Jones is an options, liquidity, and yield strategy protocol. Jones simplifies and democratizes access to innovative and complex strategies with the Jones Vaults, while unlocking liquidity for otherwise illiquid options positions through jAssets. With full composability, jAssets (and Jones Vaults) can be integrated across DeFi, bringing new sources of yield and capital efficiency to the entire ecosystem.
In this article, Jones formally announces the Jones Synthetic LP.
Cracks in the foundation
Providing liquidity is a cornerstone of DeFi, allowing everyone to trade in a permissionless and decentralized way, while earning fees for LPs.
Unfortunately, being an LP is often inefficient. It’s an open secret that the risk/reward of being an LP is mispriced and often skewed against the liquidity provider, and the provider has to just hope that the rewards make up for it—sometimes they do, often they don’t.
In fact, being an LP in an AMM is a grand bamboozle, and users have been hoodwinked into taking on a position that is often inefficient, with a mispriced risk/reward.
Here are the reasons why being an LP in an AMM may not be always be the most efficient:
- Running an LP position is like running a perpetual short strangle, except instead of getting the premia up front, they are streamed to you in the form of regular transaction fees and extra rewards on top.
- The risk/reward may be often be skewed. The composition of an LP token can change rapidly, inflicting IL (Impermanent Loss) upon the position before it even has started to collect enough fees to offset its effects. This is like running a short strangle and getting assigned before you even collect any premia on the options you sold.
- Framed without any DeFi vernacular and seen for what it is—a perpetual short strangle without premia paid upfront—It’s no wonder then, that being an LP is incentivised so heavily and that the DeFi metagame since its inception has simply been rent-seeking hyperinflationary rewards via being an LP, i.e. ‘farming’. Exorbitant LP rewards are currently the only way LP positions can attain a better risk/reward.
The Jones Synthetic LP
The Jones Synthetic LP replicates the payoff structure of a regular LP by writing options on the underlying assets. It protects the position from the pitfalls of a regular LP, with the potential to greatly enhance the yield accrued.
Users would be able to deposit LP tokens, for example ETH-USDC SLP, in the Jones Synthetic LP Vault. The vault mints ‘jETH-USDC’, the vault token. The LP token is then disassembled. The ETH is deposited across ETH-SSOV-C strikes with varying weights, and the USDC is deposited across ETH-SSOV-P strikes with varying weights.
In the SSOVs, both ETH and USDC generate yield (ETH generates DPX rewards, USDC generates 2CRV rewards) while collateralising options sold. As options are sold, the position collects premia, which are compounded into the collateral. When the options epoch ends, the positions are rolled over to the next epoch at varying strikes and weights. Upon initiating withdrawal, the position is zapped back into ETH-USDC SLP, and the user withdraws LP tokens as the jETH-USDC vault token is burned.
The Jones Synthetic LP has significant advantages over regular LP for the user:
- The Synthetic LP, as a basket of rolled short straddles, at minimum provides a similar payoff to a regular LP, and in an ideal scenario greatly outperforms a regular LP.
- If a portion of collateral within the Synthetic LP is not assigned, it still generates a single-staking yield, smoothening the downside as this portion will not incur an impermanent loss.
- The Synthetic LP can stack multiple layers of yield: yield generated by the underlying collateral (e.g. 2CRV), trading fees from pools the collateral sits inside, options premia paid upfront as options are sold, further emissions on the Synthetic LP.
- Yield (from options premia) paid upfront and unassigned collateral generates further yield, making the risk/reward of a Synthetic LP far more favorable than a regular LP, improving capital preservation during tail events.
- Synthetic LPs are just as composable as regular LPs while having the above advantages. Synthetic LP jAssets can be used as collateral for lending/borrowing/leverage, even stablecoins.
Proof of Concept Backtests
Backtests were performed on 2021 ETH options data across various exchanges, to illustrate the viability of simply approximating a regular LP position’s behavior by selling rolling straddles across monthly options epochs (as Dopex currently has only monthly epochs).
Annual yields of 5% for ETH, 7% for USDC, and 9% for ETH-USDC LP were accounted for. The regular LP is compounded daily, whereas the Synthetic LP is compounded monthly.
As can be seen above, constructing a Synthetic LP around monthly options epochs without any optimisation, naturally emulates a standard LP position while sometimes over or under-shooting by ~25%. This, among a series of other backtests, was an effective proof-of-concept for the DAO’s strategy team to begin working their magic and building an exceptional Synthetic LP product.
The aim of the above backtest was to simply illustrate proof-of-concept, that a Synthetic LP can approximate the payoff structure of a regular LP.
Synthetic LPs in prod are expected to produce vastly greater yields than regular LPs. This is due to a number of factors:
- The Synthetic LP Vaults will utilize weekly options epochs instead of monthly, meaning their payoff structure will be far closer to a regular LP. Monthly epochs, as used in the backtests, are not ideal.
- With weekly options epochs, viable strikes and suitable weights can be adjusted frequently, allowing room for optimisation and enhancement of the Synthetic LP’s performance.
Wen Synthetic LP Jones Vault?
The DAO’s strategists are hard at work, crafting the perfect combination of stacked yields, optimized weights, and the right strikes, to create a Synthetic LP that is far better for the liquidity provider than what is available in DeFi today.
The Jones Synthetic LP is coming soon™.
Join the Jones DAO community now to stay up to date on our upcoming releases and partnership announcements. We’ll be hosting AMAs, previews, and sharing plenty of alpha: