Introducing the Basis Yield ETH Index, now live on Optimism.

Generate organic yield within all market conditions with BYE, a delta-neutral strategy using Set Protocol & Perpetual Protocol V2.

Andrew Wilkinson

Published in

Galleon

5 min readJun 22, 2022

Deck crew, gather around the top deck and grab some rum.

Today Galleon launches the Basis Yield ETH Index ($BYE), a product that executes an organic cash-and-carry strategy to generate one of the highest yields in DeFi today whilst remaining delta-neutral to the market and its volatility.

BYE is native to Optimism and utilises Perpetual Protocol V2 to create a leveraged, delta-neutral position within the token contract by hedging WETH spot exposure with an equivalent, levered short vETH position allowing you to generate yield through funding rate arbitrage. Additionally, a target leverage ratio readable from the smart contract itself is maintained by Keeper bots that rebalance the product regularly when upper or lower bounds are breached.

Quick Navigation: CoinGecko | TokenSets | Uniswap | Dapp

How do you generate a yield from a delta-neutral position?

Basis trading is not a new concept, but it is one of the most organic sources of yield in DeFi generated by real users and market activity. What makes BYE an unmissable opportunity is that operating this strategy in a permissionless way on-chain is complex, hard to manually maintain and, therefore, not very saturated by market participants. By utilising Set Protocol infrastructure and their Perpetual Protocol integration, we can encapsulate this strategy within one tradable, issuable and redeemable ERC20 token where the yield is continuously baked into the BYE, raising its NAV.

So when funding rates are positive, the product earns yield through longs paying shorts to try to bring vETH trading at a premium back in line with the spot value of ETH. The yield is paid in USDC and gets auto compounded by the product generating the highest possible yield for this strategy.

Sounds great, but what if the funding rates are negative? This is an important question, and you would be correct in assuming that there would be NAV decay within BYE as the negative funding means our leveraged short position starts to pay longs. As a passive index, we do not close positions based on funding rate, but rather we base our strategy on backtested models within the space. For example, the historic funding rate on Perpetual Protocol for ETH shows a consistent positive funding rate for the asset, which we believe will hold over time, considering crypto as an asset class mainly contains heavy long-exposure.

https://www.r72.fi/derivative/perpetual_protocol/ETH%3AUSD?period=31536000

ETH Historic Funding Rates Perpetual Protocol V2

Methodology

Target Leverage Ratio: 2.0x

Minimum Leverage Ratio: 1.9x

Max Leverage Ratio: 3.0x

Ripcord mechanism: 5.0x

Rebalance Interval: when the ratio drops below -1.9x or moves above -3.0x

Re-investment Interval: 3 days

What are the risks?

Naturally, with leveraged positions, there is an inherent risk based on specific events occurring that are mitigated as much as possible by the product design. The BYE product risks are as follows:

Smart Contract: although built utilising Set Protocol contracts which are amongst the most robust in the space and have to date, never been exploited.
Optimism Network Stability / Human Error: Delta neutrality of BYE is an automated process to maintain and rebalance positions, only the Optimism network going down or human error could cause a deviation.
Funding Rate: Backtests show this product is very lucrative over time. If funding were to move negative (-ve) for prolonged periods, BYE would have some NAV decay.

Revenue Model

BYE generates compounding yield when funding is positive; inversely, when funding is negative, there is NAV decay. Because of this Galleon wants to create the highest level of alignment with BYE holders by deploying a performance fee product model. As a result, the DAO will only earn revenue-creating sustainability for our organisation when the token holder is profiting.

Therefore there is no streaming, minting or redeem fee; the product only charges a performance fee (10%) on the yield earnt. We believe this is the fairest way to operate BYE and generate the highest level of interest.

How to buy the Basis Yield ETH Index

Small-Medium Position (DEX)

Get exposure to BYE just like you would any other liquid ERC20 asset using our own Galleon application, utilising 0x Protocol for order routing or trade directly on Uniswap itself.

🌐 Galleon Dapp: https://app.galleon.community/bye

💱 Uniswap: https://app.uniswap.org/#/swap?outputCurrency=0x927Eb0dBC5c3FD172Fdfa72D563f71612eCB6122&chain=optimism

Large Position (Issuance)

https://www.tokensets.com/portfolio/optimism/bye

Basic Issuance

You can manually issue BYE very quickly using Set Protocol Issuance by providing USDC & WETH and following the steps on the TokenSets UI.

Flash Issuance (Coming soon)

We have created a contract allowing you to build a prominent position of BYE directly from USDC in one transaction. This is pending integration into https://app.galleon.community.

BYE TokenSets: https://www.tokensets.com/portfolio/optimism/bye

Issuance Guide: https://docs.tokensets.com/investors/issue-and-redeem-sets