Amphor Protocol Synthetic LP IL-hedged ETH Vault v.1
Vault Description
Similar to the USDC Vault detailed in a previous article, the ETH Vault replicates the payoff of a position in Uniswap v3 liquidity pool while hedging against Impermanent Loss on ETH/USD.
The Synthetic LP IL-hedged ETH Vault generates a fixed APR for each Epoch until the maturity date, and as long as ETH fluctuates between the Early Termination (upper band) level and the Risk Threshold (lower band).
In the event those conditions are not met, the vault would settle principal and yield at maturity.
By depositing into the ETH Synthetic LP IL-hedged Vault, users gain directional exposure and generate yield in wstETH. As the benchmark is ETH, the Vault is best suited for users looking to accumulate ETH in long-term.
The payoff of the strategy is determined by two yield drivers:
- Primary yield driver: The payoff from the synthetic LP IL-hedged ETH/USD Vault, a fixed APR determined at the beginning of each epoch.
- Secondary yield driver: The yield bearing properties of the underlying asset of the Vault — wstETH (wrapped Lido staked ETH), historically providing a slightly variable rate between 3.5–5% based on Lido’s staking APR.
In addition to the payoff profile of the LP IL-hedged Vault, the ETH Vault also benefits from Ethereum’s native staking yield accrued from holding wstETH (yield-bearing asset).
wstETH is the Liquid Staking Derivative (LSD) of Lido.fi, representing ETH staked in the PoS consensus mechanism to secure the Ethereum blockchain, generating 3.5–5% APR for wstETH holders.
More information on wstETH is available here, and on Lido here.
Deposits & withdrawals:
- Option [1]: Enter/exit the Vault directly with wstETH
- Option [2]: Enter/exit the Vault with ETH or stablecoins (USDC, USDT or DAI)
To provide flexibility, users are offered two options of deposits and withdrawals. By choosing the option [2], users benefit from the integrated zap-in function which bundles the swap and deposit functions to optimize gas fees. Moreover, users are also able to modify the slippage tolerance to guarantee the minimum output amount. Amphor integrated the zap-in/out function for user convenience and does not charge any fees on top of swaps.
Vault’s associated risks
The next section provides insights on how to evaluate and mitigate the potential loss of principal.
Depending on the assumed bias (bearish or bullish) the capital might be at risk, if ETH price at maturity is below the Risk threshold (in bullish bias) or above it (in bearish bias). To mitigate this risk, the Vault has the ability to restructure the position with new parameters.
Maximal loss exposure:
The Amphor Simulator below allows to run various scenarios based on specific parameters in order to assess the payout:
For each Epoch:
- Leverage is limited up to x2.5 (x4 post-restructuration)
- Maturity is limited up to 6 weeks (8 weeks post-restructuration)
Additional risks related to the ETH Vault strategy can be found on the Gitbook.
Restructuration
The next section introduces an effective way to mitigate the potential loss of principal when it comes to the ETH Vault.
In case an unfavorable scenario occurs, the product would get restructured prior to the last Observation Date of the epoch to prevent any loss above 15% of notional provided for the epoch.
The charts below demonstrate how a theoretical restructuration could take place:
Scenario 1: restructuration with flipping bias
In the scenario above (bearish bias), since ETH breached the Risk Threshold before maturity, the strategy is restructured to avoid the materialization of the loss on principal.
The restructuration process is achieved by calibrating new Early Termination and Risk Threshold levels based on the latest fluctuations of the underlying. As the short-term trend now flips bullish following ETH spike, the Vault accommodates new dynamics by restructuring and flipping contract bias from bearish to bullish. The maturity is extended by four additional weeks.
Restructuration effectively allows the underlying to fluctuate back within the determined range such that the principal remains protected while rewards are being generated at a lower APR.
Scenario 2: restructuration without flipping bias
Scenario 2 illustrates a restructuration scenario without the flipping of bias. In the example, ETH price spike in W4 suddenly deviates with a high probability of correction in the short-term. Restructuration allows widening the range and extending maturity while maintaining bearish bias. In week 6, the restructured position early terminates as ETH price goes below the Early Termination threshold.
For additional details on the LP IL-hedged Vault contracts, mechanics and risks you can refer to Amphor Gitbook. If you have further questions, please join Amphor Telegram group and engage with the team directly.
