1. Summary:
Onboarding the ETH Strategy - Perpetual Note Vault as a High Risk Vault for Stables.
Ethereum’s volatility has long been a feature of its market, yet DeFi has approached it defensively, treating it as a risk to hedge rather than an asset to harvest. What has been missing is a natural, structural seller of volatility. ETH Strategy fills that role, unlocking a new category of yield.
Perpetual Note Vault ETH Strategy’s Perpetual Note (ESPN) vault earns yield by harnessing the volatility of ETH. Users deposit stablecoins into the vault, which are bonded into ETH Strategy to acquire ETH. That ETH is then used to run a covered call strategy on Derive.
Options expiring out-of-the-money earn option premiums, while those expiring in-the-money are covered by ETH Strategy bonding. For STRAT holders, EPS increases relative to the difference between the initial ETH acquisition price and the option’s strike price.
2. Context & Motivation:
After the first week this vault earned 66% APR on stables. This vault has ALOT of potential to integrate as high risk stable vault earning JUICY yields for Summer Users. https://x.com/eth_strategy/status/1963708689933857278
Instead of paying interest, ETH Strategy rewards lenders with long-dated call options, a more powerful form of ETH exposure. When combined with selling shorter-dated options, this creates a steady stream of yield. ESPN takes this complex options trade and distills it into a single token. Just as Ethena productized the basis trade, ESPN transforms the volatility trade into a perpetual, compounding yield product.
One side of the trade is native to ETH Strategy. ESPN loans ETH Strategy USD, but rather than receiving interest, they receive an ETH call option. This call option is inherently valuable but not liquid.
To extract yield from this long-dated call option, ESPN systematically sells shorter-dated call options on Derive. The symmetry between the long-dated convertibles acquired and short-dated calls sold keeps the strategy balanced in USD terms.
3. Proposal:
Integrating the ESPN Vault for Summer Finance Users.
4. Open Questions:
Currently there is a cap on the ESPN Vault; the team plans to increase the cap soon though.
Contract Risk: I attached audits at the bottom of this page.
Significant drops in ETH price over long periods of time can undermine ESPN’s option strategy. The vault MUST sell options on Derive at the same strike price as convertibles acquired from ETH Strategy (otherwise the strategy isn’t delta-neutral). In the event that ESPN strike prices are significantly OTM, premiums received from selling calls will be much lower, thereby lowering ESPN revenue.
Links: Perpetual Note Vault | ETH Strategy Documentation
Audits: Audits | ETH Strategy Documentation public-audits/reports/derive at master · sigp/public-audits · GitHub
Looking for any feedback! I think this proposal would offer a new yield opportunity for Summer users! Would love to hear from the Summer team if this possible with current architecture.