This episode reveals how Yield Basis aims to solve DeFi's oldest problem by creating a sustainable, real yield on Bitcoin through a novel mechanism that eliminates impermanent loss.
Introducing Yield Basis: A New Primitive for Bitcoin Yield
- Core Function: Yield Basis enables users to provide liquidity with a single crypto asset (e.g., WBTC) and earn fees without suffering from impermanent loss.
- Initial Disclosure: The hosts disclose that Delphi Ventures is an investor in Yield Basis.
The Core Problem: Deconstructing Impermanent Loss in AMMs
- Impermanent Loss Explained: IL is the opportunity cost or underperformance an LP experiences compared to simply holding the assets in their wallet. For example, if Bitcoin quadruples in price, a 50/50 WBTC/USDT LP position in a standard AMM would only double in value (before fees), whereas simply holding the assets would have resulted in a 2.5x gain.
- The Root Cause: Egorov explains that this loss occurs because the value of deposits in an AMM grows proportionally to the square root of the asset's price, creating a non-linear drag on performance.
- Yan Lieberman's Insight: Yan frames IL as a strategy that profits from price oscillation and mean reversion. However, it penalizes LPs who are long-term bullish and do not want to sell their assets as the price increases.
- Michael Egorov states, "Whether Bitcoin goes up or Bitcoin goes down, it appears that if your crypto and US dollars are doing nothing, you actually have more money than if you put them in AMM."
The Yield Basis Solution: Compounding Leverage to Eliminate IL
- The Mechanism: By putting the LP position (whose value is proportional to the square root of Bitcoin's price) into a 2x compounding leverage structure, the final position's value becomes proportional to the square of the LP's value. This cancels out the square root effect, making the position's value directly proportional to Bitcoin's price.
- Compounding Leverage: This is a strategy that automatically borrows against the collateral to buy more of it as its price rises and sells some to repay the loan as the price falls, maintaining a constant loan-to-value (LTV) ratio (in this case, 50%).
- Why Curve Pools are Essential: Egorov notes that simply applying this to a standard Uniswap V2 pool would result in losses from constant rebalancing that offset the trading fees. Yield Basis leverages Curve's concentrated liquidity pools, which are designed to earn higher fees than Uniswap V2, ensuring the strategy remains profitable after accounting for rebalancing costs.
Mechanism Deep Dive: Sourcing Capital and Managing Rebalancing
- Borrowing and Rebalancing: The protocol uses a dedicated, internal AMM to manage the debt. This AMM swaps between the LP token and the borrowed asset (e.g., a stablecoin) to keep the loan size aligned with the pool's needs. Arbitrageurs interact with this AMM, ensuring the system remains balanced.
- Capital Source: To minimize borrowing costs, Yield Basis plans to use allocations of Curve USD (crvUSD), Curve's native stablecoin. This creates a symbiotic relationship where Yield Basis gets low-cost capital, and the Curve DAO receives YB tokens to incentivize crvUSD liquidity, strengthening its ecosystem.
Performance and Yield Profile: Simulating Real-World Returns
- Simulation Methodology: The model calculates optimal parameters (like fees and concentration) based on historical data from the previous year and applies them to the following month to simulate real-world performance.
- Projected Yields: Based on these simulations, Egorov projects that Yield Basis could generate a net annual percentage rate (APR) of 10% to 20% on Bitcoin during active market conditions. In a bear market with low volume, this could drop to a few percent.
- Actionable Insight: This variable yield profile makes Yield Basis a compelling product during periods of high market volatility, as trading fees—the source of the yield—are highest during these times.
Innovative Tokenomics: Real Yield vs. YB Tokens
- The Choice: Liquidity providers must select whether they want to earn real yield (from trading fees) or YB tokens (the protocol's native token). They cannot receive both.
- Dynamic Inflation: If more users choose to earn YB tokens, the protocol's inflation rate increases. Conversely, if everyone opts for real yield, YB token inflation drops to zero.
- Strategic Implication: This design allows the protocol to adapt to market conditions. In a bull market, users might prefer YB tokens, while in a bear market, they might favor the real yield from fees. Fees not claimed by real-yield earners are redirected to the DAO, benefiting VYB (ve-style locked YB) holders.
Go-to-Market Strategy and Multi-Chain Vision
- Initial Launch: The protocol will launch first on Ethereum, chosen for its security and trust among conservative capital holders.
- Multi-Chain Expansion: Future deployments are planned for other chains, including Bitcoin L2s. Each new chain will feature a separate, isolated instance of the protocol and its token.
- Rationale for Isolation: This strategy avoids reliance on cross-chain bridges, which are common security risks. It also simplifies the system and creates better business development opportunities, as each chain's ecosystem can focus on growing its native version of Yield Basis.
The Addressable Market and Its Natural Limit
- The Saturation Point: Yield Basis generates yield by capturing value from Bitcoin's price volatility. As the protocol's total value locked (TVL) grows, it will act as a stabilizing force, suppressing volatility. Eventually, the volatility will decrease to a point where the generated yield is no longer compelling.
- Market Size Estimate: Egorov estimates this saturation point to be between $50 billion and $100 billion in TVL in the current market. This is determined by comparing the liquidity Yield Basis would provide to the existing liquidity on centralized and decentralized exchanges.
Conclusion: A New Paradigm for Asset Yield
This conversation outlines Yield Basis's potential to establish a new, sustainable yield source for major crypto assets by solving impermanent loss. For investors and researchers, the protocol's novel tokenomics and its direct relationship with market volatility present a unique opportunity to monitor as a new DeFi primitive emerges.
