We’re excited to announce that Volt#05: Capital Protection is now LIVE!
Start earning: friktion.fi/protection
Initial capacity is at $1 million USDC and only available for Genesis Wielders — holders of Friktion’s Lightning OG NFT ⚡️
💡 This is Part II of our Volt#05 series. Read the Introduction post (Part I)!
Strategy
Volt #05 generates outsized returns in volatile markets with rising interest rates, while offering 100% principal protection. It uses interest yields from optimized lending to purchase downside protection from volatility products (options) into a single, powerful DeFi product.
ℹ️ How does it work?
- Deposits are lent out on Tulip to earn interest yield (optimizes and rebalances among overcollateralized lending platforms). Principal (USDC deposited) does not have any price exposure!
- Volatility protection: A portion of the lending interest earned is used to purchase SOL put options which hedges against downside volatility (when SOL price falls drastically).
Note: Principal is not used to buy put options — only interest accrued.
- In events where SOL price falls more than the price hedge % (eg 25%), depositors earn outsized returns from the volatility protection payoff (put option).
- In events where SOL price falls less than the price hedge % or rises, depositors earn returns linearly (from lending interest).
~TLDR~
Principal Protected: Deposit value (principal) is 100% protected — only interest payments are used for hedging.
Volatility Protection: Generates outsized returns when the price of SOL moves below the price hedge % (payoff range shown)
❓What does price hedge % mean?
Price hedge % is the percentage an asset (SOL) has to move for the hedge to payout! Measured by the difference between current spot price and the strike price of the put option being purchased by the Volt.
In the case of a 25% price hedge — this means that SOL put options are bought with a strike price that is 25% lower than the current spot price of SOL (for example: if spot price: $40 then strike price: $30)
When the price of SOL falls below the strike price, the put option is in-the-money and the option buyer (a Volt#05 depositor in this strategy) has the right to sell SOL at the strike price (which is higher than spot price), locking in gains from the difference!
📈 Strategy Payoff
Let’s look into some scenarios to help better understand Volt#05!
Assumptions:
- Epochs are 1 week long
- Alice deposits $1,000 USDC
- Lending rate for USDC is 4% APY
- Half of each week’s lending yield is used to buy SOL put options, hedging against downside volatility
- Tail risk hedge (weekly put options) bought has a strike of $30
Scenario 1: SOL price increases to $46 ( ↑ 15%)
- If Alice held USDC in her wallet: her investment remains at $1,000
- By depositing into Volt #05: she would earn $0.38 (+0.04%), making her position value $1,000.4!
Scenario 2: SOL price falls to $34 (↓ 15%), but above the put option strike price ($30)
- If Alice held USDC in her wallet: her investment remains at $1,000
- By depositing into Volt #05: she would earn $0.38 (+0.04%), making her position value $1,000.4!
Scenario 3: SOL price falls to $28 (↓30%) and goes below the put option strike price ($30).
What this means: the put option is in the money, and the option buyer (a Volt#05 depositor) has the right to sell SOL at $30
- If Alice held USDC in her wallet: her investment remains at $1,000
- By depositing into Volt #05: she would earn $50.4 (+5.04% ), making her position value $1,050.38! Let’s break this down:
- At time of deposit, SOL price was $40 which is equivalent to 25 SOL ($1,000 USDC deposit)
- PnL from Volatility Protection = 25 SOL * ($30 — $28) = $50
- PnL from (Lending Yield — Hedge Cost) = $0.77-$0.38 = $0.38
- Total Volt#05 PnL = $50.4
📊 Backtest + Analytics
This strategy was backtested using simulated implied volatility levels for Solana options to price a tail-risk hedging strategy that allocated 50% of its lending interest to buying 7-day put options every week with a 5% fully collateralized lending rate assumption.
In the backtest, the downside protection in the strategy provided by the put options outperformed. The protection component generated 45% more yield when compared to lending.
Results: depositor nets a 8.1% return on their capital before fees.
The capital protection strategy underperformed vs. fully collateralized lending when SOL was in its historic bull run in Q4 2021, but outperformed dramatically in the volatile bear market of 2022.
If you have any questions or comments regarding the backtest, methodology, or strategy feel free to reach out via Discord or at team@friktionlabs.com! We’re always open to feedback in our Analytics.
I’m in! How do I start?
- Head over to friktion.fi/protection
- Volt#05 is a Genesis Wielders exclusive (holders of our Lightning OG NFT)
Don’t have a Lightning OG? Head over to Magic Eden to get yours, or keep a look out on our Twitter and Discord for a chance to win one very soon! 👀
About Friktion
Friktion is DeFi’s leading protocol for risk-managed yield strategies. Friktion’s 5 core products, known as Volts, are building blocks of DeFi portfolios that perform across market cycles. The platform has amassed over 17,000 users and traded >$2.5bn in volume. Our protocol’s mission is to enable access to long-term sustainable DeFi yields.
Learn more at friktion.fi
Media or Institutional Inquiries: Email us at team(at)friktionlabs.com
Questions? Feedback?
Find us in Discord 24/7 — seriously, we’re always around!⚡
If you’re experiencing any issues, kindly create a ticket in the #support-ticket channel!
Quick Links:
Twitter: twitter.com/friktion_labs
Discord: discord.gg/friktion
Blog: friktionlabs.medium.com
Documentation: docs.friktion.fi
