The Age-Old Question: To Mint or Buy & LP Squeeth?

Last week, I discussed how squeeth is an instrument: it can be used to hedge and/or speculate on future ETH performance.

I want to start this piece off similarly by discussing another squeeth misconception: What does “Squeeth” actually refer to?

Squeeth is the index that tracks the price change of ETH, raised to the power of two. However, the instrument for “betting” on this index is oSQTH: the ERC-20 token, which tracks the index.

People can long, short, or LP squeeth through the oSQTH token. This article will discuss Mint & LP, which entails borrowing oSQTH and combining it with ETH.

Before we dive in, here are the high-level takeaways I hope to emphasize in this article:

• Mint & LP means the LP is *borrowing* the oSQTH token. Therefore, the mint LP only begins to pay funding when the price of oSQTH goes down and the LP needs to buy more oSQTH to balance their LP position.
• Mint LP’s can be positively impacted by funding when the price of oSQTH goes up (and they are selling the oSQTH token).
• The ControllerHelper will make it easier to manage short positions in the squeeth vault.

Mint vs. Buy

The decision to mint or buy depends on two things, which I will detail below.

ETH Price Prediction:

In last week’s article, I described that Buy & LP has a payoff profile similar to ETH¹.5 (neglecting trading fees and oSQTH funding rate). Therefore, this is appealing to traders who are bullish on ETH, but not as bullish as those who are long squeeth.

On the other hand, minting is ideal for an LP who is less bullish on ETH in the short/medium-term future. Minting means the LP is minting (borrowing) oSQTH from the squeeth vault.

Own or Borrow:

The decision to mint or buy has to do with whether an LP wants to borrow or own the assets in their LP. Minting oSQTH is essentially a loan of oSQTH that acts as a hedge of ETH. However, minting comes with the risk of liquidation. An LP must deposit ETH to mint oSQTH; however, when they put on their LP position, they can deposit their LP NFT, significantly increase their leverage, and decrease their risk of collateralization. We recommend a 200% collateralization ratio to stay above the 150% liquidation threshold.

Funding

The volatility of the oSQTH/ETH pairing is very similar to the volatility of ETH/USD (read more here), so the only “very different” part about LPing squeeth is the funding rate.

However, this is not as scary as it seems!

When an LP mints oSQTH, they are short in the vault and long in the LP, which balances out to neutral squeeth funding. However, once the price of oSQTH moves, the LP will rebalance. If oSQTH price goes up, the LP will have fewer oSQTH tokens and will get paid funding for the tokens sold. The inverse is also true–if the price of oSQTH goes down, the LP is now buying more oSQTH and will pay funding for the additional oSQTH tokens.

For a Buy & LP, the LP is long oSQTH and therefore always pays some funding (unless their position gets to 0 oSQTH). However, when oSQTH rises in price, they are selling more oSQTH and now pay less in funding. And as with minting, the opposite is true: when oSQTH goes down in price, the LP buys more oSQTH tokens and is paying more in funding.

ControllerHelper

Opyn is launching the ControllerHelper: a helper contract to improve squeeth trade flows. The ControllerHelper will make it easier to manage short positions in the squeeth vault. The TLDR is that the new ControllerHelper allows for collateral to be easily moved / re-arranged via flashloans.

Joe Clark wrote this great article about the ControllerHelper that you should really check out.

Closing

If you made it this far, thank you for reading! We here at Opyn are always open for questions. Feel free to chat with us in our discord at tiny.cc/opyndiscord