Proposal: the yETH-YFI-BULL strategy

Simple Summary

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.

Abstract

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.

Motivation

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.

Specification

Overview

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%.

Rationale:

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.

Risks:

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.

For:

The strategy is implemented.

Against:

The strategy is not implemented.

Copyright

Copyright and related rights waived via CC0.

48 Likes

Risk Mitigation strategies are good, and this one provides clear potential to support the yETH leveraged strategy in Black Swan Events.

I was thinking that option plays could be considered in the future too (eg https://opyn.co/#/) to mitigate risk, but that market is too small to be effective now.

8 Likes

On a first pass this looks great. Using the excess ETH as a backstop for yETH feels like an elegant solution.

That being said, have other options been introduced for backstopping yETH via profit sharing? Or is this the first one?

1 Like

I don’t agree with the motivation but I agree with the existence of such strategy.

Being long both assets doesn’t mean I don’t care about IL. Being 50-50 with infinitesimal rebalancing means I will never get exposure to the full exponential growth if one asset leaves the other behind.

Some people like to rebalance continuously, this product may be for them. But personally I would want to rebalance when I think it makes sense.

17 Likes

I would add Eth to this pool purely as added insurance on my yETH vault investment.

3 Likes

I feel like I’m not understanding really what happens here. For the 50/50 balance of YFI and ETH, this would automatically be maintained by the Uniswap LP– since this is how Uniswap works.

So this seems to essentially be “Uniswap LP, but with insurance for yETH vault and an insurance fee because of this”.

Am I misunderstanding the strategy?

2 Likes

I’m a little hesitant to continue including YFI in strategies because that means less staked in governance, which means less overall safety for the actual protocol.

But, at the same time, I agree that YFI has lots of value, and people should be able to long it if they want. And I’d prefer people do so on the yearn platform than elsewhere.

What are other people’s thoughts?

6 Likes

your thinking is spot on, but as I have had painful experienced in the past, this ’ the value is going to be constant because that is how uniswap works’ is more fiction than truth. I have yet to find a convincing explanation for it, but more often than not while pooling two ‘normal’ tokens (ie not one made up scam token and eth) i ended up with less than i had (and not bc both went down in value).

In any case should there not be such issue, I would pose the question how will the strategy compete with arbitrage bots that do what is proposed.

So from my point of view (and I might lack enough knowledge on LPs) we have a a uncertainty simply because of the fact that we’re pooling the assets, and add the fact that the strategy would compete with arb bots whenever the price changes.

Also one important item that I feel wasnt addressed is how is the price determined? One Oracle, several?

In conclusion for me while an interesting idea, this strategy introduces too many variables and adds the real possibility that the deposit could actually lose value, which is why my vote would be negative, at least until yearn decides to push a different line of products that might appeal to a different set of customers (ie more reward & more risk)

1 Like

I will vote Yes on this.

Biggest pro for me with this is the risk mitigation on the yETH vault in the case of any extreme events.

2 Likes

I would prefer a strategy that switched between different AMMs, not exclusive uniswap, or one that split the holdings over several AMMs depending on the volume etc on each. It could switch between uni, balancer, mooniswap, sushiswap… whatever…
but if there’s a tonne of liquidity in uniswap it may not be the most profitable place to market make.
I can easily park liquidity in uniswap myself and get great returns. What would benefit me is having a tool that switched between more profitable AMMs without me having to monitor it or pay the gas individually.

1 Like

I either do not understand what you’re trying to get across, or this vault’s concept is indistinguishable from just using Uniswap.

Folks will either deposit ETH, YFI, or both. You mention that the maximum allowable capital will be put to work in Uniswap: by definition, that means that one token will be drained from the vault’s reserves. For example, if there was $10,000 in ETH and $12,000 in YFI, the vault would use $10,000 of both ETH and YFI, leaving $2k in YFI in the vault as unworking capital.

Now, you mention that if the value of YFI dumps, you will “Buy YFI with ETH.” Not only will that be automatically done by Uniswap arbitrageurs, but the vault will have no ETH to do anything with regardless. There is no action that can be taken by the vault to remedy this imbalance.

The only thing this vault could do as described (once again, unless I’m misreading it) is collect tokens from users and add or remove to the Uniswap pool as another transaction. This would be two transactions instead of one, so I don’t see how gas would be saved either.

I’m strongly opposed to this strategy as written, since I don’t understand what value it would bring to the depositors to this vault.

4 Likes

I agree with @boatonagoat , I think YFI should be used in governance.

I am not an expert, but I would suggest the creation of a “StakedYFI” token:
The “StakedYFI” should represents governance rights and should be redeemable 1-to-1 with YFI actually locked in governance. This staked version could be used in a ETH-StakedYFI strategy vault as described by @aliatiia solving the low governance participation issue as this new token will guarantee both voting rights and market exposure.

Anyway, some thoughts on the uniswap pool: I am not happy with giving my YFI or StakedYFI to a liquidity pool as I would like to maintain my governance rights, big players could just buy YFI from uniswap and roll-back this proposal to actually move yEarn governance away from the initial community.

Probably a stupid question: Can’t we just take a cut from the deposited ETH in the yETH and keep it as reserve in case of a blackswan event where DAI repay does not work?

In case the above was actually stupid (and I think it is because this reserve could just be accounted for with an higher collateralization ratio), If the ETH:YFI pool main purpose is yETH vault safety, why not just create a pool internal to yEarn (only accessible to the token holders) where token holders provide YFI and ETH is provided by yETH vault which was over-subscribed and just keep this as reserve for a blackswan event? if YFI price moves higher, the ETH quantity provided by yETH should grow accordingly and viceversa. This would probably reduce the overall APY of the yETH vault but should increase the overall security.

Even better would be the aforementioned “offline” YFI-ETH reserve but with StakedYFI.
This would guarantee maximum governance engagement and a safe reserve.

Possible drawback of this “Offline” reserve is that YFI could lose some value as it becomes less and less traded and people lose interest but I think it will not happen as the token “pays dividends” and gives governance rights.

To avoid stagnation and the reduced velocity of YFI caused by the offline reserve, an option could be that the yETH vault can interact with the offline ETH-YFI vault so that it buys YFI when YFI is high in value and gives back YFI when YFI is lower in value, as described by @aliatiia.
This however could be seen as manipulation as the actual value of YFI is created by the protocol itself and not by the free market.

My personal take would be anyway the creation of StakedYFI to facilitate governance engagement to use in any pool the community agrees on.

To conclude this long post, I am not expert in Economic nor Game theory and neither Programming and I am open to discussions on whatever I wrote here in the hope that someone wants to share a thoughts or two on what I have come up with at 4.00 AM instead of getting some healthy sleeping.

3 Likes

I had a thought recently that I think I might create a YIP for. Instead of worrying about creating a new vault to cover the risks of the others, why not create a subsection of the yETH vault, say 10-20% of it, that is held in ETH:DAI Uniswap (I prefer Balancer, but to each their own). This ensures the yETH vault is self-insured from either a DAI or an ETH perspective - if DAI shoots super high we suddenly have a lot more ETH to mint DAI, and if ETH starts to dip we end up with more ETH to feed into the yETH MKR vault to help boost the collateral.

I’d prefer a Balancer pool with ~5% swap fee for the ETH:DAI, as that both limits the amount of impermanent loss but also creates a ~10% window of valuation where rebalances don’t occur. Keeps things a bit more stable.

Yes, this will likely reduce the %earn from the yETH vault, but I’d argue that increased long-term health is of greater value than short term gains chasing.

2 Likes

Working on building option primitives to make this a reality!

I think strategies like this proposal could be augmented to include some options to support risk management.

3 Likes

At the end of the day, I think people should be able to use their YFI however they wish. People who prize it as high quality collateral can use it as such on lending platforms.

And people who want to keep it locked for voting and earn the fee income should do so.

Though I don’t think we should entertain mechanisms where people try to do both (like vote with aYFI for example).

4 Likes

I think this insurance on the yETH pool is a great idea (although realistically, I’d maybe like to see the current strategy play out a while longer before making any changes) and seems to be what a lot of people like about the current proposal. Additionally, the most pressing thing to address with the yETH vault seems to be working with Curve to adjust their A value on the Y pool (although I admittedly don’t know much about this).

Realistically I don’t see any reason to make a vault when one can just make their own YFI/ETH LP tokens– but it might be worth amending an insurance situation such as this with the ETH/DAI Uniswap or Balancer pool in case of an emergency.

2 Likes

I am for it but with some or all of these improvement suggestions:

  1. Why does it have to be ETH ? Sure we’re all long on ETH, but it’s obvious ETH Devs as a group, do not have any urgency about fixing high gas fees any time in the next few days or weeks. I’d only vote for this if it directly addresses high gas fees in one or more manners. It’s costing us $25K in gas fees a day lately to execute Smart Contract strategies behind this ecosystem. It could be an L2 Solution, Banteg’s solution, or even another coin and network. It could be a combo of solutions.

To fix high gas fees forever: why don’t we just reward and utiilize some other top 50 coin and network that has already shown they’ve already done something about speed and TPS?. I honestly don’t care who as long as the problem is fixed. It could be Cosmos, Cardano, Ripple, Stellar…something with cheap fees we could port the Smart Contracts to in an easy manner while maintaining integrity and security of the contracts.

There are also multiple advantages to being able to execute strategy changes faster. It will have the similar effect that colocation has with physical exchanges like Chicago trading houses: he who pulls the trigger fastest, wins. These firms use high end gear like Cisco Nexxus equipment to shave microseconds off of latency to servers receiving orders from trading houses that are right next door or down the street, just to get their orders in ahead of the competition.

  1. I love the cut of your jib in trying to get us YFI HODLers greater liquidity and returns. YFI has a tiny supply though as we all know.

How about a ??? / YFI LP with a 98% to 2% YFI pool so we get gains for YFI HODLers but we’re not tying up as much very limited YFI as in a 50/50 pool? I suppose it could be ETH, but we’d be doing all of DeFi and crypto a favor if we could reduce ETH congestion by moving some of our strategies.

  1. What if this was a “premium” solution, like a reward for us YFI HODLers, by limiting access to Governance instead of yEarn or yVaults. Returns are meager at the moment for governance because there’s few options to trade it when compared to other vault options.

It’d run Vault strategies to stack YFI and x coin (that is popular, cheap, very fast, and has a high TPS) but the difference is: it would only be available in Governance, meaning it would incentivize community ownership of Governance by providing YFI HODLers higher rewards.

  1. Lastly, you must have never staked AMPL before on Uniswap because Impermanent Loss is a real thing. Ampleforth helps encourage mining by providing mining multipliers to mitigate this but IP is real. There is no way, us YFI HODLers are going to put up with us losing huge chunks of our precious YFI due to IL just because they wanted to be an LP.

We’re trying to stack YFI here, not lose it. I could only support a Uniswap-type solution if Impermanent Loss (IL) was addressed directly such as two separate pools of two different assets that are either: deployed in Single Sided AMM like Andre is planning, Mooniswap which claims to nearly eliminate IP and provide up to 50-200% more profit to LPs compared to other solutions such as Uniswap, and Bancor V2.

3 Likes

What if everything dumps (both YFI and ETH) causing a liquidity crunch on DAI. ?

Then what?

There is no way, us YFI HODLers are going to put up with us losing huge chunks of our precious YFI due to IL just because they wanted to be an LP.

Totally agree with this, the huge impermanent loss risk associated with this strategy is highly concerning

6 Likes

Can I ask - why not use a Balancer pool, and get BAL tokens as well?

3 Likes