Rysk is the only free lunch

Building a Dynamic Hedging Vault to enable uncorrelated market-neutral returns

Crypto assets are historically highly correlated, meaning that they all move in a similar direction, and this makes it complex to diversify and generate higher returns with lower risk taken. Rysk fixes this by allowing everyone to access superior yields that don’t move with the market.

Before Rysk you were in crypto and stables; after Rysk you will be in crypto, stables, and Rysk.

The importance of diversification has been around since 1950 when one of the OG gigabrains 🧠, Harry Markowitz, introduced the Modern Portfolio Theory (MPT) proving that a portfolio that includes multiple uncorrelated assets can achieve a higher return per unit of risk taken (Sharpe Ratio).

Diversification is the only free lunch. Nobel Prize laureate Harry Markowitz

Harry Markowitz

Let’s start with a story of Bob, Alice and a free lunch 🍱!

Bob is a crypto user, owns a portfolio made entirely by crypto tokens: let’s say 1/2 ETH and 1/2 BTC. Alice is a gigabrain 🧠 DeFi user with her portfolio composed of 1/2 ETH, 1/2 into rysk assets.

Let’s assume ETH has an expected return of 20% and daily volatility of 10% and BTC has an expected return of 10% and daily volatility of 5%. We can consider daily volatility as a variable to measure risk, and while they have different levels of risk (daily volatility) these assets are perfectly correlated with a correlation of 1, they move together consistently.

Bob portfolio expected return is (1/2 * 20%) + (1/2 * 10%) = 15%. Because the assets are perfectly correlated the expected portfolio daily volatility can be calculated by weighting the average of the expected volatility of each asset resulting in (1/2 * 10%) + (1/2 * 5%) = 7.50%.

Bob’s example looks exaggerated but it’s not far from reality, ETH and BTC are highly correlated with ~0.89 correlation! (source: cryptowat.ch — 30 days)

Now let’s consider Alice’s portfolio. ETH as for Bob has an expected return of 20% and daily volatility of 10%, whilst let’s assume that rysk has a similar return to BTC of 10% (we are very conservative here just to prove the maths 😉 — check out the backtest ) and daily volatility of 5% like BTC. But instead of a correlation of 1, they are uncorrelated with a correlation of zero.

As for Bob, the expected return for Alice’s portfolio is 15%, however, the risk now has to take into account the fact that assets move independently of one another because they are uncorrelated. Since the two assets don’t move in lock-step the daily volatility is actually lower than perfectly correlated assets. The lower the correlation, the more powerful is the diversification effect: that is, the risk-reduction.

For Alice’s portfolio, due to the low correlation between assets we can see an average daily volatility 4.84%, lower than Bob’s portfolio. Check this spreadsheet for the calculation.

The difference of 2.66% in daily volatility is the Free Lunch. This means that Alice is getting the same expected returns, but with less risk. In terms of returns, Alice is effectively receiving 1.10 in additional returns with an undiversified portfolio with the same risk, the free lunch effect!

By diversifying, Alice is getting the potential “risk/reward” benefit of the units of risk she is not taking. The Sharpe ratio measures the risk-adjusted performance of an investment. By adding diversification Alice increases the Sharpe ratio of the portfolio compared to Bob’s one which has a lower level of diversification.

So a portfolio made of uncorrelated assets can get you superior returns for the same amount of risk — a free lunch!

Crypto needs more free lunches

Alice showed us that the best way to minimize the risk of a portfolio is via diversification using uncorrelated assets which enables us to account for gains in a risk-adjust manner. But can we create a diversified portfolio with just crypto assets?

In reality, we found that most crypto assets and yields are highly correlated to each other. The reason for the high correlation between crypto assets and yields is clear when looking at the trending DeFi assets over the last two years. DeFi has seen huge growth over this short period thanks to yield farming, where many protocols provided high yields for investors through liquidity mining rewards and token emissions. Farming always made sense during DeFi summer.


Although yield farming generates high short-term returns during a bull market, this isn’t as effective in bear conditions. From a diversification standpoint, these assets generate a portfolio that looks like the chart below. The portfolio is highly correlated with market movement, not resistant to shocks and, through minimal diversification, the portfolio ends up having the same volatility — resulting in a higher chance of getting rekt.

The high correlation makes it difficult to diversify and reduce risk in crypto portfolios. Rysk fixes this by allowing everyone to access superior yields that don’t move with the market. Before Rysk you were in crypto and stables; after Rysk you will be in crypto, stables, and Rysk.

Introducing Rysk

Our goal at Rysk is to create decentralized crypto native uncorrelated assets to enable market-neutral returns for better crypto diversification. We believe in diversification and we aim to become “DeFi’s free lunch”.

To achieve this goal for our first product we are building a Dynamic Hedging Vault (DHV)- a brand new self-governing options AMM, generating market-neutral yield for its liquidity providers by writing options and interacting with any derivative with a trackable delta.

The Rysk DHV is a pool that uses a dynamic hedging approach. The Dynamic Hedging AMM will sell options to any user, aiming to generate a yield from options premiums and other hedging opportunities. Options are priced based on an incentivization model, where options are priced “cheaper” or “richer” based on the pool‘s delta exposure and utilization. Liquidity Providers get healthy, uncorrelated yield as the pool gains premium by acting as a decentralized and automated options OTC trading desk. To learn more check out our docs.

Who can benefit from the Rysk DHV?

The Rysk DHV provide benefits for different actors:

Liquidity Providers (LPs)

LPs can provide liquidity to the Rysk DHV and passively receive uncorrelated returns. The Rysk DHV will use the liquidity provided to sell options for premiums to hedge delta exposure, thus maintaining market neutrality and creating a de-facto crypto-native, uncorrelated and yield-bearing asset. By providing liquidity to such an asset, LPs can achieve the same amount of expected returns for less risk, or increase their expected returns by taking the same risk — a free lunch.

Structured Product Protocols

The Rysk DHV could be integrated into structured products for options trading, enabling fully automated strategies and the potential for more diverse payoff structures. The Rysk DHV acts as an “always available” counterparty that will be able to price any option at any time in a fully automated way, significantly reducing the strain and reliance on institutional market makers.

Retail Users

The Rysk DHV enables users to get a quote for any option, with any expiry and any strike. Retail users or any trader interested in trading custom options could use the Rysk DHV as a counterparty for their trades.

Market Makers and Hedge funds

The Rysk DHV prices options factoring the utilization and delta exposure of the pool. For example, if the delta exposure of the pool is skewed heavily to one side, options that move the delta closer back to zero will be priced cheaper. This presents an opportunity to get cheaper leverage or hedges, or to arbitrage against other options venues.

At Rysk we are creating crypto native uncorrelated assets that can be included in any portfolio to achieve a higher expected yield per unit of risk. The Rysk DHV is just one of our products for achieving this goal check out our docs for more.

Wen can you use rysk?


Join the rysk community

If you are interested in uncorrelated returns and derivatives in DeFi you should hang out on our Discord, we talk about DeFi, derivatives, options, and obviously uncorrelatedness!

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Before Rysk you were in crypto and stables; after Rysk you will be in crypto, stables, and Rysk.

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