Principal Protection Vaults
Amplifies the yield on assets by up to ~ 1.5X without credit or principal risk
PPVs are designed to amplify base yields by up to ~1.5X on assets such as GLP, ETH, BTC, MATIC, USDC etc., by combining composability and structured products without exposing users' funds to credit or principal risk. Olive PPVs will also support yield amplification for LP, Yield-Bearing and Liquid Staking tokens of all popular DEXes, Lending, and Staking Platforms in future.
Olive delivers auto-compounding returns, incremental principal protection, instant deposits, and withdrawals while having no operational overhead. Let's see how.
- Once funds are deposited in Olive, we amplify the yields on deposited assets in a DeFi native manner. For example, if the deposited asset is GLP, we use Beefy to amplify the yields further.
- The amplified yields are then used to gain exposure to structured products such as range-accrual, twin-win, ascent, summit, digital, highland etc.
- The critical thing to note is Olive only uses the yield component to run these strategies, thus ensuring users' funds are never exposed to credit or principal risk.
- The yields generated from these strategies are automatically reinvested into the vault, generating auto-compounding returns.
- The last cycle's yield is treated as principal in the current cycle, which means it will not be used to run the strategies, thereby ensuring incremental principal protection.
- The best part is there is no lock-in. You can invest or withdraw anytime. However, if you withdraw between a cycle, you will lose out on the yields to be accrued at the end of the cycle. Cycles typically run from Monday to Monday, 1 PM UTC.
Olive uses a range of structured products such as range-accrual, twin-win, ascent, summit, digital and highland to amplify the yields by ~ 1.5X. Here is more about how the two most prominently used strategies range accrual and twin-win works:
With a range accrual, investor profits from a range-bound market. Returns accrue if asset price remains within specified range.
Range accrual is a structured product wherein the strategy holder earns a return if the underlying's price stays within a predetermined range during observation time, in our case, 8 AM UTC daily. The price has to stay within the range only at observation time for investors to make money. The best part about range accrual is that even if the range is breached for 2 out of the 7 observations, the investors will still earn yield for the rest of the 5 observations.
Let's see the payoff of the range accrual strategy in three different scenarios. For all scenarios, the following assumptions were made:
- Base Yield: 10%
- Expected yield with range accrual: 15%
- Duration: 7 days
Scenario 1: Price remains within the range
Payoff: 7/7 * 15% = 15%
Scenario 2: Price remains within range for 5 out of the 7 days
Payoff: 5/7 * 15% = 10.71%
Scenario 3: Price remains within range for 4 out of the 7 days
Payoff: 4/7* 15% = 8.57%
So, the base yield will still be amplified if the price remains within range for just 5 out of the 7 observations.
With a twin-win strategy, investor profits from price movement in either direction. Returns are maximised when barriers are not breached. If the barrier is breached, the investor still receives a guaranteed base coupon.
A twin-win strategy is a type of structured product where the holder earns yields not only when the price of the underlying increases but also when it decreases, as long as the price of the underlying stay within a predetermined range on the weekly observation time, which is 8 AM UTC on Monday in our case. The best part about twin-win is that investors will still earn a base coupon even if the range gets breached.
Let's see the payoff of the twin-win strategy in three different scenarios. For all scenarios, the following assumptions were made:
- Base Yield: 10%
- Base Coupon: 4%
- Duration: 7 days
- Spread: +/-8%
Scenario 1: Max APY
- Keep 3.92% out of the 10% base yield aside to give a 4% base coupon [(1 + 3.92%/52)^52 - 1]
- 6.08% / 52, i.e. 0.1169%, is used to buy weekly ATM call and put spreads
- Price of 8% ATM spread options = Buying price of ATM option - Selling price of 8% OTM option = (0.0225-0.0045) + (0.0180-0.009) = 0.027 = 2.7%
- Participation rate = Purchasing power / Price of options = 0.1169% / 2.7% = 4.32%
- Yield = Base coupon + (1 + Price Performance x Participation Rate)^52 - 1 = 4% + [(1 + 8% x 4.32%)^52 -1] = 0.04 + 0.1965 = 23.65% APY
Scenario 2: Base Coupon
- If the price exceeds the predetermined range or stays the same at the observation time of 8 AM UTC on Monday, investors will still earn the base coupon of 4%
The APY on GLP Vault is a function of base GLP APR. The higher the base APR, the higher the APY will be of the GLP Vault. However, the magnitude of yield amplification, which is ~1.5X, a number based on our backtest, is independent of base GLP APR.
Here are two scenarios, one when the base GLP APR is 35% and the other when it is 20%.
Scenario 1: GLP Base Yield is 35%
- (A) GLP Base Yield: 35%
- (B) Weekly GLP Base Yield = (A/52.1429) = 0.671%
- (C) Yield Post Principal Protected Strategy = 0.894%
- (D) APY = (1+C)^52.1429 -1 = 59.00%
- (E) Olive Liquidity Mining Rewards = 5%
- Total APY = D + E = 64%
Scenario 2: GLP Base Yield is 20%
- (A) GLP Base Yield: 20%
- (B) Weekly GLP Base Yield = (A/52.1429) = 0.383%
- (C) Yield Post Principal Protected Strategy = 0.511%
- (D) APY = (1+C)^52.1429 -1 = 30.44%
- (E) Olive Liquidity Mining Rewards = 5%
- Total APY = D + E = 35.44%
Note: In both scenarios, yields are net of Beefy and Olive fees.
Currently, only the auctioning part, which is needed to gain exposure to strategies such as range-accrual and twin-win, is carried out via the OTC route. The rest of the entire yield amplification operations are on-chain and automated via smart contracts.
Here is how the yield amplification works:
- User deposits GLP
- Our smart contracts make use of Beefy's auto-compounder to amplify the base yields further
- The yield component is harvested every week and passed onto the winning market maker
- On the settlement date, the market maker returns the borrowed yield component and pays the net settlement amount
- The yield and the net settlement amount are automatically reinvested in the GLP vault, further increasing the vaults NAV
We will be rolling out a build by the end of February, which will do away with the need to pass on the yield component to market makers for running these strategies. Once the roll-out is done, a market maker's potential default or insolvency will only affect the net settlement amount for that cycle. Even with the current architecture, if a market maker becomes insolvent, only the weekly yield earned on GLP and the net settlement amount are at risk. The additional benefit of this build is that it will also result in an increase in yield. You can learn more about how the yield will increase with this build in the product roadmap section.
Olive's Yield and Risk compared to other avenues
- Principal Risk: Not applicable since only the yield generated is used to generate additional returns. Also, yields earned in all previous cycles are treated as principal in the current cycle, which means they will not be used for yield amplification, ensuring incremental principal protection.
- Credit Risk: This vault is not susceptible to credit risk as users' funds are never lent out.
The maximum potential loss in Olive is limited to the yields earned in a cycle and the potential net settlement amount due from market makers. For example, suppose you deposited 1000 GLP in Olive; over 10 cycles, your current value has grown to 1,100 GLP. Now, in the 11th cycle, say the base yield is 7 GLP, and the net settlement amount due from market makers is 3 GLP. If the market maker defaults now, the only money at risk for you is 10 GLP (7 GLP + 3 GLP). This is because the 100 GLP that was generated over the past 10 cycles was treated as principal in the 11th cycle, ensuring the yields generated are incrementally protected.
We backtested the PPV strategy across 12 months of data for 1st October 2021 to 29th September 2022. Here is the NAV curve of PPN compared to the NAV curve without investing in PPN.
NAV Curve comparison between investing in Olive PPN and not investing
The fee structure currently consists of a 2% management fee charged on a prorated basis and a 10% performance fee which is charged only if the cycle is profitable.
Suppose you invested 10,000 GLP Tokens in the GLP vault. The management fee is charged annually on a pro-rata basis at 2%, i.e. 2% x 10,000 GLP = 200 GLP. Suppose the strategy generated 67.78% APY net of Beefy fees, meaning 10,000 GLP will become 6,778 GLP. An annual pro-rata performance fee of 10% will be charged on the gains, which is 6,778 GLP x 10%, i.e., 677.8 GLP.
Therefore, the net gain made by the users is 6,778 - 200 - 677.8 = 5,900.2 GLP, which is ~ 59.00% APY net of fees.