Create a yHEGIC vault to buy stake lots and participate in governance.
Abstract:
Should this proposal be implemented, a yHEGIC vault will be created and used to buy stake lots on the HEGIC platform. The generated fees would be used to compound by buying more HEGIC.
Motivation:
HEGIC’s tokenomics are well designed and have great potential, and their main purpose outside of governance is to use in staking lots. By staking these tokens, the stakers gain fees generated by the platform during options purchases. However, the number of tokens required to purchase a lot is quite high and outside of many users’ reach, locking them out of the opportunity to participate.
Specification:
Should this proposal be enacted, a yHEGIC vault would be created. This vault would accumulate HEGIC tokens from users’ deposits until enough has been acquired to purchase a staking lot with spare HEGIC tokens remaining. At first, this amount would be 1.2x the 888,000 HEGIC required to stake. This spare amount is to allow some extra liquidity in case a user wants to withdraw, as withdrawing from a staking lot requires 7 days to clear. Once enough staking lots have been purchased and the vault grows in size, this will change to 10% of the total vault in reserve. If a user’s withdrawal exceeds the amount in the reserve pool, stake lots will be sold in order to achieve the required value. At this point, withdrawals will be halted while the vault processes the unstaking, but deposits will still be open. Once the pending withdrawal clears, the vault will reopen to more withdrawals.
Stake lots will be purchased to achieve exposure to all asset types (at first ETH and BTC), starting with ETH. Once all asset types are achieved, the vault will buy new stake lots based on whichever will achieve the highest ROI. The collected fees from these stakes will then be sold for HEGIC and compounded into the vault. These proceeds are calculated as a percentage of the total number of stake lots for that asset, so by increasing the number of lots owned by the vault, the profitability will also increase.
This vault will also participate in governance, using this strategy.
You’re right, but that’s a very different use case. Acting as an LP with ETH or DAI serves to sell call or put strategies. By staking ETH, you’re selling a call (bearish strategy), and by staking DAI you’re selling puts (bullish strategy). In either scenario, there’s a large chance of losing money.
The HEGIC token is completely different strategy. By buying stake lots, you’re able to take a portion of the contract settlement fees. This means that you only win, regardless of whether it’s a put or a call. You’re essentially taking a portion of the platform’s fees regardless of bull or bear, win or lose. You just win. The more volume HEGIC gets, the more you win. The only risks are smart contract risks and value depreciation of the HEGIC token.
Here’s their graphic explaining how it works. Note the arrow only goes one way
Exposure to the Hegic token makes this a directional play and a bet on the platform. How does Hegic stack up against the competition? A lot of crypto derivatives platforms are sprouting up.
Participating the in the liquidity pool both ways (writing calls and puts, collecting premiums) is more market neutral and in line with Yearn’s strategies.
Do you know of another platform besides Opyn that provides options contracts like this? I know Synthetix has one, but they use a binary options style. I’m sure there are others, but I’m not aware of them.
It’s a bet on a platform, sure - just like a ySNX vault is a bet on a platform, or a yCRV vault is a bet on a platform. The vaults themselves aren’t necessarily market neutral, but the umbrella organization of yearn.finance is. The only exposure the ecosystem would have is what end-users deposit.
Overall I think this is a good idea but strongly disagree with this statement: “HEGIC’s tokenomics are well designed and have great potential”
I believe there are high risks regarding Hegic’s token and coding. The vault would be strongly exposed to Hegic tokenomics. I did some pretty intense research for Hegic pre-IBCO and decided to stay away for the following reasons:
Anonymous single developer with little at stake. Overall from his/her responses in Discord / Telegram I had a pretty poor impression, mainly of an arrogant and overambitious single developer with no relations and track record in the space.
High contract risk. Bought several batches of options in the current version and it had many bugs. For example lots of parameters including volatility had to be set manually. Liquidity wouldn’t be released upon option expiry, also needed manual input. Gas cost was super variable for no reason. Lets not forget the early release lost lots of LPs funds because of a “typo”. https://twitter.com/hegicoptions/status/1253937104666742787
IBCO dynamics not very well thought out. Lots of demand and very limited supply, so token price increased ~40x vs initial price. Current fully diluted valuation ~$220 M seems very high.
This would be a great proposal for current Hegic token holders because of a likely price pump but would IMO seriously risk new users’ funds and Yearn’s rep. I would at least wait until audit results are released and new version (to be released on 10/10/2020) has been live for a few weeks to vote on this.
I’m confused by your definition of options to not be “insurance products.” Options are primarily intended to be used as insurance, to hedge your bets.
Hegic and Opyn themselves claim to be options providers as well.
These are excellent points. I disagree with point number three re: the IBCO, but I agree with you on the first two. They’re legitimate risks, though these are frequent in numerous DeFi darlings (especially as of late).
Oh, absolutely. No question in my mind at all. Before the new version, the token has almost no functionality - so there’s no rush in my mind to create this vault. I just wanted to start the discussion
Completely agree. Just want to clarify that overall I really like the concept of a Hegic vault eventually given the very high threshold for staking and total fees to be distributed. Would be a great addition to the Yearn ecosystem. Lets hope for no surprises in the audit/launch!
The tokenomics concern is valid, but this is going to be true of many different vault strategies with other coins I’ve seen proposed. Same with concerns around governance (like with CRV), yet vaults for that are available.
Also, in this strategy, the vault depositor has already purchased the Hegic token, so the depositor has made a decision on the risks of the underlying asset.
To me the purpose of a vault is to maximize the benefit for the group of those token holders (Hegic) with minimal risk. Because of the larger incentives available by pooling and staking, the collective benefit of pooling to stake for Hegic seems clear to me.
Full disclosure: I worked with @mattdw on this and have reviewed the Hegic code. I also had concerns about the volatility parameters of the contracts, actually, though my concern was about manipulating the volatility the way the contract was written.
Those are all good points. For full disclosure I haven’t reviewed the code, and have zero technical capacity to do it - so I respect your and @mattdw’s opinion. I reread my previous post and it could have seemed I did that, so I want to clarify that I’m not aware of any issue with the code in the new version.
I own a little YFI (and no Hegic) and therefore am incentivized to maximize long-term value and sustainability of the YFI protocol. It is my opinion that currently the Hegic token has very limited distribution (3% of total supply) and price will continue to be very volatile . My personal experience interacting with the current version of the protocol and the sole developer has been poor. Other than that I have no additional data or insider info or hidden interests.
Adding a Hegic vault would tacitly be an endorsement of the Hegic protocol. It would likely increase demand and awareness for the Hegic token significantly to the benefit of people that participated in the IBCO.
For me it makes sense to wait until the Hegic protocol demonstrates it can provide value to stakers without any major risks, assuming the ongoing audit finds no significant issues.
@ProjectEqual Thanks for all the feedback! My main reason for proposing this vault was less the price action of HEGIC and more that sweet sweet cash flow from the staking lots. Perhaps an alternative model could be drafted to extract value from the platform better, though that would by definition reduce the compounding nature.
Let’s see how the next month plays out for the protocol.
There are a ton of Hegic holders who do not have a staking lot. A staking pool contract has repeatedly been asked for to be built prior to v888 contracts being released. There is a significant amount of Hegic liquidity out there that is craving for a strategy like this.
Insurance implies that the counterparty risk lies with an insurance entity / mutual insurance coop / etc. Options do not imply such a counterparty: they can be any sort of agent on the end of that trade.
Hegic and Opyn can claim all they want to be an options provider, in my estimation they are not an options market, rather a derivative like a covered warrant as they don’t provide any sort of european/american strike contract amongst other things.
I hear you, though I think this is a distinction without a difference. I’ve used a HEGIC call option before as an end user. I exercised the contract before its expiration, and I made ~150% profit on that call.
To the purchaser, these are options. It’s only for the contract writers where it functions more like a mutual.
@mattdw Would it be possible if you edited “buy staking lots” and replaced it with “lock in staking lots”. Some outside of yearn unfamiliar with the yVaults are misinterpreting this proposal thinking that it is a stablecoin vault used to purchase hegic staking lots. And not realizing that their hegic would be deposited and locked into staking lots by the strat
