In the Herd: Where does Zen Bull fit within Defi return products?
If DeFi and TradFi investors have one thing in common, it’s this: they both want returns.
This article is dedicated to the former.
Quickly, some background: DeFi utilizes smart contracts to build powerful infrastructure across options, lending, market making, and more. Opyn, a protocol founded in 2020, was the first DeFi options platform. Opyn remains a leader in innovation by releasing products such as Squeeth (Q1 2022) and Squeeth strategies (Q1, Q3, and now Zen Bull in Q4). This article is dedicated to Zen Bull.
You’re intrigued. You have questions. Luckily, this article seeks to satisfy both your intrigue and curiosity. The article (with sprinkles of an opinion piece) will be structured as follows:
Zen Bull is Opyn’s second automated Squeeth strategy. This article seeks to answer:
- What is Zen Bull?
- How is it unique?
- How does it fit in the herd (ecosystem)
What is Zen Bull
Note: This is a high-level overview. If you want to dive deeper into the belly of the bull, please visit the Opyn gitbook.
Zen Bull (ZB) is an automated Squeeth strategy vault that splits a user’s ETH deposit between the Crab Strategy (Opyn’s first automated Squeeth strategy) and a 2x leveraged long position on Euler.
The design creates a strategy that aims to earn returns from the Crab’s short volatility position while maintaining a 100% ETH exposure (delta ~1).
TradFi comparison
You may want to think of Zen Bull similar to a covered call. In a traditional covered call, users are long an asset and sell an out of money call. Covered calls are well-liked because they sell off some of their upside in exchange for options premium.
Zen Bull is similar: if the price goes too much in either direction, then the strategy will underperform vs holding ETH. However, if it stays in the range, it will outperform.
Backend
The user deposits ETH and the strategy does the rest. At the highest level, the depositor gives the strategy ETH which creates a Crab position and a leveraged long ETH position. The user gets the Bull token back. The Bull token is what the user gets back from their deposit–it is a tokenized (ERC20) representation of their position in the Bull Strategy.
Under the horns, two separate flash swaps are happening. Here are the steps that are abstracted away from the user:
- User deposits ETH
- Flash Swap 1: oSQTH is swapped for some more ETH (we don’t own the oSQTH yet but the magic of flash swaps is we can sell things before we own them)
- Approximately 50% of the user ETH deposited + ETH proceeds deposited into Crab
- Flash Swap 2: USDC is swapped for ETH in the lending protocol (we haven’t borrowed the USDC yet, but through flash swaps we can sell things we don’t own yet).
- Bull places bull-specified ETH into the loan collateral (using user ETH deposit and flashswap proceeds)
- Approximately 50% of user’s ETH deposited
- Bull gets dollars back to pay back the ETH-USDC flashswap (USDC from Euler)
- User receives Bull Token (tokenized exposure of depositor’s position in the vault)
How is ZB Unique? And where does it fit in the herd?
Comparisons: Squeeth
Zen Bull is different from both the Crab Strategy and Long Squeeth. Each strategy has a different market outlook. Let’s quickly review:
Long Squeeth: best for users who are super-bullish ETH in the short term. Users pay premium (funding) for this position.
Crab: best for users who believe the price of ETH will “crab,” or not move around much. The Crab does best when realized volatility < implied volatility. This strategy receives premium (funding) payments from the users who long Squeeth.
Zen Bull: best for users who are bull”ish” on ETH–meaning they believe the price of ETH will go up slowly. Zen Bull gets returns from the Crab Strategy (short volatility) and thus wants the price of ETH to go up slowly.
- Long eth position = wants ETH to go up
- Crab position = wants ETH to go up more slowly than the market is pricing (short volatility)
Comparisons: DeFi
There is nothing in DeFi quite like Zen Bull.
Earlier in this article I compared Zen Bull to a covered call. There are several covered call option vaults offered by great protocols like Ribbon, Katana, and Frikton. These vaults sell deep OTM call options.
Zen Bull allows users to take double-sided short volatility bets. The user will stack ETH within the price bands–regardless of whether ETH goes up or down (within the profit threshold).
Note: a user can still lose money if IV goes up.
The true uniqueness of Zen Bull lies within its mechanism. The strategy utilizes several different ERC-20s (ETH, Crab Token, Bull Token, and Squeeth) and a lending protocol (Euler) to create a balanced mix of ~100% exposure to ETH and ~50% exposure to short volatility.
Please see Under the Horns for more information on the mechanism design.
Notes
Users who are extremely bullish should refrain from entering the vault. A volatile, bullish environment will cause the strategy to underperform relative to holding the asset.
Twitter thread to learn more
