Details on yNXM Strategy
As YFI looks to capture value across multiple verticals in the DeFi ecosystem the insurance space is still under-penetrated. Current yInsure offering is weak fee model vs vault strategies for YFI, and doesn’t attract direct liquidity to YFI ecosystem. Fee structure on a vault strategy allows YFI to generate material earnings on a significant and quickly growing vertical within DeFi.
Longer term potential for this vehicle to also purchase cover for other vault strategies to remove smart contract risk. For example, when providing staked capital to CRV contract within NXM, the vehicle can automatically purchasing the NFT on yInsure and sell it to the yUSD pool. This is key to allow a pathway for institutional capital to start to fund these strategies which is how YFI begins to expand beyond ETH capital in the long run. YFI as a buyer of yInsure also provides long term sustainable demand for NXM product.
-ETH input into vault. d lock up period with withdrawal fee, lower withdrawal fee for d.
-Vault buys NXM, stakes across maximum contracts, farms and sells NXM and shield mining rewards. Possible for 100-2000% APY leveraging NXM 10x across contracts (current tBTC APY c150-200%) but initially yield will be constrained by lack of shield mining alternatives.
-Allows both a) KYC’d NXM holders who want to drive capital appreciation and want exposure to these returns without lock up to be involved and b) non-KYC’d non-NXM holder to get broad exposure to insurance growth – can be a simple Zapper add on.
-Will provide immediate scaled source of staking capital to NXM.
-Provides ‘indifferent’ source of capital to plug gaps on contracts which have not maxed out staking capacity which is a key constraint for NXM at the moment with inflexible risk costs for each contract.
-NXM price pressure is offset so long as weekly capital inflows are greater than cost of risk proceeds to yNXM and demand for this new capital inflow continues to grow.
In addition to allowing for greater value capture for YFI within the insurance vertical, and the long term benefits this strategy could bring for institutional capital inflow and security on existing strategies, the yNXM strategy in itself has benefits.
The yNXM strategy APY is more sustainable (therefore consistent with core thesis of YFI vault strategies) vs other existing strategies focused on farming other protocols (eg yCRV) as NXM risk fee is endogenous to the returns/determined and constraints on maximum staking per contract stop locust capital aggressively farming away any individual APY.
From the perspective of NXM holders this solves their immediate short term issues, namely:
-Not enough total staking across contracts to meet demand and enter lateral growth phase, but more specifically staking particularly constrained on certain contracts where incentive mismatch is highest. The speed at which new shield mining can be set up is a limiting factor to unlock this.
-Inflexible duration of capital at 90d fixed is adding to the issue above which is slowing growth and is not resolved via shield mining. For some stakers no reasonable APY subsidized by shield mining is sufficient for 90d lock-up.
-Upcoming unstaking cliff where there is not enough incentive for those who have been locked up for 90d to re-stake without flexibility on lock-up. Unlikely new capital inflows replace this cliff without yNXM.
The yNXM vault is therefore a solution for the current issues facing NXM holders, but also an opportunity for YFI to attract an additional deep pocket of capital with which to earn fees, secure other vault strategies and attract more cautious pools of capital which will require insured strategies to deploy capital into.