ByteTrade Lab: Besides GMX, what other innovative on-chain perpetual contract protocols are there?
Sort out some protocols that address the challenges brought by the volatility of underlying assets.Original Title: 《Innovations of On-Chain Perpetual Protocols Part 2》
Authors: Frank Hu, Kester Wu
Compiled by: Qianwen, ChainCatcher
Key Takeaways
* Given GMX's "real and sustainable" yield, more protocols are being built on GMX to leverage $GLP yields.
* Some protocols are establishing Delta-neutral strategies based on GMX.
- Rage Trade uses other protocols like Balancer, Uniswap, and Aave to provide pre-packaged Delta-neutral strategies for $GLP holders and yield for stablecoin holders.
- Umami Finance attempts to utilize TracerDAO's perpetual pools to provide hedging strategies for $GLP holders. However, the product was indefinitely terminated.
In Part One, we mentioned that GMX's LPs face 1) GMX's open interest (OI) and 2) price volatility of the underlying assets.
Some protocols have begun to address the challenges posed by the volatility of the underlying assets.
Related Reading: 《ByteTrade Lab: A Detailed Analysis of Innovations in On-Chain Perpetual Contract Protocols Using GMX as an Example》
Rage Trade
After speaking with Rage Trade's founder @crypto_noodles, we learned that the protocol aims to 1) provide pre-packaged Delta-neutral strategies for GMX LPs and 2) offer stronger yields for stablecoin holders.
"The vision of Rage Trade is to create real and sustainable $GLP yields, becoming the largest stablecoin yield venue on Arbitrum."
To achieve this goal, Rage Trade plans to offer two products: a primary layer (Risk-On Vault) and a secondary layer (Risk-Off Vault).
The simple workflow below describes how Rage Trade's vault operates:
Referring to the mind map above, the orange numbers/text show information about the primary layer, while the blue numbers/text show information about the secondary layer.
Primary Layer:
- Users participating in the primary layer deposit $GLP into the Risk-On Vault on Rage Trade. The subsequent actions are fully automated and sent by Rage's vault contract.
- Based on the weights of $ETH and $BTC in the $GLP pool, Rage Trade uses Balancer flash loans to borrow the corresponding amounts of $ETH and $BTC.
- The borrowed $ETH and $BTC are sold on Uniswap for $USDC, creating a synthetic short position.
- In addition to selling $ETH and $BTC on Uniswap for yield, the $USDC from the secondary layer will be deposited into Aave as collateral to borrow $ETH and $BTC.
- The borrowed $ETH and $BTC from Aave are used to repay the Balancer flash loan.
This entire process allows GMX LPs to enjoy $GLP yields with a Delta-neutral position, significantly reducing the volatility of the underlying assets.
Secondary Layer:
- Users participating in the secondary layer deposit $USDC into Rage Trade's Risk-Off Vault.
- The $USDC is lent to the secondary layer to maintain a 1.5x health factor on Aave.
- Secondary layer participants earn yield in two ways. First, the $USDC deposited in Aave generates additional yield.
- A portion of the yield from $GLP is allocated to the secondary layer based on the utilization of $USDC in the secondary layer. The method of calculating utilization is shown in the diagram:
Assuming a $ETH yield of ~20%, the net yield of the "Risk-On Vault"/primary layer is ~24.8%, which includes the $GLP yield shared with the secondary layer. Note that the "Risk-On Vault" regularly compounds the returns from $ETH.
Conversely, if $GLP holders purely HODL (long-term holders), they will receive a -3% return due to the decline in asset prices within the $GLP pool.
Assuming a $ETH yield of ~20%, the net yield of the "Risk-Off Vault"/secondary layer is ~8.27%. The yield can be divided into two parts: 1) Aave's loan interest yield ~1.05% 2) $GLP's $ETH yield ~7.22%.
The "yield funnel" for both layers is shown below:
Key Challenges
The protocol faces two main challenges: 1) balancing risk and 2) heavy reliance on $GLP yields.
The positions within the vault need to be balanced for two reasons: 1) changes in weights within the $GLP pool or 2) price changes of $ETH and $BTC.
The short positions on Aave are updated every 12 hours. This means that every 12 hours, if the prices of $ETH and $BTC rise, profits will be taken from $GLP to repay the short positions. To improve capital efficiency, Rage Trade maintains a 1.5x health factor on the short positions in Aave.
If the prices of $ETH and $BTC spike within the designated 12-hour period, there may be liquidation events on Aave.
In this case, participants in the secondary layer will lose all the funds they lent to the primary layer. Meanwhile, participants in the primary layer may have to reduce their positions in $GLP to regain Delta neutrality or completely lose their Delta-neutral positions.
The protocol heavily relies on $GLP yields. This is not a systemic risk, but users should be aware of the potential volatility of yields.
The team conservatively assumes a constant borrowing rate of 20% for $ETH. However, participants should note that the yield for $ETH is highly volatile. Over the past two months, the average borrowing rate for $ETH has been 26.5%. There were 44 instances where the yield for $ETH fell below 20.0%, with the lowest borrowing rate being ~9.1%.
Umami Finance
At its inception, Umami Finance aimed to bring institutional capital into Web 3.0, promising a "sustainable" 20% annual yield.
Umami's $USDC vault provides liquidity to GMX and passes the yields from GLP to depositors while hedging unnecessary market risks.
$USDC Vault (Decommissioned)
Umami's $USDC vault generates yield by providing liquidity to GMX, and in exchange, the vault receives $GLP yields.
- Users deposit $USDC into the $USDC vault and receive a receipt token, the ERC-4626 token $glp$USDC. Users can exchange $glp$USDC for stablecoins on Uniswap at any time to exit the vault.
- The vault uses undisclosed deposited liquidity to mint $GLP and collect GMX trading fees.
- The remaining deposited liquidity is used to mint $BTC and $ETH hedging derivatives on TracerDAO (now called Mycelium).
By purchasing leveraged tokens (3S-BTC/3S-ETH) as a hedge, the vault establishes short positions in $ETH and $BTC. This allows the vault to earn GLP yields (from trading fees) while hedging against price volatility in $BTC and $ETH.
Tracer Hedging Derivatives
Umami utilizes Tracer's perpetual pools to hedge unnecessary price volatility of $GLP. Tracer's perpetual pools are synthetic derivatives that allow users to take leveraged long or short positions on assets. Each pool has a predetermined exposure (e.g., 3S BTC or 3L ETH).
These positions are non-redeemable and are fully used for collateral.
TracerDAO Perpetual Pools
The perpetual pools are managed by a contract that specifies the value transfer between the long and short sides of the collateral pool based on feedback from the underlying price.
- The pool has two sides: long and short. Users deposit $USDC on the long side of the collateral pool to mint a long token, and vice versa.
- Users can convert long/short tokens into $USD by burning either token.
- The value of the tokens is determined by the proportion of collateral held by each side in the collateral pool.
- The amount of collateral held in the short and long pools is dynamically changing.
- Rebalancing occurs every hour, with value transferring from one side of the pool to the other. The amount transferred is based on the collateral ratio in the pool, calculated as follows:
For a 1x pool, when the price of the underlying asset rises, collateral from the short pool will be transferred to the long pool:
The calculation of value transfer involves two steps:
- Assuming the price of the underlying asset rises by 5%, the calculation for value transfer is:
- The amount transferred from the short pool is calculated as:
TracerDAO perpetual pool yields are nonlinear
This feature effectively prevents either side from losing 100% of its value. While liquidation risk is effectively eliminated, yields are significantly suppressed. Observing the 2p Long Spot (green dashed line), it can be seen that if the related asset appreciates by 100%, a 2x risk exposure will yield 200%. However, the leverage function reduces the yield to around 75%.
The "yield funnel" for Umami's $USDC vault is shown below:
Key Challenges
TracerDAO's perpetual pools underperform
It is noteworthy that the hedging model of the $USDC vault did not achieve complete Delta neutrality. Despite the design flaws in TracerDAO's perpetual pools, Umami is likely to use it as a hedging tool, having initiated support for TracerDAO pool liquidity before launching the $USDC vault. It has proven that the actual cost of hedging using the liquidity pool is much higher than anticipated.
The skew of the TracerDAO liquidity pool greatly constrains the scalability and performance of the vault.
Similar to Rage Trade, risk balancing is common in Umami's $USDC vault.
The vault rebalances its Tracer hedge every 9 hours. If $BTC or $ETH experiences significant volatility in a short period, this may adversely affect Delta neutrality.
Vault Decommissioned
At the end of August 2022, Umami suspended its highly anticipated $USDC vault, claiming that the promised 20% annual yield was unsustainable.
When the public received news of the vault's poor performance and subsequent suspension, most vault depositors exited from $glp$USDC.
Moving Forward
The two protocols mentioned above both attempt to mitigate the challenges posed by the price volatility of the underlying assets for $GLP pool LPs. Umami Finance indicates it will try again, while Rage Trade's stance remains unclear. Overall, the developments achieved by the GMX ecosystem are worth looking forward to.
Summary
* Both protocols have begun to provide Delta neutrality for $GLP holders. Rage Trade's products are promising, and Umami's attempts at Delta neutrality are also commendable.
* More protocols will eventually leverage the real and sustainable yields of $GLP.
