Wait 7 days to get your assets back, or redeem them instantly for a fee. A market can be formed wherever there are preferences between participants.

Markets are full of yield-bearing derivatives that can be converted to their underlying value over a redemption period. Whether it's an LST, a real-world asset (RWA), a structured vault, or another yield-bearing derivative, market makers can profit by providing instant liquidity to traders looking to get out quickly. We call this market-making strategy Redemption Queue Arbitrage: buy derivatives at a discount, redeem them over a waiting period, and keep the profits.

This is a strategy unlocked by delayed withdrawals. It is a market based on time preference rather than directional price movement, and it is the foundation element for a healthy secondary market for this class of assets. Throughout this article, we will discuss why STEX is much larger than just tokenizing the Redemption Queue Arbitrage. First, there are some important frameworks to cover.

Market Makers must be compensated for their time spent locking up assets. Spreads of the ‘buy at a discount and redeem later’ strategy usually track with the cost of capital measurement for the redemption period. The cost of capital is the returns one could make by deploying the same asset elsewhere — like in lending, staking, or trading strategies with comparable risk. The redemption period is the time it takes to 'unstake’ or ‘redeem’ for the underlying. So for HYPE LSTs, we try to find how much one can make with HYPE over 7 days with comparable liquidity and risk properties.

7-day returns for lending HYPE on HypurrFi or Hyperlend AAVE markets usually return about 1.3 bps in 7 days. This is a great benchmark because Lending is low-risk and liquid, meaning assets can (typically) be withdrawn at any time.

If a market maker sells their HYPE for stHYPE, collecting a 1.4 bps fee, and unstakes their stHYPE over 7 days to get their HYPE back + 1.4 bps fee, they beat their returns for lending over 7 days!

Staking is not a direct comparison because it is illiquid by design. Still, it is an interesting benchmark.

* To collect 4.2 bps in 7 days for staking, one would have to stake for 7 days, then withdraw for another 7 days. Totaling 14 days of lockup for 4.2 bps of yield.

While 4.2 bps is closer to the 14-day cost of capital for staking, it is still an interesting metric to consider.

Generally speaking, if a market maker charges 1.4 bps - 4.3 bps on swaps, they’re probably making more money than they would doing anything else with their HYPE (of comparable risk).

Everything discussed above is entirely true for an individual market maker running this strategy on an order book; at first glance, the same principles apply to an AMM. But we see some interesting things in practice that show why a novel strategy enabled by a novel AMM like STEX creates an inherently different return structure.

STEX rarely needs to unstake to refresh its reserves. LPs in STEX rebalance faster than an individual market maker running this strategy, changing the cost of capital equation.

When LPs on STEX sell HYPE to stHYPE (collecting a fee), they often get converted back to HYPE 1:1 within a few hours, not 7 days! This is because Valantis is a convenient place to acquire stHYPE at the same rate as staking contracts. When a new user "stakes" HYPE on the Valantis UI, or integrated interfaces, they receive sthype 1:1 from LPs, instead of sending HYPE to validators and "minting" new sthype. For users it makes no difference, but for LPs it means their strategy is enhanced by rarely needing to enter the redemption queue.

stHYPE AMM is acting to settle an asynchronous coincidence-of-wants between new stakers and holders that are looking to exit. This happens faster than the typically coincidence-of-wants settlement between a protocol-level withdrawal queue and new stakers, because these in-protocol systems usually only settle on a 24-hour clock to keep accounting continuous across validators, withdrawal queue, and new stake.

This is a phenomenon that a solo market maker can't emulate; it is a product of AMMs being pooled capital that has frontend integrations and distribution directly to users.

Below, we can see that the pool sees more HYPE inflows than stHYPE outflows in low volatility conditions.

In a scenario where an LP’s stHYPE is replaced for HYPE within’ 24 hours by a new staker, a 1 bps fee on swaps is 5x a better use of HYPE than lending (assuming volume demand matches).

While it is not currently live, we are already seeing how powerful the effects of the proposed native integration into the stHYPE protocol (or any redeemable derivative protocol) would be for LPs.

In this case, ALL new stake would refresh LPs before being sent to validators or fulfilling pending withdrawals from other users. This means LPs are a prioritized entity: leading to higher returns in the secondary market, lower spreads for traders, and deeper liquidity for stHYPE.

The faster LPs are rebalanced, the lower fees they can charge to traders and still be profitable. This is one reason why STEX can charge lower fees than a market maker on an order book running the same strategy and still have higher profits. STEX rebalances faster.

It's only in the cases of high-market volatility that STEX sees significantly more stHYPE outflows than HYPE inflows.

In these scenarios, standard markets for the LST depeg. This means STEX can charge higher fees and keep all the profits by unstaking, even if it must wait a full 7-days. The listed weeks include stHYPE AMM charging 5+ bps for swaps and sporting 4-5% APY. Over 2x the returns from native staking, all while being much more liquid for LPs. Still, STEX always has a portion of its reserves rebalanced at 1:1 faster than any other entity can replicate.

So what happens when the AMM does need to enter the redemption queue to refresh its reserves?

In our almost 3-year history of ideating AMMs for liquid staking protocols, one conversation that has come up repeatedly is creating a secondary market for illiquid withdrawals.

A user/validator/market-maker starts to unstake, but after waiting 3 out of the 7 days, they want instant liquidity. How can we create a liquid market to sell this halfway withdrawn position?

There is a whole world of complex potential solutions for a secondary market for non-fungible withdrawal tickets, typically via auctions, none of which are implemented or are liquid today. STEX solved it in an elegant way by internalizing the strategy AND the secondary market for illiquidity altogether.

Say an LP in STEX has 20% of their position in an illiquid redemption queue being converted back to the base asset. If this LP wants to exit their strategy, they can get 100% of their liquid reserves today AND choose to sell their illiquid share back to the pool for instant liquidity (or wait for the illiquid portion to mature).

Any market-maker running this 'buy-and-unstake' strategy themselves does not have the option to sell their illiquid portion. When they enter an illiquid position, they are stuck holding it until it matures.

The option for 'instant withdrawals' allows for an LP to enter the 'buy-and-unstake' strategy without taking on the illiquidity risk traditionally ascribed to market makers running the same strategy.

This strategy is a cornerstone to the health of LST, RWA, and yield-bearing derivative secondary markets. STEX widens the capital that can be willing and able to participate by reducing illiquidity risk.

There is a liquid counterparty for partially withdrawn redeemable-derivatives positions now, and it’s the STEX Pool LPs.

AMMs have a world of programmable use of their reserves to earn additional yield.

HYPE in STEX is not sitting idle; it's currently earning a base yield of 0.7% in lending. This greatly shifts our opportunity cost equation, being able to use idle assets to earn the risk-free rate for HYPE enables market making with low spreads.

Currently, this is akin to limit orders on a CLOB sitting idly in a lending market. But in the coming months, we will see a complex expansion of these 'external yield strategies', redefining the mental model of what AMMs are.

Accessing yield from HyperCore spot market making, allocation amongst multiple lending markets, using reserves for HyperCore basis trades, looping staking yield on the idle LST reserves, etc., is entirely achievable inside an AMM as extensible as STEX.

STEX is a yield optimization vault to which Market Making is a subset yield strategy. This mental model of AMMs as high-yield vaults is what allows the market-making subcomponent of the AMM to offer lower spreads to traders while preserving high yield for LPs.

STEX has lowered spreads, increased LP returns, and deepened liquidity for redeemable derivatives by:

• Shortening the withdrawal window for LPs.

• Lowering opportunity cost by getting external yield on idle reserves.

• Solving illiquidity for the 'buy-and-unstake' market-making strategy.

We know there is MUCH more that can be done.

There are two core learnings that sit at the bottom of most expansions on the design: the faster we rebalance LPs, the more efficient the secondary market. The more diverse our idle yield, the lower the opportunity cost of depositing.

We’ve built AMMs with intimate knowledge of the assets they market-make; now we envision a set of assets with intimate knowledge of their secondary market.

Assets that give the AMM first right priority for withdrawals will be the ones that have the lowest spreads and the deepest markets. Much more to come; follow along on X to learn more.

Wait 7 days to get your assets back, or redeem them instantly for a fee. A market can be formed wherever there are preferences between participants.

Markets are full of yield-bearing derivatives that can be converted to their underlying value over a redemption period. Whether it's an LST, a real-world asset (RWA), a structured vault, or another yield-bearing derivative, market makers can profit by providing instant liquidity to traders looking to get out quickly. We call this market-making strategy Redemption Queue Arbitrage: buy derivatives at a discount, redeem them over a waiting period, and keep the profits.

This is a strategy unlocked by delayed withdrawals. It is a market based on time preference rather than directional price movement, and it is the foundation element for a healthy secondary market for this class of assets. Throughout this article, we will discuss why STEX is much larger than just tokenizing the Redemption Queue Arbitrage. First, there are some important frameworks to cover.

Market Makers must be compensated for their time spent locking up assets. Spreads of the ‘buy at a discount and redeem later’ strategy usually track with the cost of capital measurement for the redemption period. The cost of capital is the returns one could make by deploying the same asset elsewhere — like in lending, staking, or trading strategies with comparable risk. The redemption period is the time it takes to 'unstake’ or ‘redeem’ for the underlying. So for HYPE LSTs, we try to find how much one can make with HYPE over 7 days with comparable liquidity and risk properties.

7-day returns for lending HYPE on HypurrFi or Hyperlend AAVE markets usually return about 1.3 bps in 7 days. This is a great benchmark because Lending is low-risk and liquid, meaning assets can (typically) be withdrawn at any time.

If a market maker sells their HYPE for stHYPE, collecting a 1.4 bps fee, and unstakes their stHYPE over 7 days to get their HYPE back + 1.4 bps fee, they beat their returns for lending over 7 days!

Staking is not a direct comparison because it is illiquid by design. Still, it is an interesting benchmark.

* To collect 4.2 bps in 7 days for staking, one would have to stake for 7 days, then withdraw for another 7 days. Totaling 14 days of lockup for 4.2 bps of yield.

While 4.2 bps is closer to the 14-day cost of capital for staking, it is still an interesting metric to consider.

Generally speaking, if a market maker charges 1.4 bps - 4.3 bps on swaps, they’re probably making more money than they would doing anything else with their HYPE (of comparable risk).

Everything discussed above is entirely true for an individual market maker running this strategy on an order book; at first glance, the same principles apply to an AMM. But we see some interesting things in practice that show why a novel strategy enabled by a novel AMM like STEX creates an inherently different return structure.

STEX rarely needs to unstake to refresh its reserves. LPs in STEX rebalance faster than an individual market maker running this strategy, changing the cost of capital equation.

When LPs on STEX sell HYPE to stHYPE (collecting a fee), they often get converted back to HYPE 1:1 within a few hours, not 7 days! This is because Valantis is a convenient place to acquire stHYPE at the same rate as staking contracts. When a new user "stakes" HYPE on the Valantis UI, or integrated interfaces, they receive sthype 1:1 from LPs, instead of sending HYPE to validators and "minting" new sthype. For users it makes no difference, but for LPs it means their strategy is enhanced by rarely needing to enter the redemption queue.

stHYPE AMM is acting to settle an asynchronous coincidence-of-wants between new stakers and holders that are looking to exit. This happens faster than the typically coincidence-of-wants settlement between a protocol-level withdrawal queue and new stakers, because these in-protocol systems usually only settle on a 24-hour clock to keep accounting continuous across validators, withdrawal queue, and new stake.

This is a phenomenon that a solo market maker can't emulate; it is a product of AMMs being pooled capital that has frontend integrations and distribution directly to users.

Below, we can see that the pool sees more HYPE inflows than stHYPE outflows in low volatility conditions.

In a scenario where an LP’s stHYPE is replaced for HYPE within’ 24 hours by a new staker, a 1 bps fee on swaps is 5x a better use of HYPE than lending (assuming volume demand matches).

While it is not currently live, we are already seeing how powerful the effects of the proposed native integration into the stHYPE protocol (or any redeemable derivative protocol) would be for LPs.

In this case, ALL new stake would refresh LPs before being sent to validators or fulfilling pending withdrawals from other users. This means LPs are a prioritized entity: leading to higher returns in the secondary market, lower spreads for traders, and deeper liquidity for stHYPE.

The faster LPs are rebalanced, the lower fees they can charge to traders and still be profitable. This is one reason why STEX can charge lower fees than a market maker on an order book running the same strategy and still have higher profits. STEX rebalances faster.

It's only in the cases of high-market volatility that STEX sees significantly more stHYPE outflows than HYPE inflows.

In these scenarios, standard markets for the LST depeg. This means STEX can charge higher fees and keep all the profits by unstaking, even if it must wait a full 7-days. The listed weeks include stHYPE AMM charging 5+ bps for swaps and sporting 4-5% APY. Over 2x the returns from native staking, all while being much more liquid for LPs. Still, STEX always has a portion of its reserves rebalanced at 1:1 faster than any other entity can replicate.

So what happens when the AMM does need to enter the redemption queue to refresh its reserves?

In our almost 3-year history of ideating AMMs for liquid staking protocols, one conversation that has come up repeatedly is creating a secondary market for illiquid withdrawals.

A user/validator/market-maker starts to unstake, but after waiting 3 out of the 7 days, they want instant liquidity. How can we create a liquid market to sell this halfway withdrawn position?

There is a whole world of complex potential solutions for a secondary market for non-fungible withdrawal tickets, typically via auctions, none of which are implemented or are liquid today. STEX solved it in an elegant way by internalizing the strategy AND the secondary market for illiquidity altogether.

Say an LP in STEX has 20% of their position in an illiquid redemption queue being converted back to the base asset. If this LP wants to exit their strategy, they can get 100% of their liquid reserves today AND choose to sell their illiquid share back to the pool for instant liquidity (or wait for the illiquid portion to mature).

Any market-maker running this 'buy-and-unstake' strategy themselves does not have the option to sell their illiquid portion. When they enter an illiquid position, they are stuck holding it until it matures.

The option for 'instant withdrawals' allows for an LP to enter the 'buy-and-unstake' strategy without taking on the illiquidity risk traditionally ascribed to market makers running the same strategy.

This strategy is a cornerstone to the health of LST, RWA, and yield-bearing derivative secondary markets. STEX widens the capital that can be willing and able to participate by reducing illiquidity risk.

There is a liquid counterparty for partially withdrawn redeemable-derivatives positions now, and it’s the STEX Pool LPs.

AMMs have a world of programmable use of their reserves to earn additional yield.

HYPE in STEX is not sitting idle; it's currently earning a base yield of 0.7% in lending. This greatly shifts our opportunity cost equation, being able to use idle assets to earn the risk-free rate for HYPE enables market making with low spreads.

Currently, this is akin to limit orders on a CLOB sitting idly in a lending market. But in the coming months, we will see a complex expansion of these 'external yield strategies', redefining the mental model of what AMMs are.

Accessing yield from HyperCore spot market making, allocation amongst multiple lending markets, using reserves for HyperCore basis trades, looping staking yield on the idle LST reserves, etc., is entirely achievable inside an AMM as extensible as STEX.

STEX is a yield optimization vault to which Market Making is a subset yield strategy. This mental model of AMMs as high-yield vaults is what allows the market-making subcomponent of the AMM to offer lower spreads to traders while preserving high yield for LPs.

STEX has lowered spreads, increased LP returns, and deepened liquidity for redeemable derivatives by:

• Shortening the withdrawal window for LPs.

• Lowering opportunity cost by getting external yield on idle reserves.

• Solving illiquidity for the 'buy-and-unstake' market-making strategy.

We know there is MUCH more that can be done.

There are two core learnings that sit at the bottom of most expansions on the design: the faster we rebalance LPs, the more efficient the secondary market. The more diverse our idle yield, the lower the opportunity cost of depositing.

We’ve built AMMs with intimate knowledge of the assets they market-make; now we envision a set of assets with intimate knowledge of their secondary market.

Assets that give the AMM first right priority for withdrawals will be the ones that have the lowest spreads and the deepest markets. Much more to come; follow along on X to learn more.