ETH Amplifier Strategy
Risk Category: High
Last updated
Risk Category: High
Last updated
This strategy generally performs well in a bull market.
Investors bullish on ETH have the options to open a leveraged position on a DEX or to adopt an $ETH-to-$stETH folding strategy.
Unfortunately, opening a mid-to-long-term leveraged position on any DEX is often costly due to various fees, including funding or borrowing fees, that undermine the ROI. On the other hand, several effective $ETH-to-$stETH folding strategies are readily available on the market for maximizing PoS staking rewards for $stETH. However, as this strategy repeatedly converts $ETH into $stETH and leverages the $stETH against $ETH to amplify the overall staking yield, there is an increased liquidation risk.
As an alternative to these options, Teahouse developed the ETH Amplifier Strategy utilizing Teahouse’s Managed Vault secure infrastructure to facilitate borrowing through Aave, providing liquidity on Uniswap or Curve, then staking the LP tokens on Curve to maximize returns while managing risks.
The strategy supplies $ETH on Aave to borrow $USDC for depositing into Curve’s Tricrypto pool or providing ETH-USDC liquidity on Uniswap v3, then staking the LP tokens on Curve for rewards.
The key to this strategy is maintaining the collateral health on Aave and calculating the appropriate Loan-to-Value ratio to keep the strategy profitable.
Backtesting results show a significant growth of +39.5% in $ETH and +142% in $USDC.
Teahouse’s ETH Amplifier Strategy adopts an approach where the staking rewards are used to offset the borrowing interests on Aave, and the swap fees generated by LP holdings further increase our collateral. The primary challenge lies in finding the optimal balance between the debt on Aave and the LP positions to maintain the desired Loan-to-Value (LTV) ratio and leverage.
Users can deposit $ETH in the Managed Vault on mainnet, and the Strategy Manager will bridge the assets to the appropriate Layer 2 network with the available DeFi ecosystem to support the strategy.
After the user deposits their assets:
The $ETH is deposited into Aave to obtain a loan in $USDC (which will incur an annual borrowing interest of roughly 3%).
The borrowed $USDC is then deposited into Curve’s Tricrypto pool or the ETH-USDC LP on Uniswap v3 to earn the expected swap fees (currently around 10%).
The Curve LP (CRV) tokens are staked for rewards.
The Loan-to-Value ratio (LTV) of the loan from Aave is closely monitored, and we try to keep it within the desired limits using the following two measures: a) Make partial debt repayments (repay debt) b) Increase the collateral value (add collateral)
In addition, the ETH Amplifier Strategy navigates risks and optimizes yields by deploying assets in more than one pool. The strategy’s assets are mainly deployed into Curve’s Tricrypto pool. However, if the yield of the Tricrypto pool falls below our target, the assets will be reallocated to the ETH-USDC LP on Uniswap v3 using Teahouse’s Single-sided LP Strategy until the Tricrypto pool’s APR exceeds the target rate once again.
Strategy performance for the ETH Amplifier Strategy is calculated in $ETH.
As previously mentioned, the key challenge when managing the ETH Amplifier Strategy is maintaining the Loan-to-Value ratio (LTV). We have two measures at our disposal: 1) repay the borrowed $USDC (repay debt) or 2) provide additional $ETH as collateral (add collateral).
The general criteria for when to execute one measure over the other are as follows:
Teahouse’s Strategy Manager employed the GARCH (1,1) model to generate a simulated dataset of hourly $ETH prices covering a one-year period, consisting of 5,000 sample data points. Different LTV and λ value combinations were applied to find the suitable parameters for backtesting.
See simulation results in the figures below:
Teahouse’s Strategy Team performed backtesting by applying this strategy to Curve’s Tricrypto pool from June 17, 2022 to August 14, 2023. During backtesting, we made the assumption that there would be no interest charges based on the expectation that the rewards generated from Curve’s Tricrypto pool were more or less equivalent to the cost of the loan.
Note: Backtesting was conducted with an initial amount of 100 $ETH, a target LTV range of [0.62, 0.68], and a conservative factor of 0.7. These parameters were selected based on the previous simulation.
Reading the graph and our key findings:
Grey line (ETH): This line reflects the market conditions. We can see that ETH/USDC increased by 73.4%.
Red line (NAV_ETH): The NAV of the strategy’s $ETH holding position. The results show a growth of +39.5% in $ETH and +142% in $USDC.
Blue line (AAVE_ETH): This line indicates the amount of $ETH supplied to Aave as collateral. We can see that as the value of $ETH increased, the strategy increased the $ETH holdings on Aave.
The section highlighted in purple shows the period when the LP position (green dotted line) is emptied by the strategy (due to LTV managing) to repay the loan on Aave, resulting in the low levels of the borrowed $USDC (pink dotted line).
Backtesting results of the ETH Amplifier Strategy demonstrate the strategy’s potential and Teahouse’s commitment to exploring new yield portfolios with a combination of various DeFi protocols.
Rather than pursuing a conventional ETH-to-stETH folding strategy, we forged a strategy that is versatile with either a stable AMM on Curve or ETH-USDC LP on Uniswap. At the heart of the ETH Amplifier Strategy lies the meticulous management of the health factor on Aave, coupled with the precise calculation of the LTV ratio essential for sustaining profitability.
