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Compounding leverage

Compounding leverage is the mechanism that lets YieldBasis offset impermanent loss (IL), the shortfall of a liquidity provider (LP) position against holding. Your yb-LP share holds a Curve LP position at a 2× leverage target. Arbitrage trades pull it back to 2× after each price move. You do not need to do anything.

The 2× target​

The LP value of a constant-product pool grows with the square root of the price. To get a position that grows linearly with the price, you must apply leverage that reverses the square root. That requires exactly 2×. Less leverage leaves residual IL. More leverage overshoots. The p\sqrt{p} shape of the underlying LP sets the number, so 2× is not a tuned parameter. For the full derivation, read Math primer.

Leverage drift without rebalancing​

A basic way to get 2× exposure is to borrow against your LP position once and deposit the loan. That leverage drifts when the price moves. If BTC rises 10%, the collateral value rises and the debt stays the same. So leverage falls below 2×. If BTC falls, leverage increases and the position can be liquidated.

You can rebalance by hand each time leverage drifts past a threshold. Each rebalance pays gas and trading fees, which reduce your returns. Between rebalances, your leverage is off target, and the position does not fully offset IL.

LEVAMM rebalancing​

An onchain automated market maker (AMM) called LEVAMM holds the position. LEVAMM does not trade on its own. It posts a quote tied to its oracle price. On the active markets, that oracle price moves with price_scale, the Curve pool's internal price.

When price_scale moves, the LEVAMM quote moves. Arbitrageurs then trade against LEVAMM to profit from the gap. The trade direction that pays them is the direction that pushes leverage back toward 2×. Arbitrageurs trade when the spread is large enough to pay for the trade. You do not pay them directly: they take their profit from the spread.

The result is a yb-LP share whose value tracks the underlying asset one-to-one, before fees and costs. For who runs these trades and what they earn, read Arbitrage and MEV.

LEVAMM price source​

On the active markets, the oracle values the Curve LP token from the pool's price_scale and virtual_price, and from the crvUSD/USD price. virtual_price is the pool's growth accounting per LP token. The oracle does not read a market feed of the asset. For how the oracle combines these inputs, read Oracle design.

price_scale moves toward a target. A pool policy can set that target, so the policy affects when LEVAMM rebalances. The source of the target depends on the pool:

  • On a pool that runs the oracle-report policy (YBOraclizedPolicy), signed Pyth Pro (Pyth Lazer) USD price reports of the asset feed that target.
  • On a pool that runs YBTwocryptoPolicy, the target comes only from the pool's own trade prices.
  • On a pool without a policy, the pool uses its own price_oracle, a moving average of its trade prices.

To see which policy a pool runs, call POLICY() on the pool or read the pool policy table in Contract addresses. For what each policy sets, read Pool policies.

Pooled debt and the safe band​

YieldBasis gives you no personal liquidation price. Each market pools its debt and collateral, so you share the market's solvency risk.

LEVAMM uses a safe band for pooled debt: 6.25% to 53.125% of collateral value at the oracle price. The band applies to each action in a different way:

  • Deposits. If a deposit leaves debt outside that band, the deposit reverts.
  • Trades. A trade that leaves debt outside the band reverts, unless it moves debt back toward 50%.
  • Withdrawals. A withdrawal takes a proportional share of collateral and debt, and the band does not block it.

For the contract checks behind the band, read Dev: LEVAMM.

Example: four strategies after a 50% BTC rise​

The following example starts with $1,000 of cbBTC at BTC = $60,000. BTC then moves to $90,000 (+50%). The strategies do not start with the same BTC exposure. The plain LP and the separate hold put half of the $1,000 in BTC. The two leveraged strategies start with BTC exposure on the whole $1,000. The table gives the value of each strategy after the move:

StrategyOutcome
Split $1,000 50/50 into a plain Curve LP (no leverage)$1,225: trails holding by $25
Hold $500 cbBTC + $500 crvUSD separately$1,250
Deposit all $1,000 of cbBTC into YieldBasis (2× target)$1,500, before costs: tracks BTC one-to-one
Borrow $1,000 once, LP $2,000, never rebalanceabout $1,449: leverage falls below 2× as the price rises

The plain LP shows the IL that the 2× leverage offsets.

What you pay​

The position pays two running costs. Each arbitrage trade pays the arbitrageur a spread, and the total of these payments over many price moves is the rebalancing cost. The position also pays crvUSD borrow interest.

YieldBasis uses that interest to fund part of the rebalancing cost. The interest accrues inside LEVAMM, and LT, the market's vault contract, donates it to the Cryptoswap pool to fund rebalancing. This donation is called refueling. Pool trading fees pay the rest. For how refueling works, read Refueling in Fees and veYB revenue.

The rebalancing cost depends on volatility and on the borrow rate. In a sustained trend, it can exceed fee income.

The following example assumes that rebalancing cost exceeds fee income by 0.6% over 30 days, at an unchanged BTC price. It uses the 1 cbBTC position deposited at a BTC price of $100,000 from How YieldBasis works. Fundamental Value, the value of one share on the vault's books, falls from 1.0000 to 0.9940. That drop is about $600 (0.6% × $100,000). Slow or negative growth of Fundamental Value like this is PPS drag (PPS stands for price per share). For what that loss does to a staked position, read Watermark and recovery.

This cost is separate from IL. The leverage offsets IL at the depositor level. Rebalancing cost is what LEVAMM pays to keep leverage close to 2×.

While the pool is out of balance, a withdrawal can also return less than the share's Fundamental Value. That gap is the Temporary Redemption Discount (TRD). For how to check it before you withdraw, read Fundamental Value, Redemption Value, and TRD.