Description

Learn about how is stETHvv is structured.

Assumptions

The stETHvv assumes that ETH price is highly volatile and will continue to be volatile. This product creates a derivative structure to let users benefit from ETHs volatility. The direction of the market movements doesn't matter as the strategy can benefit both when the asset price goes up and when it goes down.

The strategy also assumes that Lido is a reputable source of a base yield on ETH. Find more about Lido here.

The structure

stETHvv has two main components: a yield source and a derivative structure.

The yield source

Currently, the vault can only receive deposits in stETH (ETH deposits are coming soon). stETH is an interest-bearing token that represents Ethereum 2 staking rewards within Lidos liquid staking implementation.

stETH tokens generate returns daily. Those returns compound every week.

The derivative structure

The vault applies a principal protected strategy using derivatives. Being a principal-protected strategy, it will never apply market risk to the principal. This means that the derivative strategy only uses the yield accrued within the vault to set up the structure - never the principal.

The strategy accumulated the daily yield from Lido stETH over a week and every Friday it separates 50% of the accrued yield to buy the derivative structure.

The derivative structure is made of buying calls and puts, ranging from 10% to 20% OTM with weekly maturities. This structure is also known as a strangle.

Let's take an example.

The current spot price of ETH is 2000, so the strike for the put would be at least 1800 and 2200 for the call.

But let's say that the strikes available in the venues are:

PUT:

• option 1: 1850 -> 7.5% OTM

• option 2: 1700 -> 15% OTM

CALL:

• option 1: 2150 -> 7.5% OTM

• option 2: 2300 -> 15% OTM

In this case, we always respect the 10% to 20% OTM, and we would choose option 2 in both scenarios.

The scenarios

📈 If the ETH price moves up considerably, the call option may enter in-the-money and return more than the yield used to purchase it.

📉 If the ETH price crashes, the put option may enter in-the-money, returning more than the yield used to purchase it.

📊 If there were not enough volatility, the vault would only lose 50% of the yield generated by Lido that week.

This way we can preserve the principal deposited and let it grow with Lido, risking only part of the yield to put together the strangle strategy.

The users

This strategy is perfect for those that hold ETH, believe ETH is gonna continue to be a volatile asset, and want to accumulate more ETH over time with controlled risks.