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Automated Vaults
We're proud to introduce a brand new class of products to Alpaca Finance — Automated Vaults. These are vaults that run complex strategies for you, similar to an on-chain hedge fund. We currently have two strategies for Automated Vaults, which are Market-Neutral Strategy and Savings Strategy.
Market-Neutral Strategy is a leveraged yield farming strategy where you can yield farm high APY pairs while minimizing your risk by hedging out market exposure. The Automated Vault eliminates market risk by farming long & short positions simultaneously, and rebalancing them for you to maintain neutral exposure. Or if we put it in alpaca language: high yield and low risk.
Savings Vault Strategy is a 1xLong strategy similar to lending or staking the base crypto asset(ETH, BTC, BNB, etc.) but earns higher APYs than lending or staking because the underlying capital is deployed to earn yields in high-leverage yield farming positions with no liquidation possible. The Automated Vault achieves this by farming long & short positions simultaneously, and rebalancing them for you to eliminate liquidation risk and maintain 1xLong exposure.
🚩Automated Vault’s Key Features
- Higher max leverage(8x): Because the strategy is auto-rebalancing, and liquidation-free, it can run higher leverage profitably with a minimal increase in risk. We've thoroughly backtested 8x strategies on multiple assets and marketplaces to verify this. Thus, we'll offer 8x vaults as well as lower-leverage ones.
- Auto-rebalancing: The key challenges in executing this strategy manually are having to monitor the positions (to prevent liquidation on one of the positions) and calculating how to adjust the positions as asset prices move, in order to reset the net exposure back to the desired target. Our Automated Vaults take care of all this for you, so young and veteran alpacas alike can just sit back, relax, and enjoy the yields; auto-compounding, auto-rebalancing, auto-profiting.
- No liquidation risk: We are creating a specialized worker for this strategy that will remove the ability for keepers to liquidate the positions. This is because as mentioned before, liquidation is unnecessary for this strategy due to its setup; When one position drops in equity value, the other one's equity value rises the corresponding amount, making the aggregate change to equity value close to 0. Yet, if liquidation was turned on, though very unlikely with automated rebalancing, it would be technically possible that if the price of the crypto asset moved dramatically, one of the positions could be liquidated unnecessarily (due to liquidation monitoring individual position health instead of the health of the aggregate strategy). With no liquidation, this risk will not exist within the Automated Vaults. As mentioned before, it’s important to note that this implementation DOES NOT increase the chance of bad debt to lenders, because the debt ratio of the aggregate strategy will not materially increase. With this strategy, the Equity Value and Safety Buffer remain healthy at all times, which is why it is market-neutral. In fact, the volatile asset’s price could drop 90% and the aggregate debt ratio of the two positions would still not increase enough to trigger liquidation according to our current parameters for leveraged yield farming. Of course, this would never happen in practice because our rebalancing mechanism would kick in much sooner.
- Auto-compounding: To maximize the yields for our farmers, in addition to compounding the yield farming tokens - e.g., BOO, CAKE, MDEX, etc., ALPACA rewards earned from the two LYF positions in this strategy will be auto-compounded for you, maximizing the yields and reducing position maintenance even further.
- No lock-up: You are free to deposit and withdraw at any time.
Market-Neutral Strategy
What is the Market-Neutral (Pseudo-Delta-Neutral Strategy)?
A Market-Neutral Strategy (Pseudo-Delta-Neutral) is a leveraged yield farming strategy where you can yield farm high APY pairs while minimizing your risk by hedging out market exposure. The Automated Vault eliminates market risk by farming long & short positions simultaneously, and rebalancing them for you to maintain neutral exposure. Or if we put it in alpaca language: high yield and low risk.
This is achieved by opening one long position and one short position at optimal sizing to achieve zero net market exposure on the volatile asset in a token pair. As the price of the volatile asset moves, the vault automatically rebalances the positions at ideal parameters so that they maintain 0 market exposure, while you earn yields from market-making the entire time.
How it works
1.) Farming with leverage allows you to earn higher yields. However, it comes with additional risk; Mainly, liquidation risk if the market moves against your position.
- Example: If you open a 3x leveraged position on BNB-USDT (borrowing USDT), you will have a 1.5x long exposure on BNB.
2.) With the market-neutral strategy, we seek to eliminate the exposure on the volatile asset (i.e. BNB) by opening two positions: one long and one short in optimal sizing to hedge out the exposure on the volatile asset.
- Example: For 3x leverage, the optimal ratio is 1/4 long position and 3/4 short position. As you can see below, the long exposure(all the way on the left) and the short exposure(all the way on the right) for BNB are the same size. That's the goal of this hedging strategy.
3.) As time passes, the positions will not remain neutral due to the accumulation of compounded earnings, borrowing interest, and price movements of the volatile asset. With the automated market-neutral strategy, we allow for the positions to fluctuate within a narrow range so as to not rebalance too often, but once the exposure goes beyond a pre-determined threshold, the Automated Vault will trigger a rebalance to reset the exposure back to zero. Setting the right threshold for rebalancing is key to operating this strategy. Rebalancing too often would incur higher swap fees as well as locking in the impermanent loss of the positions.
- Note: the optimal rebalance threshold is set based on the results from extensive backtesting on historical market data.
4.) One major advantage of using our Automated Vaults vs. manually performing similar strategies is that Automated Vaults running market-neutral strategies will not have liquidation risk. The Automated Vaults' positions will not have connected liquidation bots, or allow liquidation.
However, there is effectively 0 additional risk of bad debt for lenders from turning off liquidation, because due to the two positions in this strategy hedging each other, the % change in equity value is small even after a large price movement. Furthermore, rebalancing to neutral once price moves is guaranteed through our automated rebalancing bots.
- To illustrate the point above, let's take an example of the 3x leverage set up. In this case, the volatile asset's price could move 40% in either direction, and if we assume no rebalance were to happen, the equity value would only change < 7.5% (see figure below.) In reality, the rebalancing would have happened much earlier, which means the equity value change would be much smaller (mainly due to the lower swap costs and IL of rebalancing).
Savings Vault Strategy
What is the Savings Vault Strategy?
Each Savings Vault will provide 1x Long exposure on a top crypto asset (e.g. BTC, ETH, BNB) while earning you sustainable, high yields! In other words, if you want exposure to top crypto tokens, investing in a BNB Savings Vault will be similar to staking in a BNB lending vault or holding BNB, except you’ll be earning much higher APYs!
The invested capital will generate passive income through automated yield farming (DEX market-making), at high leverage that only Alpaca can provide(3x-8x), and most importantly — with no risk of liquidation!
How it works?
Similar to the Market-Neutral Strategy, the Savings Strategy opens two leveraged yield farming positions, one long and one short. However, where the two strategies differ is that the Savings Strategy balances the relative sizes of the long and short positions such that your aggregate exposure on the crypto asset remains at 1x long instead of market-neutral. Thus, you can deposit assets like BNB, ETH or BTC into a corresponding Savings Vault, keep the 1x long exposure on the asset, and earn much higher yields on those tokens than is otherwise typically available through single-asset lending or staking in DeFi or CeFi.
Like all Automated Vaults, if market prices move, the Savings Vaults rebalance their positions to maintain the desired exposure on the Savings asset, which is 1x long here. Meanwhile, Savings Vaults are always generating passive income for you by deploying the capital into automated market making on top DEXes, at high leverage, but with 0 possibility of liquidation due to how the Vaults automate risk management. This makes investing in a Savings Vault effectively similar in risk to investing in single-asset lending or staking of crypto tokens, but with much higher APYs and no lockup.
Furthermore, Savings Vaults also auto-compound your yields, making it a product you can deposit into and not have to actively manage it. In fact, you won’t need to do anything except watch as the number of crypto tokens in your portfolio grows.
💡 Market-Neutral Vaults are in fact, USD-denominated vaults. Meanwhile, Savings Vaults are crypto-denominated. For example, a BNB Savings Vaults is BNB-denominated. Here, being denominated in a certain asset means the underlying capital has exposure to that asset and earns its yield in that asset.So another way to think of the Savings Strategy is as a coin accumulation strategy, where it continually earns more of the corresponding coin(crypto asset) for you.
Example: 3x BTC Savings Strategy on the BTC-BUSD LP pool
Assumptions:
- Alice invests 4 BTC into a BTC Savings Vault
- 1 BTC = 45,000 BUSD
Position#1: deposit 1 BTC and borrow 2 BTC
- Assets in LP: 1.5 BTC + 67,500 BUSD
- Exposure: Short 0.5 BTC | Long 67,500 BUSD
Position#2: deposit 3 BTC and borrow 270,000 BUSD
- Assets in LP: 4.5 BTC + 202,500 BUSD
- Exposure: Long 4.5 BTC | Short 67,500 BUSD
Net exposure of the two positions: Long 4 BTC (i.e.,1x Long)
As seen from the example above, Alice ends up with 4BTC long exposure, the same as what she originally had, but she is now earning 3x the yields of farming with no liquidation risk.
Investing in the Savings Vaults will be very simple just like Market-Neutral Vaults. The backend contracts will do all the hard work of monitoring the positions and maintaining the 1x Long exposure by performing re-balancing when required.
Last modified 14d ago