HodlTree Elastic Modules Hedge Explained
HodlTree Elastic Hedge Modules are designed for the two types of users. Let’s call them Alice and Bob.
1) Alice wants to increase her portfolio in a specific token. This could be ETH, BTC, USDC, etc.
2) Bob wants to get high returns and is ready to take risks.
We’ve created modules that cover both Alice’s and Bob’s needs so that they can get what they want.
The modules work in the following way:
1. Alice invests a certain amount in a token in which she wants to get a return. This amount is placed in the Balancer pool where it will receive a swap fee and Balancer rewards.
2. Bob places a certain amount in the token in which Alice wants to get a return in the Reserve Pool. It will be used to pay the difference in case Alice suffers a loss in the benchmark.
3. Bob shall be entitled to a part of the swap fee and Balancer rewards for providing the liquidity to the Reserve Pool.
4. There is a Hold period during which Alice cannot withdraw funds from the Balancer pool to accumulate certain income from swap fees and Balancer rewards.
An example of HodlTree Elastic Module for USDC as a benchmark
Who is Alice?
User Alice wants to earn money in USDC. She places USDC in our Elastic Module, which places these funds in the USDC/BAL 60/40 Balancer pool. Alice’s funds start generating profits in the form of swap fees and rewards in BAL tokens. If the BAL token price falls, Alice’s drawdown will be compensated up to the specified range from the Reserve Pool (if there are funds there). To encourage Reserve Pool liquidity providers to deposit to the pool, part of Alice’s profits goes to those providers (Bob).
Alice represents users who want to earn in USDC, as well as those who mine BAL tokens in Balancer USDC/BAL 60/40 pool, but do not want to get the drawdown in USDC and are willing to share part of the future profits for the sake of it.
Who is Bob?
User Bob wants a high profit in USDC and is willing to take risks. He deposits USDC to our Elastic Module, which uses these funds in the Reserve Pool to cover Alice’s drawdowns when the BAL token price goes down. For providing liquidity to the Reserve Pool, Bob receives a portion of Alice’s profits.
Bob represents users who want high returns in USDC or those who hold BAL token because they can get a better risk profile in this elastic module. The longer the holding period, the more profitable it becomes for Bob to participate in the elastic module.
Let’s assume the Elastic Module settings are as follows:
- We are deploying a module where USDC will go to the Balancer pool: USDC/BAL 60/40.
- Hold: 6 months.
- Profit split: 50% to Alice, 50% to Bob.
Let’s check the different scenarios in case Alice invests 100 USDC and Bob invests 24 USDC:
Thus, Alice gets a return of ~21% in USDC even if BAL token falls by 50%. If Bob has placed 24 USDC in the reserve pool, then with a 100% increase of BAL price he gets ~54% higher return (comparing with hold BAL), and even if the price remains the same — he gets ~88% profit.
The longer the holding period is, the more profitable it becomes for Bob because the expected swap fees and Balancer rewards become higher. This motivates him to invest more in the reserve pool, which increases the safe range that he compensates for Alice.
HodlTree Elastic Modules can be deployed for any benchmark with different configurations by changing profit splits, tokens, hold periods, etc. That’s why we call them elastic.
Pools with inverse tokens can be used for earning high swap fees, as described here.
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All calculations are estimated and based on the historical data.