TL;DR

Brahma is thrilled to announce the launch of the Protected Moonshot DegenVault. The first vault in our gated DegenVault offering will be made accessible to experienced DeFi users with high KARMA scores. The vaults accepts single-sided USDC deposits on Mainnet which is deployed to blue-chips yield aggregators. The weekly harvested yields are used to take leverage perpetual future positions on PerpV2 on Optimism using an enhanced momentum trading strategy to generate additional returns which are compounded back into the strategy.

Introduction

For many moons the Brahma discord degens have been spamming “Wen Vault” but never “How Vault”.

In this post, Brahma can finally give the people what they want and formally announce the launch of the first DegenVault.

For those that don’t know what a DegenVault is (do you even web3.0?), Brahma’s strategy vaults will initially launch as DegenVaults, alpha peer-reviewed releases of its vaults. DegenVaults will be limited in size and gated, accessible by experienced DeFi users who are above a specific KARMA threshold. For a full refresher please check out our previous blog.

Given the current macroeconomic backdrop and general market sentiment Brahma has decided to launch the Protected Moonshot DegenVault as the first offering in the DegenVault series. During this unprecedented time of uncertainty, this hopes to provide users with an attractive alternative to sitting in stables with DegenSpartan and frens.

Motivation

Crypto prices have always blessed/cursed participants with insane volatility. If YouTubers and binary options adverts are to be believed, then this volatility provides infinite opportunities for investors to wagmi. The reality is a little different. A combination of FOMO, shameless abuse of those that dare to hold stables and peak bearish Twitter sentiment at the cycle bottom leaves a lot of entrants buying high and selling low (perhaps a career in bond trading beckons?)

What if there was a way to hold stables but still take those moonshots and advance your journey to the citadel?

Strategy

The Protected Moonshot DegenVault aims to achieve just this by employing the following strategy, accessible to users via a simple single-sided deposit:

1. USDC Stablecoins are deposited into blue-chip yield farms to generate market-leading yields
2. Weekly the yields are harvested and used to take leveraged systematic bets on crypto prices
3. A momentum trading strategy aims to generate returns in all market conditions - removing the anxiety about missing the bounce or getting rugged by another sell-off
4. Initially, for V1, the strategy will take leveraged perpetual future positions on Perpetual Protocol
5. Profits from the weekly trades will be compounded back into the yield farm

The result is a simple way for DeFi users to protect their capital while at the same time maintaining exposure to the historic volatility and short term trading opportunities that crypto provides.

It is important to note that this vault will be taking both long and short leveraged positions depending on the momentum signal. To simplify the users' experience, the decision was made to launch a single vault that can provide alpha throughout all market phases.

Backtest

Backtests were performed on various datasets with the following aims:

1. Investigate the feasibility of this type of strategy
2. Analyse the performance of a momentum trading strategy and optimise the risk management parameters
3. Identify potential strategy risks and future areas of improvement

Data

Given that trades will take place on Perpetual Protocol for the initial strategy, ideally, this would be the main data source for any backtest. However, given the nascent nature of Perp v2 on Optimism, there isn’t sufficient data set for backtesting purposes.

Instead, for our base dataset, we use 12months of hourly perpetual data from FTX. Importantly, this provides us with granular high and low price data, which is key for correctly accounting for liquidations. To complement the analysis Brahma also uses raw Chainlink oracle round data. This can be considered as a reasonable proxy for PerpV2 data; they use Chainlink to determine index prices.

Key Decisions

The following key decisions were made:

• The stablecoin yield was kept static for the duration of the backtest based on current yields
• Given the current DeFi yield environment, the use of historical figures would overestimate the strategy performance
• While there are currently 12 Perp v2 markets available, the initial strategy will take trades solely on the ETH-USD market
• Other assets were included in the initial investigation.
• Although the increased volatility of some of the alt L1s creates interesting trading opportunities these are offset by the increased frequency of liquidations
• ETH provides a more consistent return profile which was our focus for the initial strategy .(more on this covered below)
• Trade lengths: The expected trade length is 7 days to line up with weekly yield harvests.

Simple Strategy Results

Brahma starts by implementing a simple momentum trading strategy. Using the previous week's harvested interest, a leveraged position on ETH-USD is opened at the start of the week on Perpetual Protocol with the direction determined by the momentum signal. The position is closed at the end of the week and the interest together with any trading returns are compounded back into the strategy. In the case of a liquidation event occurring, the weekly interest amount is forfeited. The results are shown below for varying levels of leverage with a momentum strategy that achieves 55% prediction accuracy.

Given the signal accuracy, one may expect positive returns for the majority of leverage choices while increasing leverage should increase the expected return. However, this is not the case due to the intra-week asset volatility. In this simple strategy, we are unable to monetise the prediction edge. The use of any meaningful leverage increases the likelihood of being liquidated in weeks when the prediction was correct thus eroding any edge and resulting in losses. The effect is even more prominent in other altcoins with higher volatility.

The return for using leveraged perpetual futures in this form is inherently skewed to the downside since you are risking your entire interest amount in each bet and only getting exposure to the leveraged weekly return (which even at 10x leverage is in most cases is <100%).

Enhanced Strategy Results

In order to overcome this feature and create a return that is positively skewed we introduce simple take profit and stop loss conditions. Liquidation events are always sub-optimal so a stop loss condition aims to minimise this cost. A take profit condition does cap the upside on the bet however it can reduce the volatility of the returns. We also introduce a dynamic leverage factor that increases leverage used during times of low realised volatility since our perceived liquidation risks are lower.

The results from running the enhanced strategy on FTX and Chainlink data is shown below.

The enhanced strategy returned an APY above the stablecoin yield of 2.7% when run on FTX data and 2.4% on the Chainlink data. The feasibility of the strategy can be confirmed by these results. They highlight the ability to use weekly stablecoin yields in systematic leverage perpetual future trades to generate alpha throughout various market cycles.

Risks

As a DeFi degen one should always evaluate the risks of a strategy before aping. These include:

• Momentum signal accuracy degradation: vault returns will underperform if the market direction is poorly predicted. [Brahma continuously looks to improve signalling and provide more attractive payoffs]
• Liquidations: Due to the use of leverage, the weekly yield is at risk of being liquidated [Positions are automatically risk managed with stop losses and take profit conditions to minimize liquidation events]
• Stablecoin pegs: USDC will be deployed to the ust-w curve pool and staked on Convex. The strategy will suffer capital losses if any stablecoin in the pool loses its peg. [Brahma will be look to diversify the stablecoin pool exposure going forward]

Future Improvements

A strategist's work is never complete and the current implementation is very much the V1 of our Protected Moonshot strategy. The use of perpetual futures to take leveraged positions can be managed to create asymmetric payoffs however the strategy struggles to capture outsized moves due to the threat of liquidation. This is especially true on more volatile assets where the opportunity cost of an untimely liquidation is even more severe. Luckily, there are two other promising DeFi building blocks that can provide more Convex payoffs.

Coming soon to a V2 near you!

Protected Moonshot DegenVault releases between 14th-15th March 2022.

Stay tuned on Twitter and Discord for the latest sauce.

Legal disclaimer

The aforementioned contents in this blog are based on numerous assumptions and uncertainties which are subject to change periodically. The effect of such changes may result in alterations in premise, risks and uncertainties and may cause actual results or developments to differ from the results and progressions anticipated by brahma.fi

Brahma reserves the right to alter the plans, and intentions recorded any time and for any reason or no reason, in sole discretion. Brahma undertakes no obligation to update the decision publicly or revise any forward-looking statement as future developments or otherwise.

All contents and graphics used in the material intend no religious impairment and do not superintend its interpretation. This blog is not aiming to provide legal, financial or investment or other advice. We recommend users to stack their information sources basis their own personal research and not draw tangents from the materials or contents mentioned.