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USD-denominated vault which could generate sustainable yield with minimized risk
Market-Neutral Strategy Vault is an advanced form of yield farming strategy that minimizes the exposure towards price of the non-stable token with automated rebalancing functions. The yield farming positions consist of both equity (what the user originally owns) and debt (what the user borrows from the protocol), combining together to increase the share portion in a Liquidity Pool resulting in a higher yield after deducting the borrowing interests.
The investors then earn returns by providing a pair of token liquidity to a Liquidity Pool (LP), collecting both the transaction fee as well as the farm reward. Traditional liquidity providers may suffer severe impermanent loss when the relative price of the two assets change, regardless of the direction. Our automated bot could effectively minimizes price effect as well as impermanent loss when the price fluctuates based on continuous monitoring and dynamic rebalancing triggered.
Market-Neutral Strategy is built on top of leveraged yield farming of stablecoin & non-stablecoin pairs, while the Long/Short position towards non-stable tokens is 100% hedged initially and the exposure is monitored and tracked by Automated Hedging Bot throughout the position life.
Long position refers to the purchase of an asset with the expectation that it will increase in value; the more the asset appreciates, the more the position gains. Users can either be owning the asset directly or investing in derivatives that will appreciate in value together with the asset itself.
Short position refers to the investment that bets on the value of the asset dropping; the more the asset depreciates, the more the position gains. Users can either be short-selling an asset directly or investing in derivatives that will appreciate in value opposite to the underlying asset itself.
To illustrate the mechanism in a more visualized way, let's go through the below example with initial leverage of 2x. (Assume APT/USDC = 8)
Flowchart of setting up a 2x market-neutral position
Note that the Vault User does not possess non-stable token (i.e. APT) for the initial setup. The "Short" effect on APT is generated by "borrowing", which matches user's Long position on APT in the liquidity pool.
There are many possibilities on Market-Neutral Strategy Vault other than 2x by borrowing the optimal amounts of farming token pairs. The Vault help you out with precise calculation/simulation and uninterrupted monitoring 24/7.
The Vault brings forth three main advantages:
- 1.Increases the share portion in a liquidity pool to earn higher yield even after deducting borrowing interests.
- 2.Hugely reduces the Price Effect on the position value when the price of the non-stable token fluctuates.
- 3.Specifically designs for the investors whose evaluation of performance is based on USD value (i.e. real-yield chasers)
Though the price exposure towards non-stable token is perfectly hedged at the very beginning, part of the Price Effect will still invade the position value due to impermanent loss and change of token compositions in the LP along with the price movement.
Neglecting all the yields and interests, the graph below gives a plain view on the correlation between a position's Price Effect and price movement of the farming non-stable token. The Price Effect is largely reduced to -4.0% and -2.9% even when the price of the non-stable token moves up or down 30%.
We can also notice that the Price Effect change at different price ranges varies. The nearer to the initial opening price, the flatter the slope of the negative Price Effect (Pos. 1), and vice versa (Pos. 2). Due to the convex nature of the curve, the hedging effect diminishes when the price moves away from the initial opening price. Therefore, there is a genuine need to rebalance the position at optimal timings so as to stabilize the position's value change.
So the million dollar question is how to identify a good time to rebalance the positions, as the moment of rebalancing is a bit tricky to determine. If the rebalancing is triggered too frequently, position value gets loss by incurring a large amount of transactional cost. Not to mention if the price of the non-stable coin returns to the original after rebalancing, the impermanent loss caused by the temporary price fluctuation will be realized.
Our Automated Hedging Bot help farmers out to determine the best timing to trigger rebalancing so as to minimize the potential drawdown, retaining more yields gained as real profits rather than the compensations of the potential losses.
The fully-backtested bot does all the maths and transactions at the backend and rebalances the strategy to market neutral with the benefits of:
- 1.Time-saving of users on calculation, simulation and multiple operations.
- 2.Rebalancing the amount based on "Net" delta value, so it minimizes the transactional cost as well as slippage.
- 3.24/7 continuous monitoring so user could be hassle-free
Rebalance the position only when it meets the following requirements:
- 1.The price trend of the non-stable coin is going through tremendous changes
- 2.The accumulated interest of one of the assets is too high and affect the delta too much
- 3.The leverage level is too high or low to achieve the best risk-weighted rewards
The USD-denominated Market-Neutral Strategy Vault is paired up with the three Bots:
- Automated Compounding Bot - to maximize the earnings of positions
- Automated Stop-loss Bot - to protect the principal of the position in fiat value
- Automated Hedging Bot - to minimize the downside of your position due to impermanent loss and price effect
Users can simply invest and assess the vault performance in USD. This "USD-in, USD-out" vault serves as a higher yield option to market-neutral investors.