Sushiswap Market Neutral Vault (Coming Soon)
The vault is currently in testing. Stay tuned for more details in the near future!
If you have ever provided liquidity to a Sushiswap liquidity pool or any DEX that uses an Automated Market Maker(AMM) model, you would have noticed that you sometimes end up holding less money than you had initially started out with. This is what we well know as impermanent loss(IL), which is "the temporary difference between the value of your LP position and the value of your original position". Once you remove liquidity, this loss becomes permanent.
IL occurs as a result of a change in the price of a token relative to its pair within the LP pool due to traders swapping against the pool. Such differences occur because the AMM algorithm is programmed to automatically adjust their exchange rates to maintain a consistent ratio of supply, typically at 50:50.
There are two important points worth noting about impermanent loss:
- 1.Impermanent loss always occurs whenever there is a price change, regardless of the direction of the price movement.
- 2.Impermanent loss increases exponentially the larger the price change.
Our automated vault frees you of these concerns by letting you earn just the autocompounding APR of top-performing Sushiswap pools while minimizing your exposure to impermanent loss.
To hedge against the volatility of ETH, 2 actions are taken
- 1.Borrow ETH from Aave to create a market-neutral exposure to ETH price (ETH short)
- 2.Rebalance position to prevent accumulating impermanent loss
Infographic of the Sushiswap Market Neutral Vault
Rebalancing is triggered by 1)Liquidation Risk and 2)Price movements to serve the purpose of minimizing impermanent loss and preventing liquidation.
When the Debt Ratio goes beyond a certain threshold, the vault closes and opens new LP and debt positions to reset net market exposure to zero. Then, the position is protected against further price movements and exponentially increasing IL.
Debt Ratio (ratio of assets borrowed vs assets in LP position)
As seen in the backtesting result image above, depite severe fluctuations of ETH/USDC price, the total vault value (with and without rebalancing) shows an upward trend. Rebalancing enables the assets to be maintained in an upward trend in position value with less fluctuation.
More information about the details are coming soon as we develop further into our strategy vaults!