New yETH-PUT (Options) Strategy / Vault
Summary / Motivation
Create a new Strategy/Vault for yETH which will further increase existing yields by gradually adding liquidity to incumbent options markets. This is motivated by two main goals :
- Develop an alternative strategy to earn ETH yield in addition to the current yETH vault strategy with the potential for even higher yields.
- Provide liquidity to support and help grow the nascent Option Markets that are fundamental instruments to support further diversification in DeFi. It can become a virtuous circle for Yearn (earn good returns) and other Protocols (grow the market).
Create a yETH-Put Vault, with the main objective to have a net yield in ETH (as in the current yETH Vault).
The vault would take ETH, lock in Maker to Mint DAI and then use DAI in a dual strategy:
- Deposit DAI in a Pool to earn a relatively stable return (initially 90%+ should follow this strategy). It could replicate the current yETH strategy for this portion, or deposit DAI into Swerve.
- Sell ETH Put Options (Vault sells Price insurance on ETH) to diversify earning approach and increase yield (start with 10% or less liquidity in this strategy and increase it gradually as demand grows)
Initial yield should be similar to current yETH Vault, with a huge potential to exceed it, while providing a diversified approach.
An additional outcome is that it will provide liquidity into the nascent Option Market, which is a very important Financial Instrument for the DeFi ecosystem. Yearn stepping into the Option Market can be a strong partner to help develop the Options Market and make the DeFi ecosystem stronger. This would be in the same spirit as the current collaborations with AAVE, Curve, Nexus Mutual, Rarible and others.
ETH yield would grow always, yet not necessarily a net yield in Fiat, as that would depend on the evolution of price of ETH.
This graph illustrates the key points:
Should this proposal be implemented, a yETH-Put Vault will be created. This Vault would deploy two strategies, with the weight of each strategy being adjusted over time as the Liquidity of the Option Market increases and the Risk Exposure is better “Tested in Production”.
To start, ETH is deposited into the Vault, it is locked in Maker to mint DAI at a 200% Collateralization Ration (C-Ratio). The resulting DAI would be used in two Strategies to earn a return:
- Deposit DAI in a Pool to earn a relatively stable return:
- e.g. replicate the current yETH strategy: DAI -> Curve Pool -> Earn CRV -> Sell CRV -> Buy ETH
- e.g. same yETH strategy on Swerve (http://ipfs2.swerve.fi/#/swusd): DAI -> Swerve Pool -> Earn SWRV -> Sell SWRV -> Buy ETH
- Sell ETH Put Options with a Strike Price close to the Price that ETH would be bought in Strategy 1. The two possible outcomes are:
- Keep the Put Premium because the Put option expires worthless or is not exercised -> Earn a Yield on the Collateral that secured the Put.
- Get assigned (i.e. the Put is exercised), so the Vault buys ETH at the predetermined Strike Price, but effectively, at the
Strike Price – Put Premium, so it buys ETH at a lower price than it would have originally.
There are two alternative Option Protocols identified as candidates to use for this Strategy:
The Vault would have to mint specific Strike/Expiration Combinations that then are offered on the Opyn Website for Customers looking to buy Put protection on ETH price (Yearn (https://yinsure.finance/add) already offers insurance based on Opyn).
Upside of this Protocol:
- the result is either more USDC if not assigned (Collateral needs to be posted in USDC, not DAI) or ETH at a more convenient price (if assigned).
- Protocol is open source and shows flexibility for more products.
- There are currently no fees involved from Opyn.
Downside of this Protocol:
- Puts have to be purchased by somebody to effectively earn the yield.
- It could happen that a Put series is minted and there are no buyers, effectively not providing any yield.
The Vault would provide DAI Liquidity into the DAI pool which is used as collateral for Users that can mint any Strike and Duration combination that they may like.
Upside of this Protocol:
- It is more flexible for the Put Buyer and more flexible for the Vault, as it only requires providing Liquidity into a Pool.
- Also there is a Liquidity Incentive Program that was just launched (September 9, 2020) so there are HEGIC tokens earned (for the next 3 years), which can be market sold for higher returns or staked for further rewards.
Downside of this Protocol:
- The Liquidity Pool is denominated in DAI. If there was a consistent downward trend of ETH price or a black swan event, the net result in DAI could be negative. Given the current incentives with the Liquidity Mining Program, this might be counteracted.
- Options Market is huge in Tradfi, and very lucrative. In Defi it is incumbent, liquidity and demand still small, which is a great opportunity.
- Call option is another proposal which we are in the process of elaborating.
- We have contacted the Opyn team (Alexis Gauba and key developers) and they are open to collaborate on the contract side and other aspects.
40% of tokens will be allocated on the Liquidity Mining & Utilization Rewards contracts. Liquidity providers and options holders will be receiving HEGIC tokens during a three years long M&U rewards program.
- Liquidity mining & utilization rewards: 1,204,809,000 HEGIC (40%)
- Rewards allocation: 80% — liquidity providers, 20% — holders
- Rewards in HEGIC tokens: 963,847,200 (80%) / 240,961,800 (20%)