General Overview - Risks, Hedge Strategy & Fees

Introduction

Yields tokens are synthetic spot positions that are created by providing liquidity in a Concentrated Liquidity Automated Market Maker (CLAMM) and borrowing from the GammaPools to hedge the Impermanent Loss. You can think of it as a basis trade like Ethena but using any AMM & token. There are no oracle requirements and every position is fully collateralized. Yield tokens like gETH are fully composable and accrue value over time by increasing in price. The yield is from DEX fees and represents the true interest rate for a token.

Hedge Strategy

The strategy depends on the volatility of the asset but essentially there is a pre-defined range based on the historical vol of that asset paired with either a long or short position in GammaSwap to hedge the impermanent loss. See the example below. Combining an ETH/USDC LP position in Uniswap V3 with a GammaSwap ETH long position in ETH/USDC results in synthetic ETH exposure.

This would be the net ETH exposure if the strategy was fully hedged. We conducted thousands of back tests and forward tests. The highest Sharpe strategy (highest returns for least risk) according to ETH volatility was a strategy that was 90% hedged. Ex: backtesting using following parameters: range=20%, pool_hedge_ratio=3, apy = 28.47%, sharpe = 3.596

The performance was around 25% per year based on historical performance. Now compare to the value of 1 ETH in a Uniswap V3 LP position with a GammaSwap hedge position of 0, an unhedged LP position.

The yield token strongly outperforms providing liquidity without hedging. One thing to note is that we used an estimated slippage parameter for rebalancing in these models as historical volatility is easy to calculate but historical price impact is not. Therefore, we decided to start with a wider range (+-50% log scale) to ensure that rebalancing was efficient enough. We maintain the same hedge ratio 3x in the gETH (Base) vault as we used in backtesting. Other yield tokens will have different ranges and hedging strategies depending on the asset token & volatility of the token pair in the pool. Strategies may change in the future to optimize performance.

What type of market do the yield tokens perform best in?

The yield tokens have the least drawdown in a crab market, or a market that is not moving much since the LP position will not have to rebalanced frequently. However, the yield can significantly make up for the risk if the market is volatile but mean reverting. Or if the market is trending but slowly.

The yield token will likely underperform, depending on the range, if a token trends significantly in a short period. It would still be up in USD terms, however. You will be up if nothing happens because of the high yield and if the asset token increases and eats into your principal a bit from rebalancing you're still up in USD terms. Note: Any lossees from price deviations are only realized if the strategy is rebalanced. If prices mean revert before a rebalancing, the losses are impermanent. If you entered before the price mean reverts in this situation, you could earn extra gETH. There are a few ways to think about yield tokens. You can think of them as a covered short straddle ETF, like a covered call ETF but delta neutral. You collect high yields in exchange for small drawdown risk.

APY Calculation

How is the yield calculated? It is calculated as (UniV3 Fees - Fees distributed to GammaPool / NAV ). It is not a calculation of expected return.

Fees

• Slippage - There is slippage when entering and existing a yield token position. It can be minimal but depends on the asset & available liquidity. You will be able to see your price impact in the UI. There is also some slippage during rebalancing of the strategy which is reflected in the Net Asset Value of the yield token vault.

• Management Fee - The protocol takes 10% of the yield as revenue. 30% of that revenue is distributed to stakers in ETH and the rest is sent to the Treasury.

Risks

• Drawdown Risk (~3%) - If the price moves and the strategy has to rebalance the range, there is an estimated drawdown of ~3%. This loss is only realized during a rebalance. The smart contract will rebalance before it goes out of range to minimize drawdown. Example spreadsheet available here for gETH. It will depend on the strategy.

• Smart Contract Risk - Interacting with any smart contract carries the risk of losing access to your funds given they are open source and immutable. The contract has been audited and tested for multiple months, however. Vault contracts are also permissioned limiting possible attack vectors.