Skip to main content

Compounding Leverage

Compounding leverage is the mechanism that lets YieldBasis cancel impermanent loss. Your yb-LP share holds a Curve LP position at exactly 2× leverage, all the time, without you needing to do anything.

The problem with regular leverage​

The simplest way to get 2× exposure is to borrow against your LP and double down once. But that leverage drifts the moment the price moves. If the price of BTC increases by 10%, the collateral appreciates while the debt stays the same, so the leverage ratio falls below 2×. If BTC continues to increase in value, leverage drifts further. If the value of BTC decreases, leverage increases and the position can be liquidated.

You could fix this by rebalancing manually — sending a transaction every time leverage drifts by some threshold. Two problems:

  • Cost: every rebalance pays gas and trading fees. Frequent rebalancing eats yield.
  • Drift between rebalances: in the moments between trigger events, your leverage is off-target and you are accumulating impermanent loss exactly as if you had no leverage at all.

What YieldBasis does instead​

YieldBasis maintains 2× leverage with no LP action required. The position lives inside an on-chain AMM called LEVAMM. LEVAMM never trades on its own; it just posts a quote tied to the external oracle price.

When the oracle moves, LEVAMM's quote moves with it, and a gap opens between LEVAMM's price and the underlying Curve pool's spot. Arbitrageurs see that gap and trade against LEVAMM to capture it. The trade direction that's profitable for the arbitrageur is exactly the direction that pushes leverage back toward 2×.

You don't pay these arbitrageurs directly. They pay themselves out of the spread. Arbitrageurs rebalance the pool whenever the spread and rebalancing budget are large enough for the trade to be worth it.

You hold a yb-LP share whose value tracks the underlying asset 1:1. When BTC moves +50%, your equity moves +50%. When BTC moves −50%, your equity moves −50%. No drift, no impermanent loss at the depositor level.

Example​

Start with $1,000 to deploy at BTC = $60,000 — call it $500 of cbBTC plus $500 of crvUSD.

If BTC moves to $90,000 (+50%):

StrategyOutcome
Plain Curve LP (no leverage)$1,225 — grows by √1.5, lags hold by $25
Hold the cbBTC + crvUSD separately$1,250 — the IL baseline
YieldBasis (continuous 2×)$1,500 — tracks BTC 1:1
2× leverage without rebalancing, never rebalancedbetween $1,225 and $1,500 — drifts off-target as price moves

The continuous 2× position lands on the BTC move exactly. The plain LP shows the impermanent loss the leverage cancels.

What you pay​

Continuous rebalancing is not free for the protocol. Each arbitrage trade pays the arbitrageur a small spread. Stack those small payments over many price moves and you get a real cost, rebalancing cost.

YieldBasis funds most of this cost out of the protocol's own revenue. crvUSD borrower interest accrues inside LEVAMM and gets returned to the Cryptoswap pool as a rebalance subsidy (see Refueling). Pool trading fees cover the rest. In normal volatility, the net drag on yb-LP returns is small. In high-volatility, the rebalancing happens more often and the drag is larger.

This rebalancing cost is not impermanent loss. IL is the structural shortfall vs holding, and it is cancelled at the depositor level by the leverage identity above. Rebalancing cost is the operational price LEVAMM pays to keep the leverage exactly at 2× in real time.

Why exactly 2×, not some other number​

The LP value function for a constant-product pool grows with the square root of the price (for the math behind this, see Math Primer). To get a wrapped position that grows linearly with the price — which is what cancels impermanent loss — you need to apply leverage that "undoes" the square root. That requires exactly 2×. Less leaves residual IL; more overshoots.

So 2× is not a tuned parameter: the p\sqrt{p} shape of the underlying LP forces it.