Alice believes that there will be a crab market in BTC for the next 7 days and Deposits $1,000 USDC into Volt#03 (Crab strategy). Per normal Friktion Epoch standards, the deposit is Pending till the following Epoch begins.
- 1.At the start of the next Epoch, Alice’s $1,000 deposit goes from "pending" to "active" in the Volt. Alice receives a VoltToken which represents her share of the Volt. This token works similarly to VoltTokens in other Friktion Volts which you can read about here.
- 2.Crab Volt generates yield in sideways (or crab 🦀) markets by shorting a BTC²-perp and collecting yield in the form of continuous funding payments. In order to remain delta neutral (ie agnostic to the price movement of BTC), we hedge our BTC²-PERP by being long the regular BTC-perp (on Entropy.trade). We call this “delta hedging”.
- 3.This results in a profit for Alice price movement of BTC “crabs” around and stays within the Profit Range. This profit range depends on the funding rate of the power perpetual market. A larger funding payment means a wider Profit Range, which increases how volatile BTC can be and still be profitable for Alice. Entropy Docs here
- 4.In this example, suppose spot BTC oracle price is at $50,000, and the BTC² oracle price is at $50,000² = $2,500,000,000.
- 5.Note: On Entropy, the price on BTC² is divided by 1,000,000 (10e6) = $2,500 on the exchange to keep the price manageable.
- 6.Meanwhile, the BTC-PERP on Entropy is trading at $50,000 while BTC²-PERP is trading at $2,550.
- 7.Note the mark price is trading at a $50 premium to the oracle.
- 8.The BTC²-Perp will always be trading above the oracle price because of the convexity of the payout. An upside move has a larger gain than an equivalent downside loss. Read more about the convexity of power perpetuals here.
- 9.Since the BTC²-Perp is always trading above the oracle price, that means the long BTC²-Perp holders are always paying the short BTC²-Perp holders in the form a funding payment. Alice can generate yield by taking on a short BTC²-Perp position. She will profit if the price stays within the profit range implied by the difference between the BTC²-Perp market and the oracle price.
- 10.This payoff resembles a short options payoff, similar to Volts #01 and #02. The differences are that:
- 11.Alice gets continuous funding payments rather than a premium up-front.
- 12.Alice is “delta neutral” and isn’t exposed directly to the underlying price movement. This allows her to harvest pure volatility yield.
- 13.The Volt targets roughly a ~200% collateralization ratio (CR) [formula] as to minimize the chance of liquidation [define]. If CR falls below 150%, the safe collateralization ratio (SCR), the Volt is at risk of liquidation and satisfies a rebalance condition.
- 14.The position generates yield by collecting funding on the power perpetual position. The exact funding can be calculated by taking the difference between the mark and the index for BTC² which is paid out over the funding period.
- Deposit amount = $1000 USDC, Volt Asset = BTC²
- Volt shorts $500 worth of BTC²-PERP
($500/$2,550) = ~0.196 BTC²-PERP
- The Volt hedges the short position by purchasing $1,000 worth of BTC-PERP
($1,000/$50,000) = 0.02 BTC-PERP, hedge payoff subject to funding rates
17. In this example, BTC² is trading at $2,550 and the oracle price is at $2,500. Entropy uses a 7 day funding period [define] to pay out the difference, so the total funding per epoch:
1 day funding = (mark-oracle)/oracle/7 = (2,550-2500)/2500/7 = 0.28% / day
Which is equivalent to 177% APY annualized
18. The user’s net profit depends on how much BTC moves during this time period. The profitability bounds depends on how much funding the user collects.
- A 0.28% daily funding rate means Alice will generate a profit if BTC moves less than 5.2% in a given day.
19. Below is a chart that shows how daily funding rate translates into a profitable range.
Funding rates affects profit range and yield earned
20. Below is another chart of what the payoff looks like assuming a 20 bps daily funding rate.