• Staking boxFEE gives an APR of 1.75% which is expected to pick up.

• boxFEE trades at a discount to its fair price. If a trader believes this discount is unjustified, it would give him a profit of 30.6% if right. The risk is minimal due to the backing acting as a floor to the price.

• Alpha is being delivered on a plate at the end of this article if you believe into the risk reward of the trade.

boxFEE APR

boxFEE stakers receive the LIDO staking yield of 1% of all stETH deposits and 25% of the locked stETH (amount equal to the boxETH supply). Therefore the APR can be calculated as:

Introducing the LTV in the equation gives the following:

At the time of this article this results into an APR of around 1.75%. We provide below an interactive plot of the APR vs the TVL based on different system parameters.

https://www.desmos.com/calculator/xbirqfh45z

A few observations on how parameters play out:

• A higher system LTV brings more yield to stakers as they collect 25% of the yield of the locked stETH. System LTV has been relatively stable and in the high range.

• A lower staking participation is beneficial for the APR as the yield is less diluted. Since protocol inception, the amount of boxFEE has decreased from 35k to 25k. We expect this trend to continue as participants expecting a quick buck leave the system.

  https://dune.com/queries/2148860/3522540

• A higher TVL is beneficial as the yield tax is imposed on a bigger pie. We believe that the TVL will keep increasing as people realise they can get a high yield on their stETH (around 14% currently) which will in turn increase the demand for leverage within the system.

Based on the above, we expect the boxFEE staking yield to slowly pick up.

boxFEE pricing

The fair price of boxFEE in ETH terms can be determined based on its backing ratio. At inception the liquidity generation event raised some ETH to provide liquidities on the ETH / boxETH pair. Part of the liquidities have been removed in the form of boxETH and are now used to back the supply of boxFEE. Going forward the backing will increase due to resolving events and the minting of new boxFEE.

The price therefore should find support at the backing ratio. But due to the staking yield, boxFEE should trade at a premium based on the sum of its discounted cashflow. We can express the fair price as:

With pi equal to the sum of discounted cashflows

As the APR is an endogenous function of the boxFEE price, we use the following notation to get the price out of the APR calculations.

Which gives the desired result for the premium

The boxFEE price can be expressed as below. Please note that the backing and the future yields are paid out in boxETH. Hence, the need to include it into the equation.

Rewriting the equation a little, we can get a second-degree polynomial according to the price of boxFEE

By considering only the positive root, we can obtain a close form expression of the boxFEE price

We provide the desmos board below in order for you to play with different system parameters and to see how the price of boxFEE moves against the CIAB TVL. Note that we assume a default discount rate of 75% which is on the conservative side given the recent nature of this project. It is industry standard to use a value between 50 and 75% for web3 projects.

https://www.desmos.com/calculator/gihffl2ih7

Overall, we observe the following effects:

• A higher APR turns into a higher boxFEE price as rational investors give value to future cash flows according to their own utility function which can be summarised with a 75% discount rate. We expect the APR to increase.

• If the project shows resilience it wouldn’t be crazy to reduce the discount rate to 50% which would result into a higher boxFEE price.

• A very high demand for leverage in the system would temporarily decrease the price of boxETH and therefore of boxFEE. A trader expecting mean reversion due to the resolvers, can use this equation to enter and exit his position.

At the time of this article, the price of boxFEE is around 0.088 ETH while our fair value assessment gives 0.115 ETH. As this market becomes efficient, we believe the market value to trade above fair price which could deliver a profit of 30.6% in ETH terms.

How to trade the discount

If you believe the discount is unjustified the following play can be used

• Deposit stETH into CIAB

• Borrow boxETH against your stack (with 0% maintenance and liquidation costs)

• Convert boxETH to ETH

• Bid boxFEE with ETH under current market price

This allows you not only to profit from your stETH yield but also to capture the boxFEE APR plus the 30.6% boxFEE price surge if you believe that it shouldn’t price at a discount to its fair price. You can use the equation from our previous article in order to size your leverage such that you get a net yield equal to the LIDO staking rate.

https://mirror.xyz/nemoventures.eth/yPvr6k2AOzQVHpQrt7hvtD2ybTKKkqnUGtMzoL8IAxM

All in all this trade allows you to capture the same LIDO staking yield as if you would hold naked stETH in your wallet. But it also allows you to get exposure to the boxFEE staking yield and to a 30.6% boxFEE price appreciation.

At current price the backing ratio reduces the market risk close to 0. However if the boxETH price drops too much a small loss can be expected. But due to the resolving mechanics, the price of boxETH can’t stay significantly low for too long. Finally, do not forget that the code is not audited and carries smart contract risk.

Nothing in the above is financial advice and you should do your own due diligence before taking any action.

Links

https://mirror.xyz/nemoventures.eth/z23IWN4TMgOpABq66v53YI_oCj97rfHBiuAlkAFEbbQ

https://mirror.xyz/nemoventures.eth/yPvr6k2AOzQVHpQrt7hvtD2ybTKKkqnUGtMzoL8IAxM

https://dune.com/nemoventures/cat-in-a-box

https://catinabox.finance/

• Both AAVE and CIAB (Cat-in-a-Box) allow users to deposit stETH as collateral in order to borrow ETH which can be used on your favorite DeFI protocol or to buy NFTs while enjoying a positive net yield on your ETH

• At the time of this article CIAB provides a better net yield than AAVE until a LTV of 82.5%

• For a reasonable LTV of 40%, CIAB gives a 2.4x better net yield

Hey all you cool cats and kittens, after our last article explaining the core mechanics of CIAB, you should already be enjoying some juicy APR. If you haven’t read it yet, that’s your bad. But please go through it in order to fully grasps the concepts of this article.

https://mirror.xyz/nemoventures.eth/z23IWN4TMgOpABq66v53YI_oCj97rfHBiuAlkAFEbbQ

You must wonder why you should use this protocol instead of AAVE in order to unlock the utility of your stETH. Both platforms allow you to deposit stETH as collateral in order to borrow some ETH which can be enjoyed on your favorite DeFi protocol or to finally buy your long awaited Azuki. But the net yield for the borrower is very different with the ghost or the kitty. In this article, we are going to go full nerd and establish mathematically which protocol makes more sense to use and under which conditions. LFG!

Borrower’s net yield

AAVE

On AAVE you receive the LIDO staking yield and pay the ETH borrowing rate on the ETH that you borrowed. Therefore your net yield is:

CIAB

A CIAB borrower receives two yields. The first one corresponds to 99% of the yield (due to the 1% protocol fee) on his unlocked stETH.

By using LTV = deposit / debt we can rewrite the equation as:

The second part of the yield corresponds to 74% (due to the 1% protocol fee on all stETH yields + the 25% of the protocol fee on all locked stETH yields) on all the locked stETH proportional to the amount of the user’s unlocked stETH to the system’s unlocked stETH. System metrics are denoted with a start sign.

By using LTV_system = deposit_system / debt_system, we can rewrite the equation as follows.

All in all, the net yield of the CIAB user is:

Who’s the winner?

In order to find under which condition the CIAB net yield outperforms the AAVE one, we have to solve for

This gives an inequation where the user’s LTV should be lower than the following quantity

At the time of the article we have the following values:

• LIDO staking yield: 7.1%

• AAVE borrowing rate on ETH: 3.96%

• CIAB system LTV: 74%

It means that a borrower gets a better net yield on CIAB until a LTV of 82.5%. Also for a reasonable LTV of 40% the user gets a 2.4x better net yield.

If you want to play around with different values and see how the protocols compare, we put at your disposal the following interactive plotting tool.

https://www.desmos.com/calculator/ifae9uynut

From the plot, we can notice the following relationships:

• A higher system leverage is beneficial for the CIAB user as it allows to draw a higher LTV and still be better off compared to AAVE

• A tight spread between the LIDO staking yield and the AAVE borrowing rate for ETH makes CIAB a preferable choice

At NEMO, we got quickly hooked up by the very DeFi mechanics of the protocol and wanted to share the headache with our fellow degens. You’re welcome!

Hopefully, you’ll grasp the mechanics and join us on the fun. Currently, our little kitty offers very juicy and organic yields but as always please do your due diligence before aping in.

At the time of this article: 14.6% yield on stETH deposits and 6.1% APR on staked boxFEE.

Mechanics

• Users can borrow boxETH (a synthetic ETH) against their stETH. For each borrowed boxETH, one stETH is locked.

• Instead of paying interest rates on their borrowed assets, borrowers give up the yield on their stETH which are locked by debt. Example: if a user deposits 10 stETH and borrows 2 boxETH, the user will only receive LIDO staking yields on 10 - 2 = 8 unlocked stETH.

• The yield from locked stETH is redistributed proportionally among all unlocked stETH. Example: if Alice borrows 2 boxETH against 10 stETH and Bob deposits 5 stETH, Alice will receive a staking yield on the 8 stETH which are unlocked and the redistributed yield of 8 x 2 / (8 + 5) = 1.23 stETH. While Bob will earn the yield of his 5 stETH plus the redistributed yield of 5 x 2 / (8 + 5) = 0.77 stETH. To put it another way, the yield of 0.77 stETH is redirected from Alice to Bob as an implicit borrowing cost for Alice and a boosted yield for Bob.

• In order for borrowers to unlock the utility of their boxETH, a boxETH / ETH market is created.

• Resolvers (or liquidators) can repay a portion of the debt of any vault and retrieve an equal amount of their collateral. But they also have to pay a fee proportional to the LTV (loan to value) of the vault. The higher the LTV the lower the fee.

• In case boxETH trades at a discount, a potential arbitrage opens up to resolvers. They buy cheap boxETH against ETH. They spot the vault with the highest LTV and repay part of the debt in exchange of the corresponding collateral. If the LTV is high enough and the price of boxETH vs ETH is low enough, the fee to resolve the vault might be lower than the amount of ETH they get back.

• Resolvers therefore make sure that the leverage of the system is healthy and maintain the peg of ETH vs boxETH.

• Also “liquidations“ or “resolving” events are not incurring extra costs on the borrowers compared to a traditional borrowing / lending platform.

• Finally, users can buy boxFEE or mint one boxFEE by burning one boxETH.

• boxFEE holders can stake their boxFEE to benefit from the following fees:

  • 1% of all the stETH yields (unlocked and locked)

  • 25% of the locked stETH yields

  • 100% of the fees paid by resolvers

• Before the genesis of the system, early users could buy 1 boxFEE for 0.1 ETH in order to bootstrap liquidities for the ETH vs boxETH pair. 90% of those liquidities have now been withdrawn in the form of boxETH in order to back the supply of boxFEE. It means that boxFEE are 9% backed by boxETH at the time of the article.

• Users can burn their boxFEE against a proportion of the boxETH backing. At the moment, for each boxFEE withdrawn, the user can get back 0.09 boxETH.

• As users will mint new boxFEE with boxETH, the backing percentage will increase slowly toward 100%.

Links

https://dune.com/nemoventures/cat-in-a-box

https://catinabox.finance/