TAP-16 Whitelist Opyn Squeeth Strategies

Don_G_Lover

Summary:

Whitelist the Opyn Crab V2 Strategy for Olympus treasury deposits. The goal of these vaults is to allow ETH exposure to increase decentralization but reduce the overall volatility of ETH. We plan to only maintain a small portion of ETH in this position to better understand how Opyn Crab V2 can perform against the broad market.

Background:

OIP-20 defined a framework for Olympus where 33% of excess treasury reserves can be deposited to earn yield in whitelisted protocols. This proposal seeks to add Opyn’s Crab V2 Strategy to this whitelist while keeping the same 33% treasury deposit cap. As this is a whitelist proposal, a risk analysis was performed and can be found below.

About Crab:

Opyn is a DeFi options protocol and the team that designed and developed the smart contracts for Squeeth, a power perpetual tracking ETH² in the form of the ERC-20 oSQTH. Crab is an automated short-volatility, delta-neutral vault strategy that allows depositors to reap the benefits of shorting oSQTH without taking a view on if the price of ETH will move up or down. By creating a mix of oSQTH debt and ETH collateral, Crab earns returns in USD terms when price of ETH fluctuates within a relatively stable range with periods of low volatility (compared to market expectations). The vault regularly rebalances via a recurring batch auction that allows Crab to buy or sell a target amount of oSQTH to neutralize delta

More about Crab V2:

Motivation:

Crab V2 provides a short volatility, delta-neutral strategy that aims to earn returns on the treasury’s plethora of idle ETH assets. Delta-neutrality can allow the treasury to earn USD-denominated returns without taking a position on the price of ETH itself. The treasury is currently long ETH and recent market fluctuations have frequently oscillated the dollar value of the treasury. The delta-neutral strategy aims for (1) rapid drops in ETH price to have a less significant impact on the Olympus treasury’s dollar value and (2) generating USD-denominated returns when ETH moves less than people’s expectations (between hedges).

Risks:

Vulnerability: A vulnerability in the Crab V2 or Squeeth smart contracts could lead to partial or complete loss of funds. Crab V2 has been audited and is insured by Sherlock and Squeeth has been audited by Trail of Bits and Akira.
Liquidation: While Crab Strategy deposits can be liquidated if it falls below the safe-collateralization ratio of 150%, rebalancing on a time-based or ETH-price-changes threshold helps prevent a liquidation from occurring. Crab has never been liquidated to date.
ETH Price Movement & Volatility: If there are changes to implied volatility or the price of ETH moves by more than is implied by the Squeeth funding, Crab can lose money.
Slippage: Crab can experience slippage when rebalancing (depending on clearing price from the batch auction) or due to price impact when deposits trigger a Uniswap sell.

Protocol Analysis:

Using a risk analysis framework developed by the DAO, the Policy and Partnerships teams have attempted to score various protocols based on some subjective and non-subjective data.

https://docs.google.com/spreadsheets/d/10rSv9DBA0l2RdgeQ1Lg2DkB-Rusl7ssW7h9qQTMcuRE/edit?usp=sharing

PEYDA_E_PENHAN

Don_G_Lover WE WANT

cpt_zeke

All for whitelisting and conducting tests with the Crab strategy.

Getting hands on experience with protocols that allows diversifying out of stablecoins while still maintaining low delta exposure is key to scale Olympus and increase the robustness of the treasury.

Ghassemikiarash

We want allowlist Opyn Strategies

conceited

not a good look. crabbing at this point is counterintuitive to treasury growth. do we really want to employ crab strategy at ~$1500 eth? dao needs to prioritize patience; we are not a venture studio and if we want more delta neutral exposure we can do it in a self-directed and non-leveraged manner.

Don_G_Lover

conceited I would be keen to your suggestions - our team has looked at a variety of options and believe the Crab vault is one of the more interesting ones.

If you have other suggestions, we are open to understand them!

On treasury growth - ETH's volatility is quite concerning for a variety of reasons. Although (nearly) everyone agrees ETH is bullish - we would like to avoid strong downward pressures.

balotelli45

conceited I think the end goal of this type of strategy is to have the option to reduce reliance on stablecoins. @Don_G_Lover Could you clarify what Olympus Treasury asset would be deployed in the Crab Strategy?

yesir

允许名单 Opyn Strategies

conceited

could we not reduce stable exposure by engaging in delta neutral positioning without employing an additional protocol

Don_G_Lover

conceited the main alternative to a stable would be holding spot ETH (which can go down in value). We'd like to protect the value.

For this proposal, I'd suggest we utilize some DAI or swap a nominal amount of ETH into DAI.

The vault is not restricted on deposit.

0xkumquat

I like the idea of delta neutral diversification. i'm a big yearn fan but they don't have delta neutral. looks like crab strategy also can have the opportunity to do well. we can try it and see

PlayCardsCapitcal

I’m a big fan of carb , so I agree this ideal, carb can make OHM better than before

0xkumquat

PlayCardsCapitcal I’m a big fan of carb , so I agree this ideal, carb can make OHM better than before

Cc2

Big fan of Opyn, squeeth, and option strategies here.

However, crab is a short volatility strategy.

I do not think that Olympus should play vol (short or long) strategies with its treasury. Olympus is not a hedge fund, it should not partake in directional strategies, including volatility strategies.

Short volatility is especially vulnerable to black swan events. If Olympus had deposits in a short vol strategy during the UST collapse or the 3AC liquidation in June (if we may call these events black swan events), it would have lost a big chunk of its deposits there. And I am pretty sure everybody agree that Olympus strength is to be especially resistant to black swan events, not the other way around.

Also, depositing in option strategies has already been discussed here for TAP-11 Ribbon Finance Whitelist : https://forum.olympusdao.finance/d/1165-tap-11-ribbon-finance-whitelist

Which was a heavily contested snapshot vote : https://snapshot.org/#/olympusdao.eth/proposal/0xe52a4af6307bea40a34f2eaf9a93f11c8abf382020cca2d370ffaa0337620b6b

At the very least, I think that this proposal should highlight very clearly the possibility of loss of fund if a large volatility event happens, which is only highlighted through a little sentence that doesn't say much.

Davood

Love crab strategy

farzin

Definitely

Gistfire

While crab is a good strategy and i used it personally too, i believe there is lots of centralization risk associate with it, and should be more thoroughly discuss before putting treasury money in.

The current crab strategy relies on a single owner (control by opyn) to trade with retail orders to hedge delta on a daily basis, in the contract there is no logic "enforcing" the vault to act as a delta neutral strategy. If we deposite into the crab strategy, we will be trusting opyn's owner to properly execute trades, otherwise it can lose significant amount of money.

I didn't see this mentioned in the risk paragraph above, but i believe this is very important

Don_G_Lover

Apologies as I have been out!

I'd like to propose a Twitter Space to address some of the centralization concerns and cover/focus on a risk discussion with the Opyn team.

IVAREAL74

I love carb, that it will make things better. Keep building

amir007

I think that's useful method

mostafanazari

We want allowlist Opyn Strategies

I think that's useful method