When boiled down to base level, DeFi vaults are generally just yield-bearing strategies. They’re either singular farms, or multiple building blocks slapped together as components of a more complex puzzle.

More formally, some DeFi vaults could also be called structured products - pre-packaged investments that include assets linked to interest in addition to one or more financial derivatives, such as options.

As DeFi adopts and creates different financial products, ways to combine them into structured products are unlocked. Take GMX’s GLP, for example – multiple protocols have built upon their innovation, composing it with different perps to create various types of strategies.

This interoperability is something we’ve most obviously had an emphasis on when developing our vaults. They’re straightforward as standalone strategies, but thinking of them as building blocks unlocks more complex use cases.

In this article, we’ll venture into the potential that Knox’s DeFi Options Vaults (DOVs) bring to the table, focusing on 2 polar opposites - degenbox leverage, and capital protection (protective collars).

Without further ado, let’s get into it.

In case you’re not familiar with the options landscape, let me provide some further context.

Traditionally, there exists a wide array of strategies that utilize options contracts – either by underwriting (selling), or by simply buying them. Due to the flexibility and risk-averse nature of options, such strategies are generally used for hedging.

For example, an investor could utilize options to hedge against potential loss of their spot positions, or as a means to reach a yield-generating position as close to risk-neutral as possible.

Options in crypto could also technically be implemented in a strategy providing completely uncorrelated delta-neutral yields, as displayed by Rysk’s Dynamic Hedging Vault. We also have a similarly dynamic vault in mind for the future, although it’s quite different in terms of strategy - I digress.

While our vaults are primarily benchmarked on beating HODL strategies, we also have a product fit for users with an increased appetite for risk.

So, if you’re ready to take on an unspecified amount of risk for a chance at multiplying your gains, there’s a lever to pull. For our vaults, this lever is wrapping – the process of taking out loans with yield-bearing assets as collateral (in our case, vault tokens) and buying more of said assets, then repeating the process.

Let me give you an extreme example of this strategy, one that was quite fun while it lasted:

Some of you might not be aware of what the $aUST/$MIM degenbox strategy was. It was unlocked by a collaboration between 2 protocols:

Anchor Protocol & $aUST - Deposit $UST (Terra’s native stablecoin) and receive a yield-bearing token $aUST in return with 19.5% APY.

Abracadabra & $MIM - Bridge $aUST to Ethereum and use it as collateral to mint Magic Internet Money, another stablecoin.

So, what you’d do is deposit some $UST on Anchor, bridge your $aUST to Ethereum, mint some $MIM, swap it for $UST on a 1:1 ratio, deposit that money to Anchor again, and repeat the process until you ran out of money. The collateral ratio for minting $MIM was quite low as it’s a stablecoin, so you’d be able to keep wrapping your assets 10 more times, totaling well over 100% APY.

As a painful reminder, $UST permanently lost its peg earlier this year, bringing down both Terra and this strategy with it. Obviously, there were large risks associated with this.

Now that I’ve either educated you or had you reminisce some unfun memories of times past, let’s dive into how you could theoretically apply similar principles to lever up the yields of our vaults through lending protocols.

When depositing into our vaults, you receive ERC-4626 vault tokens in return. These tokens represent your share of the vault’s liquidity, and possess similar functions as standard ERC-20 tokens. This means that while they’re easily tradable, they also come pre-packaged with parameters essential for a vault token.

With this strategy, leveraging on DOV yields is fundamentally the same as leveraging on Anchor yields was. Here’s a quick rundown of how it would work in action; say you have $1000 to degen up with.

• You deposit $1,000 into our cash-secured puts vault = this represents $900 of collateral assuming a 90% collateral ratio

• You receive your representative share of vault tokens

• You go to a lending platform to collateralize your vault tokens for a loan

• You go back to our cash-secured puts vault to deposit your borrowed assets

• Repeat the above steps until you run out of money.

It makes the most sense to use our cash-secured puts vault for this strategy. Since the liquidity is in stablecoins, underlying asset price volatility is removed from the equation.

However, there’s still prevalent risks involved:

Smart contract risk - there’s always a degree of risk involved with smart contracts, as is apparent from the ongoing hacks this year - e.g. bridges.

Even if we’ve been very diligent and put an emphasis on the security of our products, something might’ve still been overlooked. Keep in mind that DeFi is still in its infancy, and anything can happen.

Near-term risk - our vaults are designed for long-term holding. This means that while our yields are more predictable over a longer timeframe, there’s still the short-term risk of having a losing week.

If our vaults have a bad week and the vault loses 4-5% of underlying assets in the exercised event, there’s a real risk of liquidation assuming a very tight collateral ratio.

De-pegging risk - as with all stablecoins, there’s a possibility of price straying away from the peg of $1 for different reasons – smart contract exploit, regulatory action, insolvency, the list goes on.

Instead of USDC, we use DAI. Although it’s largely backed by USDC, it’s still largely more decentralized, taking away a slight amount of centralization risk.

The above strategy is called degen for a reason – leverage shouldn’t be taken lightly, and you should manage risk accordingly.

Most obviously, this can be done by setting a looser collateral ratio, thereby lessening the risk of liquidation from our vault having a bad week.

In stark contrast to degen leverage, we’ll now go over the protective collar strategy – as implied by the name, this is one for capital protection. It’s also a whole lot easier to wrap your head around compared to the aforementioned side of things.

A protective collar is a hedging strategy to mitigate risk of downside loss of the underlying asset that combines two other option hedging strategies: protective puts and covered call writing. Let’s explain these components before covering a practical example:

Protective put - this strategy is done as a means to insure a spot position on a given asset. It’s quite simple, really: a long put option (buying a put to hedge against an asset’s downside) is added to a spot position, providing insurance for the underlying asset’s value.

So basically, this means buying a put option to hedge for the potential downside of an asset you’re holding.

Covered call writing - as you should be aware by now, one of our initial vaults is based on this strategy. Covered calls writing is generally done by users who want to generate yields with their spot holdings while maintaining exposure to the underlying asset.

This strategy has inherent opportunity risk, but also provides small downside cushioning in the event of the underlying asset decreasing in value.

So, a protective collar combines the above strategies to mitigate maximum near-term loss in the underlying asset, and proves useful as a hedge while writing covered calls to generate yield. Here’s an example:

Say you underwrite an ETH call option at the strike price of $1350. You’ll then buy a protective put option at a lower strike price (price depending on when you’d want the protection to kick in). This allows you to mitigate some loss in the event of the underlying asset declining in value.

While you’re hedging your spot position from potential downside, you still face the same opportunity risk of the call option being exercised.

In a nutshell, a protective collar means buying a protective put option to mitigate downside risk while writing covered calls.

As I’ve emphasized, this is very much a protective strategy used when you fear prices going down, but still want to keep having exposure to the underlying asset and writing covered calls.

Since our covered call vault is a structured product based on writing covered calls, it would be quite easy for users to implement protective collars if they wanted to do so. You’d simply deposit assets into our covered call vault and buy put options at a lower strike price.

The degenbox strategy is a bit more complicated, and obviously not for the faint of heart. I don’t necessarily endorse doing it, but once we get a lending platform on board, it’ll be there.

These two extremes are but a fraction of the potential strategies that could be implemented. Look forward to future innovations!

Knox provides structured products focused on predictable yields and risk management. Our initial strategies will be DeFi Options Vaults (DOVs) with built-in risk tooling — providing flexibility, capital efficiency, and predictable yields.

In collaboration with Premia, we achieve best-in-class options pricing and trade execution!

Discord | Twitter | Documentation | Website

When boiled down to base level, DeFi vaults are generally just yield-bearing strategies. They’re either singular farms, or multiple building blocks slapped together as components of a more complex puzzle.

More formally, some DeFi vaults could also be called structured products - pre-packaged investments that include assets linked to interest in addition to one or more financial derivatives, such as options.

As DeFi adopts and creates different financial products, ways to combine them into structured products are unlocked. Take GMX’s GLP, for example – multiple protocols have built upon their innovation, composing it with different perps to create various types of strategies.

This interoperability is something we’ve most obviously had an emphasis on when developing our vaults. They’re straightforward as standalone strategies, but thinking of them as building blocks unlocks more complex use cases.

In this article, we’ll venture into the potential that Knox’s DeFi Options Vaults (DOVs) bring to the table, focusing on 2 polar opposites - degenbox leverage, and capital protection (protective collars).

Without further ado, let’s get into it.

In case you’re not familiar with the options landscape, let me provide some further context.

Traditionally, there exists a wide array of strategies that utilize options contracts – either by underwriting (selling), or by simply buying them. Due to the flexibility and risk-averse nature of options, such strategies are generally used for hedging.

For example, an investor could utilize options to hedge against potential loss of their spot positions, or as a means to reach a yield-generating position as close to risk-neutral as possible.

Options in crypto could also technically be implemented in a strategy providing completely uncorrelated delta-neutral yields, as displayed by Rysk’s Dynamic Hedging Vault. We also have a similarly dynamic vault in mind for the future, although it’s quite different in terms of strategy - I digress.

While our vaults are primarily benchmarked on beating HODL strategies, we also have a product fit for users with an increased appetite for risk.

So, if you’re ready to take on an unspecified amount of risk for a chance at multiplying your gains, there’s a lever to pull. For our vaults, this lever is wrapping – the process of taking out loans with yield-bearing assets as collateral (in our case, vault tokens) and buying more of said assets, then repeating the process.

Let me give you an extreme example of this strategy, one that was quite fun while it lasted:

Some of you might not be aware of what the $aUST/$MIM degenbox strategy was. It was unlocked by a collaboration between 2 protocols:

Anchor Protocol & $aUST - Deposit $UST (Terra’s native stablecoin) and receive a yield-bearing token $aUST in return with 19.5% APY.

Abracadabra & $MIM - Bridge $aUST to Ethereum and use it as collateral to mint Magic Internet Money, another stablecoin.

So, what you’d do is deposit some $UST on Anchor, bridge your $aUST to Ethereum, mint some $MIM, swap it for $UST on a 1:1 ratio, deposit that money to Anchor again, and repeat the process until you ran out of money. The collateral ratio for minting $MIM was quite low as it’s a stablecoin, so you’d be able to keep wrapping your assets 10 more times, totaling well over 100% APY.

As a painful reminder, $UST permanently lost its peg earlier this year, bringing down both Terra and this strategy with it. Obviously, there were large risks associated with this.

Now that I’ve either educated you or had you reminisce some unfun memories of times past, let’s dive into how you could theoretically apply similar principles to lever up the yields of our vaults through lending protocols.

When depositing into our vaults, you receive ERC-4626 vault tokens in return. These tokens represent your share of the vault’s liquidity, and possess similar functions as standard ERC-20 tokens. This means that while they’re easily tradable, they also come pre-packaged with parameters essential for a vault token.

With this strategy, leveraging on DOV yields is fundamentally the same as leveraging on Anchor yields was. Here’s a quick rundown of how it would work in action; say you have $1000 to degen up with.

• You deposit $1,000 into our cash-secured puts vault = this represents $900 of collateral assuming a 90% collateral ratio

• You receive your representative share of vault tokens

• You go to a lending platform to collateralize your vault tokens for a loan

• You go back to our cash-secured puts vault to deposit your borrowed assets

• Repeat the above steps until you run out of money.

It makes the most sense to use our cash-secured puts vault for this strategy. Since the liquidity is in stablecoins, underlying asset price volatility is removed from the equation.

However, there’s still prevalent risks involved:

Smart contract risk - there’s always a degree of risk involved with smart contracts, as is apparent from the ongoing hacks this year - e.g. bridges.

Even if we’ve been very diligent and put an emphasis on the security of our products, something might’ve still been overlooked. Keep in mind that DeFi is still in its infancy, and anything can happen.

Near-term risk - our vaults are designed for long-term holding. This means that while our yields are more predictable over a longer timeframe, there’s still the short-term risk of having a losing week.

If our vaults have a bad week and the vault loses 4-5% of underlying assets in the exercised event, there’s a real risk of liquidation assuming a very tight collateral ratio.

De-pegging risk - as with all stablecoins, there’s a possibility of price straying away from the peg of $1 for different reasons – smart contract exploit, regulatory action, insolvency, the list goes on.

Instead of USDC, we use DAI. Although it’s largely backed by USDC, it’s still largely more decentralized, taking away a slight amount of centralization risk.

The above strategy is called degen for a reason – leverage shouldn’t be taken lightly, and you should manage risk accordingly.

Most obviously, this can be done by setting a looser collateral ratio, thereby lessening the risk of liquidation from our vault having a bad week.

In stark contrast to degen leverage, we’ll now go over the protective collar strategy – as implied by the name, this is one for capital protection. It’s also a whole lot easier to wrap your head around compared to the aforementioned side of things.

A protective collar is a hedging strategy to mitigate risk of downside loss of the underlying asset that combines two other option hedging strategies: protective puts and covered call writing. Let’s explain these components before covering a practical example:

Protective put - this strategy is done as a means to insure a spot position on a given asset. It’s quite simple, really: a long put option (buying a put to hedge against an asset’s downside) is added to a spot position, providing insurance for the underlying asset’s value.

So basically, this means buying a put option to hedge for the potential downside of an asset you’re holding.

Covered call writing - as you should be aware by now, one of our initial vaults is based on this strategy. Covered calls writing is generally done by users who want to generate yields with their spot holdings while maintaining exposure to the underlying asset.

This strategy has inherent opportunity risk, but also provides small downside cushioning in the event of the underlying asset decreasing in value.

So, a protective collar combines the above strategies to mitigate maximum near-term loss in the underlying asset, and proves useful as a hedge while writing covered calls to generate yield. Here’s an example:

Say you underwrite an ETH call option at the strike price of $1350. You’ll then buy a protective put option at a lower strike price (price depending on when you’d want the protection to kick in). This allows you to mitigate some loss in the event of the underlying asset declining in value.

While you’re hedging your spot position from potential downside, you still face the same opportunity risk of the call option being exercised.

In a nutshell, a protective collar means buying a protective put option to mitigate downside risk while writing covered calls.

As I’ve emphasized, this is very much a protective strategy used when you fear prices going down, but still want to keep having exposure to the underlying asset and writing covered calls.

Since our covered call vault is a structured product based on writing covered calls, it would be quite easy for users to implement protective collars if they wanted to do so. You’d simply deposit assets into our covered call vault and buy put options at a lower strike price.

The degenbox strategy is a bit more complicated, and obviously not for the faint of heart. I don’t necessarily endorse doing it, but once we get a lending platform on board, it’ll be there.

These two extremes are but a fraction of the potential strategies that could be implemented. Look forward to future innovations!

Knox provides structured products focused on predictable yields and risk management. Our initial strategies will be DeFi Options Vaults (DOVs) with built-in risk tooling — providing flexibility, capital efficiency, and predictable yields.

In collaboration with Premia, we achieve best-in-class options pricing and trade execution!

Discord | Twitter | Documentation | Website