MEV Capital, an institutional investment manager focusing on DeFi, plans to take advantage of short-to-medium-term arbitrage opportunities between on- and off-chain crypto assets. The company manages $32 million in assets.
To protect against downside risks on Uniswap yields, MEV Capital has created a new impermanent loss hedging product, which is believed to be the first of its kind due to its unique structure. The product is currently being presented to potential limited partners through separately managed accounts (SMAs).
MEV Capital, a DeFi-focused institutional investment manager, has introduced a new product aimed at hedging impermanent loss on Uniswap yields, which is said to be the first of its kind. The strategy involves exotic, short-dated crypto options designed to generate returns on DeFi yields via Uni v3 while providing downside protection. MEV has partnered with OrBit Markets, a Singapore-based company specializing in sector derivatives and structured products, as a counterparty.
Impermanent loss in a DeFi context is the risk of the cost of running a Uniswap pool falling below the total fees generated. Numerous competitors have launched their own impermanent loss strategies, but MEV claims to be the first to use short-dated crypto options rather than perpetual swaps, which do not provide complete coverage. MEV has an additional undisclosed counterparty, described as an established commodities market maker with a growing interest in digital assets. The source requested anonymity to discuss confidential business dealings.
How MEV hedges impermanent loss in DeFi
MEV, which is headquartered in Lithuania, manages assets worth $32 million. The firm's trading activities are led by Chief Investment Officer Laurent Bourquin, who previously worked at Societe General's investment banking division, where he dealt with leveraged finance products and other asset classes.
Bourquin co-founded MEV in 2020 with Gytis Trilikauskis, the firm's Chief Operating Officer and fellow General Partner. MEV now has nine full-time employees.
Trilikauskis confirmed the launch of MEV's latest strategy in an interview on Friday. However, he declined to provide further details about the company's marketing materials or communications with investors.
The process works as follows:
Through separately managed accounts (SMAs), interested limited partners can invest in MEV's strategy, with their holdings being held on the decentralized exchange Uniswap.
MEV, using its LP assets, acts as a market-neutral liquidity provider for Uni crypto pools like WETH/USDC. The company is on the lookout for any pricing discrepancies that may trigger a higher payout on fee payouts for providing that liquidity.
According to MEV's investor documents, the investor yield is generated from capturing “organic trading volume” on the DEX. The goal is to lock down initial returns from that yield, then use options to provide downside protection against impermanent loss.
Options contracts are settled with Orbit and an undisclosed commodities market maker, with capital being distributed accordingly.
Due to the scarcity of digital asset derivatives liquidity in institutional markets, MEV settles its crypto options over the counter. These options are kept open for a week or two. Managing the risk on open options is critical for MEV due to the rapid fluctuations in the cost of carrying derivatives used as hedges. The underlying cryptoassets are also highly volatile, adding to the challenge.
In contrast, traditional financiers have a wider range of options to structure their own OTC options, and more derivative market makers to choose from, with lower associated cost of carry.
Although options market makers in the crypto space have made progress, industry insiders claim that they still have a long way to go to maintain sufficient liquidity due to the requirement of maintaining voluminous balance sheets. MEV has launched several crypto structured products and strategies, including ones that rely on non-traditional sector products.
MEV has been involved in designing DeFi strategies since its inception in the summer of 2020. Its flagship fund focuses on stablecoin yields, and the firm introduced an Ethereum strategy in May of last year. It has since rolled out sector structured product plays.
According to MEV's COO, Gytis Trilikauskis, the Uniswap product was launched due to several factors, including increasingly inflationary DEX governance tokens that power Uniswap and its competitors, as well as decentralized market making volumes evaporating. However, DEX market making payouts are still relatively low, even if volumes remain high.
Despite high vDEX volumes, MEV will still need to raise and deploy significant amounts of limited partner capital to profit off of fees alone.
Uniswap pool opportunity set
MEV aims to generate yield from decentralized pools, such as the WETH/USDC pool, which it expects to generate between $20 to $60 billion in volume in the early part of this year, despite the pool payout being a meager 0.05%. The firm believes that crypto options markets have not accurately priced the potential fees that can be earned from DEXes, creating arbitrage opportunities. However, over time, the dislocation between on-chain assets and options exercised on them will decrease, creating opportunities for the firm in the short-to-medium-term.
MEV's strategy of using SMAs, which offer instantaneous liquidity measures, has been favored by both crypto native and Wall Street investors, as they provide greater visibility into a strategy's book in terms of tracking trades. The firm settled its hedging strategy through OrBit Markets and is betting on the benefits of this approach.
Trilikauskis, the general partner at MEV, said that the firm's strategy is unique and that they aim to be a mercenary in DeFi by funding opportunities on the market. He added that MEV's flagship fund focuses on stablecoin yields and that the operation introduced an Ethereum strategy in May 2020. The firm has since rolled out sector-structured product plays and is not dealing with centralized exchanges or centralized lenders.
Looking for more information about cryptocurrencies？ WikiBIT offers you a one-stop service! Not only can you access numerous hot news topics, but you can also search for relevant trading firms and obtain their information, such as their ratings, user reviews, and whether they are regulated. Additionally, you can also use WikiBIT to keep up with the latest market trends of various digital currencies.
Don't hesitate any longer - download WikiBIT now and experience its features for yourself!
As a reminder, WikiBit is ready to help you search the qualifications and reputation of projects in a bid to protect you from hidden dangers in this risky industry!