Partnered With:

Numoen Nest: Decentralized Derivatives Hedging LP Losses

Read this article in 8 Minutes

The income of Power Token comes from Uniswap transaction fees

Original title: " Death to Impermanent Loss—introducing Numoen Nest "

Original author: Robert Leifke

Original compilation: kaori, BlockBeats

In traditional finance, market makers focus on creating hedged portfolios through options strategies. The advantage of a hedged portfolio is that it provides investors with very little downside risk while providing the greatest degree of liquidity to the market.

By creating the first fully decentralized option-like derivatives - POWER TOKENS, our goal is to use it to hedge Uniswap liquidity The price range (called a position) of an investor (LP).

With Numoen Nest, we have created a financial product that provides real benefits to Passive Liquidity Providers , these returns come from the most sustainable source of income in DeFi - Uniswap transaction fees.

Where the Numoen Nest comes in

Numoen's Power Market Maker Protocol (PMMP) is a decentralized automated market maker for minting Power Tokens. Because all Uniswap positions have negative gamma, and these are option-like derivatives with positive gamma. Numoen Nest offers a simple strategy of matching the positive gamma of a Power Token with the negative gamma of a Uniswap v3 position, creating an LP position or portfolio with no impermanent losses.

Where do you get the money?

Numoen Nest does not provide impermanence loss protection for free, depositors pay interest on positive gamma exposure. So to earn a yield, depositors must earn more from Uniswap transaction fees than they pay in interest.

Vault Structure

Vault is an interface to PMMP and is in many ways just an abstraction of Power Tokens and Uniswap LP. It has a very simple design and is very easy to use. At most two transactions are actually required: one for the deposit and one for confirming the amount.

1. Connect your wallet

2. View your existing Uniswap LP positions

3. Double click to buy Protection

4. Complete hedging

Uniswap hedging strategy

In many ways, the provision of liquidity to Uniswap represents a volatility strategy whose value Best performance. Since the Uniswap portfolio is short volatility, it can make money when realized volatility is low but implied volatility is high (as reflected in trading volume). In simple terms, Uniswap LPs take volatility risk and perform best when the transaction fees they earn outweigh their impermanent losses.

The impermanent loss of the Uniswap portfolio means that the reserve balance of the speculative asset ETH rises slowly as prices rise and rapidly as prices fall. This results in Uniswap portfolios consistently underperforming holding strategies without transaction fees. When paired with Power Token, the portfolio remains 50/50 while still earning transaction fees from providing liquidity on Uniswap. Since the Gamma of the Power Token is always 2, we can multiply the Gamma of the Uniswap LP position to get the perfect amount of Power Token to hedge against.

Gamma value matching

For more custom portfolios suitable for Uniswap V3 concentrated liquidity, calculating the Gamma value is more complicated. For this, we have to find the lower and upper bounds of the custom portfolio to find the value of the LP position. The equation for valuing a bounded Uniswap portfolio is shown in Joe Clark's Replicating Bounded Liquidity.

The formula is as follows:

Then calculate:

As Guillaume Lambert showed in Gamma Transforms article, by matching positive convexity (gamma) with negative convexity (gamma), we can get a portfolio with linear returns.

< h3>Decentralized DOVs in fact

Using only LP shares of constant function market makers (CFMMs), we can safely create fully decentralized Vaults of Options (DOVs). Unlike Ribbon Finance, our options strategies are facilitated by smart contracts and are not executed by centralized market makers. We are exploring new strategies that can be constructed by combining the returns of different LP shares.

FAQ

When can I use the Numoen Nest?

- Soon.

Can I hedge multiple positions at once?

—Not yet.

How will the benefits be displayed?

——The estimated annual interest rate is calculated as the rate of return of Uniswap transaction fees - the interest paid for holding Power Token. The implied volatility is calculated as shown in "Volatility and Uniswap V3 (lambert)", that is, the square root of the total trading volume of the day divided by the liquidity of the current real-time quote, multiplied by 2 times the pool fee level and 365 a year square root of the day.