Amphor Protocol Synthetic LP IL-hedged USDC vault v.1

Vault Description

​​The Synthetic LP IL-hedged vault utilises a set of options to replicate an LP position on a volatile asset pair (ETH/USDC, BTC/USDC) while hedging the Impermanent Loss within the lower and upper bands. For the duration of the contract, spanning from 1 up to 6 weeks, the strategy generates fixed daily coupons in the form of option premiums as long as the underlying asset price fluctuates within a pre-specified range.

The principal and accrued coupons can be redeemed at maturity date or upon early termination date, occurring every week, and can be withdrawn from the vault or rolled over into the next epoch.

Comparison of a Synthetic LP IL-hedged vault vs. Uniswap V3 LP position

Overall, the synthetic LP IL-hedge vault replicates an Uniswap v3 between two bands while hedging both:

- the IL effect within the bands

- the directional exposure between BTC or ETH vs USD within the bands

The receivable premium is usually higher than a Uniswap v3 positions over the same time period, while offsetting the directional exposure.

Key parameters

• Underlying asset: The benchmarked asset in which the notional and generated coupons are denominated (USDC, ETH, BTC).
• Product price range (Bands): The relative price boundaries within which coupons accrue. Bands are determined at the beginning of each epoch based on current market conditions and volatility and price of the underlying asset.
• APR (Annual Percentage Rate): The annualized rate of return in % earned by Vault liquidity providers. APR is based on current market conditions, implied volatility, price range spread, maturity date, leverage, and other factors.
• eAPR (Expected Annual Percentage Rate): The projected interest to be earned on vault deposits in one year. It is noted as “expected” as it depends on the current market condition and the expected price range at the inception of the upcoming epoch. Once the bands are set, the eAPR turns into a fixed APR for the epoch duration.
• Duration: The time length of one epoch, lasting from 1 up to 6 weeks, depending on the upper band (see Early Termination level).
• Maturity date: The date on which the epoch ends, giving users access to invested funds and accrued interest. At maturity, users can withdraw invested funds or roll over the principal and the coupons in the next epoch.
• Bias: The IL-hedged LP vault is market-neutral while the price remains in the specified bands and assumes either a bullish or a bearish bias should the price exceed the boundaries.

In the bullish contract, the LPs might be subject to losses on the notional amount should the price go down and stay below the lower band until maturity.

Conversely, in a bearish contract, the notional can be negatively impacted if the price goes above the higher band and stays above it until maturity.

• Early Termination (ET) level: Set for each week of the current epoch, it represents a price threshold that triggers an early termination event if the price is above the ET level (bullish bias) or below the ET level (bearish bias) on the Observation date.
• Observation date: The day on which Early Termination (ET) occurs if ET conditions are met.
• Leverage: Optional parameter allowing increasing principal exposure by borrowing additional funds on the LP token, hence increasing the APR and exposure on the underlying asset.

Strategy rationale

• A synthetic LP IL-hedged bull bias expects the underlying to stay above the lower band (risk threshold). The faster the underlying price reaches the higher band, the sooner the position settles.
• A synthetic LP IL-hedged bear bias expects the underlying to stay below the higher band (risk threshold). The faster the underlying price reaches the lower band, the sooner the position settles.
• A synthetic LP IL-hedged vault is short volatility on either BTC or ETH underlying for a specific time frame (short gamma).
  Depending on the implied volatility of BTC/USD and ETH/USD, the underlying assets may change between Epochs, seeking the best yield between the two pairs (best-of-both).
• In a synthetic LP IL-hedged USDC vault, USDC is used as a medium to enter and exit both ETH/USD and BTC/USD.

Early termination:

If the asset trades above the upper band in the strategy with bullish bias (or below the lower band with bearish bias), the principal and accrued coupons will be paid back, but the product might stop.

Risk threshold:

If the asset trades below the lower band in the bullish bias strategy (above the upper band in the bearish bias), coupons are not generated and the strategy can be restructured based on the market parameters. If the strategy reaches maturity below the risk threshold, users can incur losses on their deposited funds.

Examples of possible scenarios (assuming 4 weeks epoch)

• Unlike an LP on Uniswap v3, the Synthetic LP IL-hedge vault is composed of one dynamic band. In a case of a bullish bias, the upper band of the range will dynamically decrease every week, increasing the probability of early termination at each Observation date so to recalibrate the bands as frequently as possible.

• Price going above or below the bands: If the reference price leaves the epoch’s range, daily coupon accrual stops until the price returns within the bands.

Bullish bias:

- If lower band < P < upper band, then fixed yield is accrued and principal is secured

- If P > upper band, fixed yield is accrued, principal is secured but position can early terminate if it happens at the Observation date

- If P < lower band, no fixed is accrued and principal is at risk (options: do nothing and wait, early terminate or restructure)*

Bearish bias:

- If lower band < P < upper band, then fixed yield is accrued and principal is secured

- If P < lower band, fixed yield is accrued, principal is secured but position can early terminate if it happens at the Observation date

- If P > upper band, no fixed is accrued and principal is at risk (options: do nothing and wait, early terminate or restructure)*

• Each week, the early termination level is reduced (bullish bias) and increased (bearish bias), effectively reducing the range capturing the fixed yield overtime.

•Strategy stops, if:

• P > early termination level at observation date (bullish bias)
• P < early termination level at observation date (bearish bias)

In case of an unfavorable scenario, where the reference price is above the high band (in a bear case) or below the low band (in a bull case), and assuming no restructuration, the maximal loss on principal would represent the price difference between the underlying asset at maturity date and the low band level (in a bull case) or the high band level (in a bear case) multiplied by leverage, if any.

Maximal loss exposure:

The Amphor Simulator below allows to run various scenarios based on specific parameters in order to assess the payout:

Leverage is limited to x2.5 for each Epoch and is limited to x3.5 for post-restructuration (if any). Additional risks related to the BTC vault strategy and can be found on the Gitbook.

In case an unfavourable scenario occurs, the product would get restructured prior to the last Observation date of the epoch to prevent any loss above 10% of notional engaged in the epoch.

Restructuration: If the reference price goes out of the range on the last Observation date or nearing contract maturity, the position would be restructured to protect the principal against realised loss. Restructuration reduces APR and/or extends epoch duration and/or flips the bias in exchange for widening the price range of the product prior to contract settlement.

For additional details on the LP IL-hedged vault contracts and mechanics, you can refer to Amphor Gitbook, vaults’ section.