Announcing Vovo: Structuring Money Legos for Customizable Yield

9 min readJan 14, 2022

TL;DR

Vovo Finance is a structured products protocol that offers a variety of products catering to users with different risk profiles and market views. Vovo offers products including:

Principal Protected Products: Stand a chance to earn large profits without the risk of losing a gwei. The first product is built by integrating Curve with GMX perpetual swap exchanges on Arbitrum.
Yield Enhancement Products: Earn high returns by taking the risk of your choice. Yield is being produced by integrating with on-chain Option protocols like Primitive Finance and Opyn’s Squeeth products.

The advantages of Vovo Finance include:

Fully automated without off-chain dependency on market makers. Many existing structured products protocols source the liquidity from off-chain market makers, relying on the team to move the funds around to place orders. Vovo, however, is an autonomous protocol that sources its liquidity fully from other onchain DeFi pools, without the need to trust any third party.
For the risk-averse, the daring, the bulls and the bears. Vovo offers different products for users with different risk preferences and market views.
An organic yield. Many projects talk about sustainable yield recently, but DeFi is still far from achieving that. Most DeFi protocols’ high APY is sustained by governance token emissions, but the runway is short before APY drives the token price over a cliff. Vovo Finance allows users to earn an organic yield from derivatives regardless of market conditions.
Easy access to on-chain financial instruments. Vovo democratizes derivatives and interest rate products for those without deep financial knowledge.
Passive investing and cost saving. Achieving a certain risk profile requires consistently trading and rebalancing, which is expensive on-chain. Since Vovo’s keeper handles the rolling activities for all users via an aggregated pool, it greatly reduces the operational and gas cost.

Over the long term, Vovo aims to become an ecosystem that unlocks unlimited volume offerings of passive investing by allowing users to invest into products with customized payoffs.

Background

What are Structured Products?

The complexity of financial instruments is often reserved for the financial elite and allows them to achieve a better risk or reward payoff which far exceeds buying and holding an asset. In traditional finance, financial instruments are packaged into structured products by institutions for investors to access the various payoffs without the need to understand the underlying instruments. According to Bloomberg, the total structured product market accounted for over $7 trillion in invested assets.

Advantages of DeFi Structured Products

With the gradual maturity of on-chain derivatives and fixed income products, structured products will become a core component of the entire DeFi space. A great benefit of decentralized money legos is the ability to create complex structured products combining financial instruments as a bundle with smart contracts acting as the broker, which is 100% transparent and reduces the complexity of figuring out the various DeFi protocols, and it is open to everyone.

DeFi is Ready for Structured Products

For structured products to exist, there needs to be mature derivatives markets for options and futures. It also requires the offerings of interest rate products. The derivatives market has been taking off over the past year, with the adoption of products like Perpetual Protocol, GMX, Opyn, Dopex, Lyra, etc. Interest rate products like Element and Pendle are also starting to have adoption. Moreover, any yield farming pools can technically function as an interest rate product in DeFi.

Pain Points of DeFi Structured Products

The current DeFi structured products protocols did a great job by replicating the traditional option selling products to DeFi, bringing real organic option yield from offchain to onchain via market makers. Many more protocols are also launching similar option vaults recently.

While option vaults have found a great product-market-fit among DeFi users, there are a few things we should think about:

Most current structured products projects suffer the risk of centralization or liquidity shortage. Due to the lack of on-chain option liquidity, most source the liquidity liquidity by negotiating a deal with a few market makers off-chain. Hundreds of millions of dollars are handled by furious clicks after texting on telegram each week. Some protocols are taking a great initiative to decentralize the process via auctions, but due to the lack of active market makers, some level of coordination is also needed and it could result in a less-ideal option premium if market makers collude with each other or not many market makers show up for a certain week.
The current DeFi structured products are restricted to BTC, ETH and few other major tokens. This is largely due to the dependency on the off-chain market makers, since major tokens are the only ones with good perpetual swap or option volume in centralized exchanges.
Only few types of structured products have been created in DeFi so far. When almost all the structured products protocols are focusing on option selling vaults right now, that is just one type of structured products. Since the number of payoff structures we could create in DeFi is unlimited, the design space is huge for Vovo and all the players.

The Design Philosophy of Vovo Finance

Vovo is a fully automated protocol which sources its liquidity from on-chain instead of off-chain market makers. How are we able to achieve this if there’s a lack of onchain derivatives liquidity? Well, this was true a few months ago, but things have changed recently. The onchain perpetual swap volumes skyrocketed in the recent months. For options, breakthroughs like Primitive Finance’s RMM and Opyn’s Squeeth are very promising.
Vovo is bulding a wide ranges of structured products that fits users preferences. Many existing DeFi protocols offer a single dimension of investment products. For example, some tranche protocols offer products with different risk levels, and option vaults offer products with different market views. The market still lacks products which include multiple dimensions. Vovo aims to offer products with choices of various dimensions, including risk levels, market views, locked period, deposit tokens, etc. This will allow users to fully customize their yield based on their demands.

The 1st Product: Principal Protected Products

Traditional Principal Protected Products

Principal Protected Products(PPP) is one of the most traded products in traditional finance, but almost no one has built it in DeFi successfully. “Be prepared to lose all your money” has been the common advice for crypto traders. What if you are guaranteed to keep all your money while having the potential to get 1.5x-3x or even 10x of normal APY?

In traditional finance, PPP guarantees a rate of return of at least the principal amount invested with a potential upside. A PPN is structured as a zero-coupon bond — a bond that makes no interest payment until it matures — and an option with a payoff that is linked to an underlying asset, index, or benchmark.

Vovo Principal Protected Products

Is there a way to re-innovate PPP as a native DeFi product rather than just copying it over from traditional finance?

Absolutely. With the composability and transparency of DeFi, the product can be constructed in a more flexible and potentially more profitable way. Instead of buying fixed interest rate products to earn yield, Vovo PPP does direct yield farming into pools and collects rewards, which is more flexible and free from any locked period like normal fixed interest rate products. Periodically, Vovo Principal Protected Product collects and invests whatever daily floating profit into high risk/reward products.

Also, while traditional product normally buys options to generate profit with a fixed expiry, Vovo has the flexibility of investing in products like high leverage perpetual swaps(e.g., 20x leverage), which has a better on-chain liquidity than options and their profit can be collected anytime rather than only at expiry. Vovo protocol can rebalance the leverage position periodically to harvest the trade profit and reinvest into yield farming pools. This could potentially bring more profit compared to traditional principal protected products if the trade direction is correct.

Vovo’s first PPP is built by using Curve as a farming pool and GMX as the perpetual swap exchange on Arbitrum.

The choice of Curve as yield farming pool is a no-brainer, largely because of its capacity to park large capital with good yield.

GMX is the most successful perpetual swap exchange on Arbitrum right now, with consistently more than $100m daily trading volume. The most important reason we choose GMX is because it supports 0 slippage trading, especially beneficial to protocols like us who could open large trade.

APY of Vovo Principal Protected Products

The APY of each vault depends on:

The base APY from Curve pool
Whether the vault bets on the right market direction

Using the Curve 2pool(USDC-USDT) current APY at 7%, we did some backtests to see how the APY will be like for “ETH UP Vault ‘’ and “ETH Down Vault”. The vaults collect CRV reward from Curve pool each week, swaps the yield to USDC and then use the USDC to open a 20x long or short leverage position on GMX. The position is automatically closed after a week.

We compared the leverage levels from 5x to 30x, and found 20x leverage has the best average performing APY for the long period. The backtest(after deducting fees and slippage cost) shows the APY is 1.5x-3x of the base APY if users bet on the right market direction, and above half of base APY if betting on the wrong direction. However, these are average APY for a long period. The actual weekly APY ranges from 0% — 156% for the past 4 years. Around 60% of weeks having 0% APY when the positions are liquidated, but for the other 40% of weeks, the APYs are normally above 30%.

Investment Strategies of Users

Based on the backtests results, there are two types of strategies users can consider:

If you are bullish or bearish on a certain token for the next few months, but no particular view on short term, then you can park the fund into the vault that matches the market view to achieve 1.5x to 3x of base APY.
If your market view changes frequently, then it is best to transfer funds into different vaults periodically. No deposit fees will be charged to transferring vaults. If you are right most of the time, it is easy to achieve 10x of base APY.
At the end of day, you should not lose a penny even if you are wrong all the time, as only the farming yield is used to open the trade, while your principal remains untouched.

Upcoming Products: Yield Enhancement Products

Degens will never get satisfied with a 20% APY, but how can we double the return organically without token incentives? One of the answers is via option vaults, like what most structured products protocol is doing. Unlike other structured products, Vovo will be sourcing the liquidity purely from onchain protocols.

Enhance Yield with Primitive Options

Primitive Finance’s latest design of Replicating Market Maker(RMM-01) enables the creation of covered call options by being an LP of their AMM pools. The ability to sell calls and collect premiums without the need for a counterparty is ensured simply through the swap fee of the AMM. The elegance of its design removes the dependency on oracles, making the creation of options of any tokens possible. This could become the “Uniswap moment” of DeFi options. Vovo creates automated option vaults by directly integrating with Primitive Finance pools, enabling the creation of rolling covered call vaults supporting various underlying tokens and strikes.

Enhance Yield with Opyn’s Squeeth

Inspired by Paradigm’s Power Perpetual paper, Opyn is launching its Squeeth product, an option-like product without any expirations and strikes, which makes the liquidity more concentrated than normal options. Many strategies could be deployed to earn the funding payments of squeeth products.

The details of Yield Enhancement Products implementation will be shared in a later post.

Why Arbitrum?

As the first working Ethereum layer 2, Arbitrum is getting great adoption among the Ethereum community. Thanks to its low gas fee, many perpetual swap exchanges(e.g., MCDEX, GMX) are deployed on it with huge user adoption. Especially, option protocols like Dopex, Opyn and Primitive Finance are or will soon be available on Arbitrum, making the creation of complex structured products possible.

What’s Next?

Vovo is expected to launch its first Principal Protected Products on Arbitrum in late January or early February after 2 audits are completed, allowing people to get a chance to earn high profit by betting on the market direction without worrying about losing a penny. The Yield Enhancement Products are expected to launch in the 1st half of 2022.

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Visit website: www.vovo.finance