Consider an Ondo Vault backed by the USDC-ETH liquidity pool on Uniswap, with the fixed yield depositors contributing USDC and the variable yield depositors contributing ETH.
Other terms: 10% hurdle rate, 30 day duration.
Subscription: Fixed yield depositors make subscription requests with USDC and variable yield depositors make subscription requests with ETH during a one week window. At the end of the subscription window, USDC and ETH are pooled in equal dollar value and used by Ondo to provide liquidity to the USDC-ETH liquidity pool on Uniswap v2. (For Vaults on Sushiswap, Ondo stakes the LP tokens in MasterChef to earn SUSHI rewards and periodically sells and reinvests these rewards. Excess requests in the over-subscribed tranche are made available for users to reclaim.)
Redemption: Upon expiration 30 days later, Ondo withdraws liquidity from Uniswap for USDC and ETH. Fixed yield depositors are paid back their USDC principal plus 10% annualized returns, then variable yield depositors receive all remaining returns. Variable yield depositors are paid back in ETH and Ondo swaps USDC and ETH for each other as needed in order to service redemptions.
Fixed Yield Returns (vs USD):
Fixed yield depositors receive their target 10% hurdle (vs USD) return unless fees + yield farming income is low AND ETH returns are highly negative. Large market moves typically come with increased trading volume, which should provide a hedge against both of these factors occurring simultaneously.
Variable Yield Returns (vs ETH):
Variable yield depositors experience more severe losses under low fees + yield farming income and highly negative ETH returns (the top left corner of the sensitivity table below). When variable yield depositors contribute ETH, they are effectively borrowing USD in order to get levered exposure to LP tokens derived from 50% USD and 50% ETH - this has a dampening effect on ETH price movements. It will limit losses relative to ETH in scenarios where ETH declines in value. As ETH increases in value, their leverage and fee income generally more than compensates for the fact that the LP tokens are half derived from USD and for impermanent loss. Variable yield depositors outperform ETH in the majority of scenarios, but may underperform those with very low fee income and extreme ETH weakness, or those with violent ETH movements to the upside.
Explore Additional Scenarios
Want to explore other scenarios with other pairs, such as those without stable coins? We have created a worksheet you explore returns where both Junior and Senior asset prices change. Simply make a copy of the worksheet and input your own assumptions.