A Study on Tranching: Maximize Potential Airdrop Yields with Leveraged LP Fees
Trader Joe is the main AMM DEX on the Avalanche blockchain and a top 5 exchange for weekly volume.
Most of the recent volume increase has come during the $ARB airdrop.
This article sheds light on why providing liquidity to ARB Pools on TraderJoe was the most profitable strategy for capturing ARB yields and how Struct Finance’s Interest Rate Products can amplify these returns by tranching positions that use concentrated liquidity.
Although the first Struct Interest Rate Products will be built on top of the GLP Token of GMX, TraderJoe has been a long-time partner of Struct Finance and this article will showcase how the future integration with TradeJoe might function architecturally.
In the last article, we did a deep dive into Struct Finance’s tranching mechanism.
For this article, we will use the recent ARB token airdrop as a hypothetical example of how the tranches function when combined with profitable concentrated liquidity positions, using data pulled from Trade Joe Liquidity Providers during the days that followed the airdrop.
Although the data for future yield-bearing positions may be different, the principles remain the same:
- The Variable Tranche amplifies your returns.
- The Fixed Tranche caps your downside.
Trader Joe varies from Uniswap due to their Liquidity Book (LB), a different AMM design compared to more traditional AMM DEXs.
It still uses concentrated liquidity positions, with some notable differences.
In Trader Joe liquidity is stacked vertically: each vertical line in the LB liquidity represents a price range that liquidity can be provided into.
The LB design offers higher flexibility for liquidity providers, as they can choose from “liquidity shape pre-sets” the strategy that better fits their profile.
For instance, we have seen how most of the users who received the ARB airdrop ended up providing liquidity on Trader Joe, to take advantage of the possibilities to decide their own pre-set and price range.
This eventually resulted in the TVL rising more than 300% during this past month.
As of today, the most used ARB Liquidity Pools are on TraderJoe.
This is a testament that users are taking advantage of the flexibility and customizability of the LP to select their most accurate price range and take advantage of those juicy APY.
What happens if you build a Struct Vault on Top of Trader Joe?
Struct Finance provides a wider range of investment options, better suited for every investor’s profile: investors can leverage Struct Vaults to manage their risk exposure and generate higher returns.
Struct Finance vaults could be leveraged to build up to 6 main strategies users can carry out on Trader Joe.
These strategies mirror the ones that are currently available on Trader Joe and may change by the time Struct Finance fully integrates with Trader Joe Liquidity Pools.
In fact, even though the pre-set strategies cover the different risk profiles, users might still be:
- Reluctant to be 100% exposed to these yield-bearing strategies;
- Willing to take extra risk for the specific setting, to maximize returns.
Users on Struct Finance could leverage Trader Joe positions to create their tranches based on their risk appetite.
By leveraging a Struct Finance Vault on top of Trader Joe, users will be able to tailor the yield according to their risk profile, thanks to the mechanism of tranching.
For a primer on tranching please refer to our previous article:
Leverage without Liquidations: A Deeper Look at Tranching
The first product of our suite of Struct Finance will be Interest Rate Products. Interest Rate Products allow anyone to…
In simple words, tranching changes the risk profile of investments by dividing them into tranches, prioritizing the way in which the cash flows from these assets are returned to investors. This allows investors to choose the tranche that better fits their risk and return profile.
- More risk-averse users: Fixed Tranche;
- A user looking to increase returns: Variable Tranche.
How could Struct Finance Increase Liquidity Providers' Yields?
Let’s have a practical example using the ARB/ETH LP:
The LP has an average APR of 136% (based on the average of the last 7 days).
Who would Use Struct finance vaults?
- Users who might be wary of the issues of LP, including when they go out of range, might be willing to sacrifice some APR in exchange for less risk exposure: they will therefore invest in the Fixed Tranche;
- Users who might be overly excited and want to capture the maximum benefits from the ARB airdrop LP fees will therefore increase their risk exposure by taking a leveraged position in Struct Finance using the Variable Tranche.
Assuming a 136% APR for the yield-bearing assets, these are the expected returns for the two different tranches:
Afraid of risk? No problem, you can still get a 54% APR.
Willing to take more risks? Almost double your profits with Struct Finance Variable Tranche.
Considering that airdrop season might kick off on Avalanche too, Struct Finance is a very interesting tool that allows users to build more complex strategies to ripe off the benefits of LP fees from the airdrop.
The Trader Joe model is slowly gaining market share and tools such as Struct Finance will allow users full customization and flexibility on how to play further airdrops.
It’s airdrop season and other chains like zKsync and Celestia have teased their upcoming airdrops.
Given TraderJoe’s current position as a prominent DEX and the recent performance of its liquidity provider fees for ARB, it will likely be one of the first destinations for new airdropped tokens — and we’re ready for it.
It is, however, important to mention that the first product of our Struct suite will be the Genesis GLP Vault, based on GLP. Nonetheless, this is an interesting thought experiment of what can be achieved with concentrated liquidity on Struct Vaults.
Speaking of airdrops — there’s been some buzz on our Discord about a list of names being formulated.
Keep your eyes peeled!