[RFC] ETH Strategy Perpetual Note (ESPN) Vault - High Risk Stables Vault

General Discussion Request for Comment [RFCs]
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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.

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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: About ESPN | ETH Strategy Documentation

https://x.com/eth_strategy

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.

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Lazy Summer Governance Recap [September 2025]
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Thanks @MasterMojo for sharing this proposal. ETH Strategy is an innovative approach to packaging ETH volatility selling into a compounding yield vault.

The main risk, as noted, is a significant market downturn, where the long-dated calls held by ESPN lose value and option premiums shrink. The strategy looks like it would really print during sideways or choppy markets, but may face challenges in a prolonged bear.

However, given that the product is still new and supply is capped at $1M, it seems prudent to gather more data before considering deeper integration. That said, I’m interested to see how the team envisions ESPN fitting into the existing ETH fleets.

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This is a fascinating (and complex!) yield strategy. I’m supportive of exploring this, as long as it’s clearly firewalled as a high-risk experiment and we let it mature a bit first.

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I wanted to provide an update on this since its been a few weeks. Yields still look good! Curious to hear what other @Recognized_Delegates think.

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Well,
what do I think?

First of all, thank you for bringing this topic for discussion.
I strongly believe ETH HigherRisk strategy needs such additions and maintain significant APY margin over its ETH LowerRisk younger brother. Otherwise putting eth into “HigherRisk” might look “too risky” :slight_smile:

Secondly, it is obvious this strategy is very complex and involves some risks which are hard to asses. I’m no different - having researched this strategy for 1-2h - still not having confidence to assess its risks.

In the screenshot you shared there is “Base Asset Growth: 12%” - this is the strategy performance, right?

Since ESPN has no redemption, user performance is effectively realized only through the LP price. In theory, the LP price should track the base performance (mint/NAV + option premiums), but in practice it can trade at a discount or premium depending on liquidity conditions. It would be useful to monitor and publish an “LP depeg” metric (LP price ÷ NAV − 1) so we understand the gap between reported strategy APR and their actual exit P&L.

Here is the only pool with decent liquidity:

To summarize:

  1. I think expanding HigherRisk fleets is a good idea
  2. I have no confidence to asses the risk
  3. This ark performance might turn slightly negative for longer period (like 2-4 weeks). This is something new or very uncommon in our arks. Might be visually off-putting for some users.
  4. The last point to consider: what is the marketing effect of onboarding ESPN? Does it have much traction? If there is enough hype - maybe it is point for onboarding (with small caps to limit the risks).

Curious to hear others’ opinions.

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Thanks @MasterMojo for surfacing this exciting opportunity. I definitely see the value in adding strategies to the Higher Risk side (as it is def. the path to $1B+ TVL), but I’m wondering about the right placement.

Would ESPN require its own dedicated FLEET? None of the current stables vaults in Lazy Summer Protocol use direct USDS (or any other stablecoin) exposure, and spinning up a new Ethereum mainnet fleet carries meaningful costs for keepers, rebalancing, etc. That overhead can make sense if there’s strong traction and TVL growth, but if not, it risks being inefficient.

On the other hand, am curious whether this could instead be integrated into the USDC Higher Risk Fleet, which would keep it aligned with the current vault structure while still capturing the upside of ESPN. If the intent is to establish a standalone ESPN Fleet, are there other strategies in the pipeline that could make use of it over time?

Onboarding ESPN could make sense, but I’d love to hear thoughts of @BlockAnalitica and other @Recognized_Delegates first.