ETS

Delta-neutral Exchange Traded Strategies

Exchange-traded strategies are structured ERC-20 products that involve leveraging a collateralized debt position (such as DAI lent on Aave) to borrow a volatile asset (like WETH). This volatile asset is then paired with a stablecoin to provide stable-to-crypto liquidity (e.g. WETH/DAI) on an Automated Market Maker (AMM) like Uni V3. This approach allows for earning a high Annual Percentage Yield (APY) and hedging against the volatility of cryptocurrencies.

It's worth noting that the current usage of exchange-traded strategies (ETSs) has shifted more towards internal functions, particularly as collateral for USD+.

As the crypto asset moves up in price, the value of the debt goes up accordingly. As the crypto asset falls in price, the amount of debt reduces. Thus the yield received is 'delta-neutral', i.e. stablecoin based.

ETSes are exposed to impermanent loss, thus, ETS is 'delta-neutral but gamma-exposed yield'. In order to mitigate the gamma exposure, the position is regularly rebalanced by automated bots that react to a delta b/w amount of crypto borrowed and LPed.

There are wide range ETSes (corresponding to classic Uni V2 positions) and narrow range ETSes (corresponding to various concentrated liquidity positions). Wide range ETSes are relatively low risk; in contrast wide range ETSes are high risk-high return.

A fee retained by Overnight for ETSes can vary b/w 20 and 50% of the yield charged daily. The higher the risk, the costlier it is to run regular rebalances - some narrow range ETSes during periods of high volatility can require up to 100-150 rebalances per day with corresponding gas costs.

Each ETS is an ERC-20 rebase token that runs on absolutely same mechanics as USD+, using similar exchange and mark-to-market logic.