The strategy manages a 2-asset pool of ETH and YFI. The strategy market-makes with, sells, and buys YFI and ETH such that the value of each asset always represents 50% of the total pool value in USD terms. In black swan events, the strategy provides a safety valve to rescue yETH vault from potential Dai liquidity crunch. In such event, it transfers tons of ETH to yETH’s Maker vault to shield it from liquidation.
Users deposit ETH and/or YFI with the expectation that their deposit will always be worth 50% ETH and 50% YFI in USD terms. If a deposit changes the 50:50 ETH:YFI USD value of the pool, some ETH or YFI are swapped to restore the invariant. The pooled capital is put to productive use mainly on the Uniswap YFIETH pool to collect trading fees. Because of the 50:50 invariant, there can be excess ETH and YFI. The excess ETH or YFI funds are invested in the yETH-Vault or Aave, respectively.
When YFI becomes cheap in ETH terms (i.e. YFIETH ticker dumps), the strategy buys enough YFI with ETH in order to bring the value of YFI holdings back to 50% of the total vault value, in USD terms. Similarly when YFI becomes too expensive in ETH terms (i.e. YFIETH ticker pumps), the strategy sells just enough YFI into ETH to bring the total value of ETH holdings back to 50% of the total vault value, in USD terms.
Meanwhile, the pools checks on the health of yETH vault’s collateral in Maker after each interaction. If the vault is at extreme risk, implying yETH vault was unable to deleverage due to a Dai liquidity crunch, sufficient amount of ETH is is transferred to the Maker vault to avoid it getting liquidated. In return for this insurance service, the yETH vault shares a small portion of its earnings with the yETH-YFI-BULL pool.
Buying YFI dips with ETH and selling YFI pumps into ETH is a common practice since many in the community are very bullish on both. Doing this individually is intensive manual labour and costs lots of gas. This strategy automates this investment strategy, providing a valuable service to those who are long both ETH and YFI and want to accumulate more of both continuously.
As a side benefit, this non-levered strategy provides a safety net for the yETH vault during black swan events, in return for a small profit-sharing from yETH to yETH-YFI-BULL. This improves the robustness of the yEarn ecosystem generally.
The maximum possible amount of ETH and YFI is deposited into Uniswap’s YFIETH pool to collect trading fees which grows both assets. Because depositors are long both assets, they should be relatively insensitive to impermanent loss. Because Uniswap is a 50:50 pool, not all capital can be deployed to Uniswap while maintaining the 50:50% USD value invariant of ETH:YFI. Hence, yETH-YFI-BULL deposits excess ETH to yETH vault. If it has excess YFI instead, it deposits it into Aave and/or the upcoming yYFI vault when implemented.
When YFIETH price changes, the value of total ETH in the strategy’s vault changes (in USD terms).
If total USD value of ETH is greater than that of YFI (i.e. YFIETH ticker went down), the pool does the necessary unwinding and swapping of ETH into YFI to restore the 50:50% invariant. As usual if excess YFI results, it gets deposited to Aave or yYFI when implemented.
If total USD value of ETH is less than that of YFI (i.e. YFIETH ticker went up), the pool does the necessary unwinding and swapping of YFI into ETH to restore the 50:50% invariant. As usual if excess ETH results, it gets deposited to the yETH vault.
In both scenarios, excess funds are utilized fully first, and if the invariant is still not restored, sufficient amount of Uniswap shares are unwound to top-off the required remainder. Hence, strategy maximizes Uniswap utilization.
Small +/- 5% change in the USD value of either ETH or YFI holdings is tolerated so as to reduce the number of rebalancing, hence reducing gas costs. This saves the strategy from unnecessarily balancing when the YFIETH ticker is just moving in a tight range.
Standard practices in other vaults, such as 5% withdrawal fees, and a gas subsidy slush fund, are applied in this strategy as well.
With each pool interaction, a check is made on the health of the yETH vault. If the next OSM price renders yETH Maker vault under-collaterlized, sufficient amount of ETH is transferred from yETH-YFI-BULL pool to yETH’s Maker vault.
The higher the fee-sharing yETH vault offers to yETH-YFI-BULL vault, the more attractive a pool the latter becomes, which attracts more ETH deposits, which increases the fire-power of yETH-YFI-BULL to counter any Dai liquidity crunch in a black-swan type of events. Suggested fee is 3-5%.
YFI and ETH bulls considered these two assets for long-term holding, so a simple low-risk strategy is fitting here. Uniswap is chosen as the main vehicle for accumulation of wealth because it has high volume which brings in attractive returns in both assets from fees. Because depositors are long both assets, impermanent loss is less relevant. Of course both assets can go down in USD value, but that is not the metric of this strategy’s customers. Their metric is accumulating more units of both assets. By definition, anyone bullish both assets believes the appreciation of their USD value is a long-term inevitability.
The symbiotic relationship between yETH and yETH-YFI-BULL clearly brings safety to the whole yEarn ecosystem and arguably to the Maker protocol itself given the fact that yETH vault is the largest CDP holder. A 3-5% of yETH’s earning being shared with yETH-YFI-BULL vault aligns incentives perfectly.
The strategy is not leveraged so there are no unwinding risks.
In extreme events where the Maker system completely collapses due to Dai liquidity crunch in a black swan, there can be liquidation risks for the ETH that was transferred to Maker to rescue yETH. Maker continues to improve upon their liquidation mechanisms however, so if Black Thursday is replayed verbatim, the cascading liquidations should go smoother.
This strategy inherits the risks of the underlying protocols and vaults being used, and the risks of bugs in its own smart contracts.
The strategy is implemented.
The strategy is not implemented.
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