Introducing Ribbon Earn
Ribbon has been known for its category-defining “Decentralized Option Vaults”. Prior to Ribbon launching, on-chain options volume was abysmal due to constraints around liquidity, scalability, and capital efficiency. Ribbon DOVs made it extremely easy for anyone to become an option seller through our vaults, earning yield for selling out of the money options.
However, Ribbon DOVs are not risk-free — users are selling risk (potential upside or downside) in exchange for premiums today. As market conditions have changed significantly in the last few months, there has been an overwhelming demand for safer, principal-protected products that still allow users to express their view on the market.
Ribbon Earn
Ribbon Earn is our first structured product that revolves around principal protection. It is an all-weather yield product that generates yield through lending, then enhances that through purchasing options to get exposure to short-term volatility in the market.
Instead of trading a difficult and choppy market, Ribbon Earn lets you get exposure to weekly moves in both directions, up to a certain level. If the price level does not move, or exceeds the range in either direction, users will get back a rebate of 4% APY, as well as their principal back.
The terms and specification of the product are as follows:
Deposit Currency: USDC
Lockup Period: 28 days
Option Trades: 4 (one every week)
Options Tenor: 7 days (expiry in line with Deribit)
Upside Barrier: 108%
Downside Barrier: 92%
Underlying Asset: ETH
Capital Protection: 100%
Base APY: 4%
Backtest
We investigated how the vault would have performed if it had been launched in January 2021. Using historical market data, we find that depositors would have already accrued 17.23%, while having 100% of their funds protected, corresponding to a realized APY of 10.37%. The cumulative P&L of the vault along with the weekly yield generated is shown below, assuming a deposit of 1 million USDC. The vault earned more than the base coupon 51.80% of the time, and the option payoff was 4.05% on average in these cases, corresponding to 12% bonus APY in addition to the 4% base APY.
Source: Ribbon Finance, as of 17Aug2022. Data from 01/01/2021 to 12/08/2022. Backtesting analysis for illustrative purposes only. Ribbon Finance provides no assurance or guarantee that the strategy will operate or would have operated in the past in a manner consistent with the above backtesting analysis. Backtest and/or past performance figures are not a reliable indicator of future results. All data backtested over the entire range.
Source: Ribbon Finance, as of 17Aug2022. Data from 01/01/2021 to 12/08/2022. Backtesting analysis for illustrative purposes only. Ribbon Finance provides no assurance or guarantee that the strategy will operate or would have operated in the past in a manner consistent with the above backtesting analysis. Backtest and/or past performance figures are not a reliable indicator of future results. All data backtested over the entire range.
Risks
Ribbon Earn has a very different risk profile than existing Ribbon Vaults. In the Ribbon Vaults, users are taking on market risk (selling calls/puts) to generate yield. On the other hand, Ribbon Earn generates yield through lending, which has credit risk. Ribbon lends to accredited market makers such as Genesis and Wintermute who have a history of credit worthiness in order to minimize this risk. We are also exploring working with projects such as Credora to evaluate creditworthiness of the market makers.
Conclusion
Ribbon Earn is an all-weather yield product, much more akin to a “set and forget” strategy that users do not need to actively pause-resume based on market conditions. People who are looking for a place to earn yield on USDC, and want some exposure to the market volatility, may find Ribbon Earn the right product for them.
We are excited to launch this first product within the Ribbon Earn category, and are working on introducing other products such as Ribbon Earn ETH, Ribbon Earn BTC, and other structures for users to express bullish or bearish views while staying principal protected.
