get reinvested — they get amplified by the leverage ratio. If the strategy earns 0.5% annually in MORPHO rewards and operates at 3x leverage, the re-levered rewards contribute approximately 1.5% to the effective APY. That's three times the value compared to simply holding the reward tokens or reinvesting them without leverage.

This compounding happens automatically in every report() call. Over a year, the difference between "claimed, re-invested, and amplified at leverage" versus "sitting unclaimed in a Merkl contract" compounds into a meaningful APY gap — especially in markets with significant MORPHO incentives.

A leveraged position drifts as market conditions change. If the collateral appreciates relative to the debt, leverage drops and the position under-earns. If the collateral depreciates, leverage rises and liquidation risk grows. The tokenized-looper handles this with a rebalancing system designed to act only when the math says it's worth it.

The _tendTrigger() function implements a multi-condition gate:

function _tendTrigger() internal view override returns (bool) {
    if (_isLiquidatable()) return true;                // Emergency: always rebalance
    if (currentLeverage > maxLeverageRatio) return true; // Safety ceiling: always rebalance
    if (block.timestamp - lastTend < minTendInterval) return false; // Cooldown: 2 hours
    // Only rebalance if leverage drifted outside the buffer band
    if (currentLeverage > targetLeverageRatio + leverageBuffer) {
        return _isBaseFeeAcceptable();  // ...and gas is below 200 gwei
    }
    if (currentLeverage < targetLeverageRatio - leverageBuffer) {
        return _isBaseFeeAcceptable();
    }
    return false;
}

The strategy rebalances only when all of the following are true:

• Leverage has drifted outside the buffer band. With a 3x target and 0.25x buffer, the strategy tolerates leverage between 2.75x and 3.25x. Small fluctuations within this range are ignored: they cost more to correct than they're worth.

• Gas is acceptable. The maxGasPriceToTend parameter (default: 200 gwei) prevents rebalancing during gas spikes. A rebalance that costs $200 in gas to recover $50 of yield improvement simply doesn't execute.

• Enough time has passed. The minTendInterval (default: 2 hours) prevents rapid-fire rebalances during volatile periods where the position might oscillate around the buffer boundary.

• There's enough capacity. The strategy checks that there's sufficient deposit capacity and flashloan liquidity before attempting a rebalance, avoiding wasted gas on transactions that would fail.

When rebalancing does trigger, the LooperKeeper contract batches multiple operations: liquidity reallocation via Morpho's PublicAllocator, reward claims, and the actual tend. This further reduces overall gas costs. The result is that leverage stays within a tight range of optimal without bleeding yield to unnecessary gas.

Yearn is verifiable DeFi, so we can verify everything onchain. Every looper strategy in Yearn has a target leverage ratio, a max leverage ratio, and a current leverage ratio that keeps the strategy within reasonable limits. You can query the values directly from onchain data, or take a shortcut and use this Python script to pull the data for you.

The tokenized-looper doesn't operate alone. It's one of several strategies inside a Yearn V3 vault, and the vault itself runs a continuous optimization loop to maximize aggregate yield across all of them. This is the core idea behind Yearn vaults: a vault continuously shifts capital across a set of strategies in order to find the highest yield opportunities for depositors.

Yearn's Debt Allocation Optimizer (DOA) is a Python system that runs offchain to calculate ideal allocations. It checks APR data for each strategy and determines the optimal allocation for total vault yield. The results are written onchain via setStrategyDebtRatio() on the DebtAllocator contract, which stores the target allocation for each strategy.

Yearn's keeper system runs continuously. When the DebtAllocator indicates that a strategy's actual allocation has drifted from its target, the keeper calls update_debt() on the vault to move assets. This is the mechanism that actually moves assets to match the target specified by the debt allocator on a frequent basis.

This vault-level optimization runs continuously alongside the strategy-level automation described above. The tokenized-looper maximizes yield within its allocated capital. The DOA maximizes yield across all strategies by deciding how much capital each one gets.

The tokenized-looper turns a passive deposit into an actively managed leveraged position without any active management from the user. This is a new direction for Yearn, which has often stuck with tried-and-true less complex yield strategies. But leveraged strategies now offer users a host of benefits:

• Simple and efficient leveraging with flashloans

• Rewards that compound with leverage

• Automatic leverage management to avoid drift

• Yield optimization between strategies

The user experience is simple: deposit your USD-pegged stables into yvUSD and watch the yield roll in as the strategy leverages, compounds, and rebalances on your behalf. Let the complexity live in the contracts, not in your manual operations.

See more data about yvUSD and deposit here.

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>2.8K subscribers