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User Flow

Example

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. 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. 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. 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. 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. 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. 6.
    Meanwhile, the BTC-PERP on Entropy is trading at $50,000 while BTC²-PERP is trading at $2,550.
  7. 7.
    Note the mark price is trading at a $50 premium to the oracle.
  8. 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. 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. 10.
    This payoff resembles a short options payoff, similar to Volts #01 and #02. The differences are that:
  11. 11.
    Alice gets continuous funding payments rather than a premium up-front.
  12. 12.
    Alice is “delta neutral” and isn’t exposed directly to the underlying price movement. This allows her to harvest pure volatility yield.
  13. 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. 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.
  15. 15.
    Trades:
  • 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.
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