Rysk Alpha: Debrief

From Alpha into Beyond

Rysk Finance

Published in

Rysk Finance

5 min readJul 10, 2023

Introduction

We launched the Rysk Alpha Dynamic Hedging Vault (DHV) seven months ago. An audacious endeavor to explore product assumptions and technical infrastructure as well as allow us to gain familiarity with and test the resilience of our underlying protocol and its surrounding ecosystem.

This threefold initiative had us focusing on:

Validating the demand for on-chain liquidity providers seeking uncorrelated returns
Examining the potential to generate these uncorrelated returns
Reinforcing our understanding of Rysk Alpha smart contract security, reliability, bug bounty practices, transactional operational processes, off-chain infrastructure, debugging, monitoring, and integrations

While the demand for a Dynamic Hedging Vault offering uncorrelated returns was undeniably affirmed, consistent production of positive uncorrelated returns posed certain challenges. In this post, we are sharing our journey transparently, shedding light on the discoveries and invaluable lessons learned, all of which will undoubtedly be instrumental for our future product development and optimization.

User Acquisition and Growth

The DHV has shown robust growth since its inception. Launched with a 500k cap, it attracted a total of 84 depositors hitting its cap within minutes. Throughout its lifespan, the DHV operated at full capacity, with new depositors quickly filling slots whenever withdrawals occurred. By the end, we had seen a total of 187 unique depositors and 32 unique withdrawers.

Financial Performance

While the vault maintained maximum capacity, the financial performance fell short of our expectations. Over seven months, the vault generated a cumulative return of -0.52%. For comparison, during the same period, ETH yielded a 38% return, albeit with significantly higher volatility than that of the DHV. Nonetheless, for the vault to have matched ETH in risk-adjusted terms, it would have needed to return 1.4% over the same period.

A Tale of Two Models

Spread Model

Initially, the vault was launched using a spread model to price options. In theory, this model is reasonable for a market maker, assuming that the market maker engages in enough volume to turnover its inventory of options. The challenge with a closed alpha vault is that it did not generate enough volume to cross the spread frequently. In fact, most positions were held until expiration. This resulted primarily from trading with only a handful of qualified trading partners. Consequently, the primary driver of vault returns was the spread between the implied and realized volatility on positions.

Volatility Trading

In February, the DHV began to implement a series of trades based on backtested research around the estimated expected value for volatility harvesting trades. These trades, in isolation, contributed 3% in positive returns to the vault in the limited time they were deployed. Although the strategy is promising, it currently has too many moving parts to operationalize. Furthermore, it contradicts the concept of being a market maker. A market maker is always around to provide liquidity, whereas the volatility trader only waits for positive expected value trades.

Head to Head

The market maker model seeks cost leadership; the spread or margin can come down as inventory turnover increases. The volatility trader model seeks differentiation as a driver of returns, waiting to provide and remove liquidity where and when others will not.

The market maker model is simpler to scale. As volumes increase, option inventory turnover rises, which should enable the margins on the trades to decrease. This, in turn, should attract newer, more cost-sensitive traders, thereby creating a positive feedback cycle.

Rysk Beyond

With the resources of a small team, we found that running the alpha vault distracted us from building a public-facing options AMM. By winding down the alpha vault, we were able to focus our energies on preparing Rysk Beyond for the trading competition. As we gear up for the mainnet launch of Rysk Beyond, we have learned new lessons and gleaned data points from the trading competition, which we look forward to sharing in the near future.

With higher expected volumes post-launch of Beyond mainnet, a traditional spread model (market maker) should serve to generate adequate returns for LPs. This will be our default model moving forward. Furthermore, rysk will continue to research and backtest additional complementary strategies such as Volatility trading on high EV trades, among others.

How to use Rysk Beyond

Rysk Beyond is currently live on Arbitrum Mainnet and deposits are open to Alpha depositors to migrate their liquidity from Rysk Alpha.

To secure your spot in the Rysk Beyond DHV, follow these simple steps:

1️⃣ If you haven’t already done so, please withdraw your funds from Rysk Alpha (https://alpha.rysk.finance). Click the withdraw tab and select 100% as amount. Once the epoch is executed you can complete your withdrawal and redeem your USDC.e

2️⃣ Rysk Beyond will accept native USDC on Arbitrum . You can swap USDC.e using Uniswap, make sure the native USDC address is the official one: 0xaf88d065e77c8cC2239327C5EDb3A432268e5831, or you can bridge native USDC from Ethereum using the Cross-Chain Transfer Protocol (CCTP)

3️⃣ Visit Rysk Beyond App: https://app.rysk.finance . Connect your wallet and make sure the address is the same that you used to deposit into Rysk Alpha.

4️⃣ Input the amount in USDC you will like to deposit. Approve the spending transaction first and then completed the deposit.

At this point your deposit is completed!