Understanding Multi-Strategy Vaults
Avid readers of my otherwise inconsistent publications will recall “Modelling DeFi – Part 4”, in which I wrote about the premise of Reaper Multi-Strategies and their implications.“Instead of parking your assets in one strategy and leaving them to the whims of the market, place them somewhere that will move them around for you to continually find yield opportunities.”This article will offer some additional insight into the real world application of that theory, exploring Reaper’s wETH Multi-Strategy vault on the Optimism Network.
You may be wondering what the vault is doing to earn 5% on WETH. Well, that information is presented in the glorious More Info button, which allows users to see what the vault is doing on their behalf, as well as access contracts, audits, and analytics. Importantly for this discussion, strategy allocations can also be viewed.
This is user-facing, meaning you can access this information at all times.
But the Reaper Team goes one step further and utilizes a private dashboard that allows them to monitor the performance of strategies and change allocations as needed.
Taking a look at the Sonne strategy, we can see the following:
First is a simple timeseries analysis that normalizes performance metrics to forecast yield in the short term. For more on timeseries analyses, read my Basics of Timeseries Analysis piece. Next is an Allocations summary. This is where the Reaper team monitors the contract allocation value and the actual allocation value (to ensure there are no dangerous discrepancies), and can compare these to the Optimum Allocation value.
Note that the optimum allocation is currently lower than the contract value. This is because the strategy is earning 3.73% on 65% of the vault. Meanwhile, the Granary strategy is earning 8.95% on 35% of the vault. Yield doesn’t necessarily scale linearly, but the market tends towards rate parity by diluting wherever yield is best, and scaling up and down as an asset class.
Instead of withdrawing assets to dilute high yield, or manually operate complex looping strategies, the calculations (derived from the model in “Modelling DeFi – Part 4”), prompt the team to adjust allocations, diluting wherever the yield is best, on your behalf.
This means that your assets will dilute the best available yields on the safest available strategies, all in one place.
PS: This is also the premise of Ethos Reserve’s rehypothecation. Assets deposited to Ethos enter a private multi-strategy vault, where they are used to farm the lowest risk strategies available and deliver yield to the Ethos Reserve Note, or $ERN stablecoin.
As the team reinforces strategies and develops additional security measures to protect user funds, there may be opportunities to implement more advanced strategies on Ethos, should the community desire.
