Fund-of-Fund Strategy

MAX LRT Strategies
1

Pick a Strategy Name:

Fund-of-Fund Strategy

Title: ynETHx (and others) Fund-of-Fund Strategy

1. Select Your MAX LRT Category:

  • ynETH MAX (ynETHx): Ethereum-based strategies
  • ynBTC MAX (ynBTCx): Bitcoin-focused strategies
  • ynUSD MAX (ynUSDx): Stablecoin-based strategies
  • ynBNB MAX (ynBNBx): Innovative BNB strategies

Selected Category: ynETH MAX

Strategy Description:

Recently, many liquid funds that run both on- and off-chain strategies while maintaining a large portion of the fund to be invested in liquid positions have emerged. For such funds, there exist MEV Capital, RE7 Capital, and so on. Delegating funds to them and letting them run various strategies will give a superior yield compared to only running fully on-chain strategies by ourselves. I suggest the following format of strategy:

  1. Companies that want a delegated fund submit a request for funds to the governance forum.
  2. If the proposal is approved after voting, the company’s ERC-4626 vault is created and added as an underlying asset to the master AMM.
  3. Each epoch, governance votes on the weight of each fund in the master AMM.

The master vault should be a fork of yETH, which supports a wide variety of weight parameters and can support up to 8 assets simultaneously. We can also use the balancer LP as an alternative. In this case, we may stake LP tokens in Aura to compound additional yields.

The fee sharing should be based on comparing against the benchmark yield, ynETH, or another LST yield, and charging a fee only for the alpha. We expect this strategy to attract many mid and small-sized funds but with competitive edges, while rewarding those with good yield by raising their weight in each epoch.

Protocol Risks:

  • Smart Contract Risks: We need a new primitive for the vault contract, which inherently risks centralisation and trust assumptions.
  • Market Risks: This is purely up to each fund’s strategy.
  • Operational Risks: We need an additional arm for monitoring and punishing associated funds. We may consider CoWSwap-style bonding requirements by requiring funds to hold YND and slashing it if misbehavior is found.

Protocol’s Liquidity History:

  • Current liquidity depth and health status.
  • Historical performance and stability during stress scenarios.
  • Note any past liquidity disruptions or challenges.

There is no history available, but we may refer to other protocols that adopted a similar strategy, such as Mellow protocol.

Redemption Flows:

  • Detailed Flow: Each vault must hold some portion of the asset in WETH or deposited in highly liquid lending protocols, so that whenever the withdrawal is requested, it can be instantly redeemed. If a user requests a withdrawal, it is essentially done by burning the LP token of the master AMM and is received solely in WETH. To do so, the master AMM must contain WETH as one of the underlying assets. Arbitrageurs will adjust the reserves by minting or redeeming vault tokens and trading against the master AMM.
  • Potential Issues: The biggest concern is the legal risk. As aforementioned, the potential solution is to require a bond and slash it for malicious acts. The next issue is the risk of not having enough liquid assets. We can prevent or partially mitigate it by requiring the floor portion for the liquid strategy.

Best-case Scenario: When the slippage for redemption is small enough, nothing is stuck and can be easily redeemed.

Worst-Case Scenario: Redemption cap is hit, or slippage for burning LP token into a single underlying asset is too big. In this case, the operator should redeem the LP token in each vault token and redeem it individually.

Conclusion - Why Add This Strategy:

  • Explain clearly why this strategy adds value.
  • Highlight unique advantages and long-term benefits.
  • Describe how it aligns with YieldNest’s broader objectives.

Many delta-neutral strategies have been suggested that contain off-chain components, such as basis trading. By adopting this strategy, we can abstract the burden of running off-chain components by ourselves by only monitoring and managing vault contracts and bonds. Moreover, the voting system for the weights of each company creates competition between companies for more fees, which results in better yields for us. Lastly, this strategy can support many mid- and small-sized companies that run highly profitable but small-capacity strategies. While each of these strategies may be small, by aggregating them, we can benefit collectively.

Submitted by: wycfwycf

Date: 2025/04/21

1 Like
2

This strategy is actually quite interesting. I’m also curious about where the returns of these capital funds have typically landed in the past.

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