The catch-up: Rage Trade pt. 1
What's DN?
In my earlier article I hinted on DN, which you may have interpreted as a reference to Deez Nuts. I wouldn’t do you like that anon, I meant Delta Neutral. But it’s just getting started with the GLP-Delta Neutral Vaults. I’m not going to cover in-depth how GLP works but here’s a brief overview of the mechanism.
Overview of GLP
Arbitrum is home to a myriad of AMMs and perpetual exchanges but there’s one ruler amongst them all in terms of TVL and that’s GMX. This perps exchange allows its users to trade major digital assets with up to 50x leverage and utilizes a Peer-to-Pool model called “GLP”. GLP consists out of a basket of assets which are:
Stable coins (USDC, DAI, USDT, FRAX & MIM)
BTC
ETH
LINK (will soon be phased out - confirmed by the GMX team)
UNI (will soon be phased out - confirmed by the GMX team)
AVAX (Only on the Avalanche blockchain but I’ll exclude it from now on since I’ll be focussing on Arbitrum in this article)
It’s important to know that as a GLP holder you are the counter party of the traders on GMX, this means that if a trader is long you (as GLP holder) are taking the opposite part of the trade and means that you’re effectively short if a trader opens a long position. What I’m going to say now may sound harsh, but it’s the truth, as a GLP holder you facilitate deep liquidity but you want said traders to lose on their trade (else you’ll be paying their profit).
Even though the GLP basket consists out of a fair basket of stable assets (approximately 50% consists out of stable coins), you are still exposed to the directional risk of all the non-stable coins. I don’t think that I have to mention that the prices of these risk assets were simply just obliterated since the beginning of 2022. This brings us to the primitive of Delta Neutral Vaults delivered to us by Rage Trade.
Overview of the GLP vaults
To be precise, the GLP Delta Neutral Vault actually consists of 2 vaults, dubbed the “Risk-on Vault” and “Risk-off Vault”. Due to the different risk appetite of these vaults, their APRs will be diverging as well.
Risk-on vault
In this vault users will be able to deposit sGLP or USDC (which will be converted into sGLP automatically). The GLP token foremostly consists out of spot BTC and ETH exposure (which results in a directional trade, namely spot long BTC/ETH) indubitably this carries the directional risk of picking the wrong direction.
Rage Trade hedges this exposure by using a combination of bluechip DeFi protocols which are Aave, Balancer & Uniswap. First off, every 12 hours the percentual weight of both BTC and ETH in the GLP pool will be determined. If this clear, a flash loan will be taken out on Balancer of the aforementioned asset with respect to their relative weight in the GLP basket. These assets will be deposited in the Risk-on Vault which subsequently will swap the tokens for USDC on Uni V3. The USDC that is obtained from this swap will be deposited on the lending side in the Aave protocol, USDC deposited in the Risk-off Vault will be added as well to maintain a safe health factor that prevents the Rage Trade Risk-On Vault from liquidation. After the USDC deposit, a loan will be taken out on BTC and ETH (which results in a short position that hedges the long exposure in the GLP basket) and eventually the flashloan will be repaid. So the process will looks as follows:
The percentual weight of BTC and ETH in the GLP basket can change due to GLP deposits and trader’s PnL, to act accordingly, the Risk-On Vault rebalances every 12 hours and subsequently executes these tasks:
Harvesting fees
The rewards paid out in ETH from GMX will be auto-compounded in the Risk-On Vault by automatically converting into sGLP and depositing in the Risk-On Vault again.
The rewards paid out in ETH from GMX will be auto-compounded in the Risk-Of Vault by automatically converting it into USDC and depositing it on Aave.
Rage Trade takes a 18.5% cut of the ETH rewards to maintain the protocol in the longterm.
There are no additional costs such as deposit/withdraw/management fees, but depending on the size of a user he may experience some slippage (Rage Trade won’t get to keep any of this).
Rebalance profits
Due to the fluctuation of the price of BTC and ETH, the PnL on the short side will be calculated and if needed it will be rebalanced.
Rebalance hedge
The continuous fluctuation in the GLP pool needs to be hedged, the vault will recalculate its current position and act accordingly.
Risk-off vault
The Risk-Off Vault, is as the name suggests, a low risk vault which requires a user to only deposit his USDC and won’t have any direct exposure to GLP. The USDC in the vault will be deposited on Aave and will subsequently be lent out to the Risk-On Vault and in turn will earn some yield. On top of this, depositors of the Risk-Off Vault will be earning some of the ETH distributed by GMX which will be auto-compounded every 12 hours into USDC as I mentioned earlier.
The team is striving for a target APY for this vault somewhere between the 5 - 8%, which is considerably higher than the yield offered by traditional lending products such as Aave and Compound.
Both vaults went live for the first time on the 12th of December, first off there was the deposit possibility for whitelisted community members and for the holders of Degenscore’s Beacon NFT. Two hours later the general public had the possibility to deposit at 4PM UTC. It was a positive sign that this product was so sought after, the remaining vault capacity was filled within minutes. The vaults currently have a combined cap of 10M USD but will be gradually increasing after their upcoming security audits - just how I think it’s supposed to be. The next cap raise will be likely be concluded in January and will put the total cap to 20M USD. After the third audit the cap will be removed and every market participant can deposit as much as they desire. Another remarkable effort that deserves to be mentioned, and enhanced my confidence in Rage Trade, is the fact that they have bought a policy which covers the risks of exploits on the Rage Trade platform of up too 5M USD.
Backtesting data
This primitive of Delta Neutral Vaults built on top of GMX sounds very interesting, but eventually it’s all about the data and the subsequent results. Let’s take a closer look at the performance over the past year. I’m not a wizard with regards to data analytics, I will use Aperture’s chart, since he’s done a way better job than I could.
What can be derived from the chart above is that early on in 2022 GLP is slightly outperforming the Risk-On Vault, while shortly after GLP makes a nosedive and seems to somewhat follow the ETH price (which heavily declined after the Terra/UST/Voyager/3AC incidents. Over this period the Risk-On Vault endures some volatility spikes but all in all properly corrects itself and starts to deviate to the upside compared to holding GLP. Despite the underperformance of GLP, the Risk-On Vault is still outperforming GLP over the longterm and therefore a deposit in the Risk-On Vault should be entered with a long(er) term mindset.
According to this chart the Risk-On Vault is up 24.58% from January until October, while the return on GLP in blue during the same period would be -13.72%. For a more detailed analysis I would definitely recommend to read the original thread of Aperture here, for a breakdown of the weekly numbers, here is a thread of mastermind Noodles himself.
Partnerships
To state that the Business Development of Rage Trade is on steroids, is an understatement. It can be witnessed due to a multitude of factors such as the ‘White Glove’ service and all their (un)confirmed partnerships. The ‘White Glove’ service is focussed on (important) stakeholders of the protocol such as partners and big LPs for the protocol. The lineup for protocols that are confirmed to work with Rage Trade are:
I mentioned this one already, due to the partnership the holders of the Degenscore NFT could deposit earlier in the Delta Neutral Vault than the general public.
Rage Trade will integrate (future) tokenized assets into the platform of Halls Of Olympia.
Revest Finance
Both the depositors of the Risk-On and Risk-Off Vault will be able to reap the benefits of this partnership. The vault depositors will be able to earn their yield upfront while other participants pay this yield upfront for a discount.
Thru this partnership Sperax will be depositing USDC from SperaxUSD in Rage Trade’s Risk-Off Vault to earn idle yield. It entails others benefits for the Sperax community such as co-marketing efforts as well extended use cases for USDs and more.
Due to this partnership, users of the Risk-On Vault will be able to create a leveraged position to earn additional yield on their position.
This partnership encompasses SushiSwap’s BentoBox and allows the protocol to deposit idle tokens in the Risk-Off Vault to earn additional yield.
This partnership allows users to mint a stablecoin (UXD) against their Delta Neutral position in Rage Trade’s vault. Despite this position being used as collateral, a depositor will still earn yield on his Rage Trade position. In addition to this, UXD Protocol stated that depositors of the Delta Neutral Vault will be earning UXP, the protocol’s governance token!
These are the confirmed partnerships, but it doesn’t stop here. As I mentioned earlier, the BD is on steroids so they keep on going. Currently Rage Trade and the protocols mentioned here are working out a possible partnership:
This partnership would allow users to deposit their LP position in the cauldron (dedicated smart contract for a lending market on the Abracadabra platform) and mint the MIM stablecoin against this position.
As of the time of writing, the partnership is up on the governance forum. Check it out here.
With the next cap increase, which currently is scheduled for January, Hashflow will be introduced to prevent slippage on a user’s initial vault deposit.
As of the time of writing, the partnership will be formed and is a pre-governance stage.
Of course it would be ignorant to exclude the fact that they are building on top of GMX. As such, they have done a treasury swap of 5.000 esGMX tokens with the GMX DAO.
These partnerships are powerful in the sense that they allow for a more capital efficient environment compared to when the funds in the Rage Trade vault would be just sitting idle. By using Abracadabra, a user can mint MIM against his position, sell for USDC, deposit it in the vault again and do this loop as many times as desired in consonance with a user’s own risk appetite. I will post updates and strategies in the future if these strategies can be applied.
Thanks to BD Viperr for providing feedback on this article and sharing insights.
Disclaimer: Nothing in this article is financial advise and solely serves educational purposes. As of the time of writing, the author isn’t in possession of Rage tokens however this might change in the future, I probably will deposit in the Delta Neutral Vaults as well.