GLP Market Neutral Vault (nGLP Vault)
GLP is the liquidity provider token of GMX, the hottest decentralized perpetual exchange on Arbitrum. The protocol is recognized as one of the most robust and successful project in DeFi, providing a lucrative revenue stream as "real yield" to its community through its liquidity provider token, GLP.
The GLP pool is a multi-asset pool composed of around 50% stablecoins, and ~50% of ETH and BTC. Upon providing liquidity, users receive the GLP token, which gives them a share of protocol fees in ETH. What's even better, LPs are automatically protected against impermanent loss, as GMX's pricing mechanism uses oracle prices of external centralized exchanges instead of the traditional AMM model.
However, GLP's price fluctuates with price changes of its composing assets, meaning in holding GLP, you are also exposed to ETH and BTC price risks. If you are concerned about the market or do not want this exposure, you would have to hedge out this portion of ETH/BTC. Unfortunately this is not an easy process, as GLP's composition changes dynamically with trading activity on the platform and GLP buying/selling.
Our GLP Market Neutral Vault (nGLP Vault) simplifies this process for you through our unique rebalancing algorithm and enables you to easily and safely earn double-digit APY while protecting your equity value.
The strategy works as follows:
- 1.User deposits DAI to vault
- 2.The vault allocates a portion to buy GLP (= long exposure on ETH and BTC)
- 3.The other portion is used to open leveraged ETH and BTC short positions (= short exposure on ETH and BTC)
- 4.The vault rebalances the position whenever market exposure reaches a certain threshold
When you deposit DAI into the vault, the strategy appropriately allocates your assets so that the amount of ETH and BTC you are holding through GLP equals the amount of ETH and BTC being shorted.
We use leverage in opening short positions in order to allow the strategy to allocate more of the deposited funds into buying GLP, thus maximizing capital efficiency and making sure you are earning as much APR as possible. We have found that 5.5~6x leverage is the most optimal in terms of rebalancing costs and in enabling us to allocate at least 90% of deposits to buy GLP (hence earning at least 90% of GLP APR).
Rebalancing occurs based on 1)liquidation risk and 2)asset weight deviation within GLP.
Liquidation risk is managed through real-time monitoring of short positions.
While our initial position is delta neutral, with the amount of ETH and BTC in our GLP holdings being equal to the amount of ETH and BTC in short positions, there are times when this balance is broken. When the weight of assets within GLP changes such that a portion of the position is exposed to delta (market exposure), the vault rebalances to return the position to a delta neutral state.
In simple terms, rebalancing involves buying or selling GLP and adjusting the short positions on the other side. In the case where a user makes an additional investment, the deposit is appropriately allocated to hedge the exposed value, reducing the costs of rebalancing.
Note that we have designed our rebalancing mechanism so that we do not hedge against changes in token weights from traders' PnL on the GMX platform. Recall that GLP is the counterparty to traders, which means when traders win, their profits are taken out of the pool. If they lose, their losses are deposited into GLP, leading to GLP profit. GLP is well-known for being the "house of the casino", and historical data has shown that traders tend to lose, or that "the house always wins". In effect, we can maintain this unique advantage and allow users to profit from traders' losses while reducing unnecessary rebalancing costs that would go into hedging them out. Also, according to our backtesting results, not hedging the trader PnL gives a higher APR on the strategy 🔥 (This PnL is accounted for in the nGLP token price.)
During a rebalance, the webpage will not be able to show the nGLP price. Rebalances take a few minutes, so you will be able to see the nGLP price a few minutes later.
In addition to how overweight or underweight ETH or BTC becomes due to changes within GLP, our rebalancing mechanism also reflects the inherent price volatility of each asset. This is made possible by our Average True Range(ATR) algorithm, which brings in and analyzes recent price data to give predictions of the volatility range of the asset.
This means two things:
- Firstly, since we are not relying on past data to determine our threshold but are analyzing recent price data, we can effectively react to the current market condition.
- Secondly, we aim to increase efficiency by reflecting the differences in volatility between the different assets in our portfolio. We are ultimately able to pre-emptively cut off large delta exposure, reducing unnecessary transaction costs and giving extra protection against price movements.
Hence, rebalancing is triggered when asset weight deviation + predicted price volatility exceeds a certain threshold. Such a mechanism enables us to more proactively reflect current market conditions and pre-emptively rebalance for tokens with large volatility, protecting the portfolio from large delta exposure.
Below is the backtesting result on managing a $10,000 position with rebalancing for 5 months:
As seen in the image above, despite fluctuations in GLP price, the total position value (green line) has seen a steady increase due to accumulating APR and continued rebalancing reducing delta exposure. You can also see that the red and blue lines, each representing long and short values, are tight mirror images of each other. This shows that the overall market exposure is being hedged at "zero".
The image below shows what would happen if we deposit $10,000 into
- 1.Simply holding GLP
- 2.Holding GLP with rewards
- 3.Investing in our nGLP strategy
Simply holding GLP (blue and gray lines) shows constant fluctuation due to changes in asset value within the GLP pool. If you were to invest in our strategy (green line), your total assets would be protected from price exposure and you would see a steady increase in position value without having to manage your assets yourself.