With an Annual Percentage Rate (APR) consistently ranging between 10-20%, the Theta Vault offers a reliable option for liquidity providers (LPs). However, the challenge of the original Theta Vault was the higher funding rates required to maintain open CVI positions , which, while necessary, posed limitations for scalability.
Transformation to the Hedged Theta Vault in CVI V4
With CVI V4, we introduced the Hedged Theta Vault, a significant evolution of the Theta Vault concept. This new mechanism maintains the foundational strengths of the original Theta Vault but addresses the issue of high funding rates through innovative risk management strategies.
Key Features of the Hedged Theta Vault
Balanced Exposure: The Hedged Theta Vault ingeniously balances long and short exposure in the market. This equilibrium reduces the risks associated with one-sided market positions and consequently decreases the funding rates required for maintaining positions.
Dynamic Liquidity Management: The vault incorporates a dual-structured approach, consisting of the original Theta Vault and an added Inverse platform. This Inverse platform allows for the opening of leveraged short positions on CVI, thus offering a counterbalance to the long position risks.
Adaptive Risk Mitigation: In scenarios where the market experiences high volatility, the Hedged Theta Vault dynamically adjusts and adds liquidity to the Inverse platform. This addition ensures the vault's capacity to support larger positions without escalating its risk profile.
Phased Access: Initially, the Inverse platform is made available exclusively to market makers, with plans to extend access to all users, providing an intuitive and user-friendly interface for broader engagement.
Lower Funding Rates: With these enhancements, the Hedged Theta Vault can afford to offer lower funding rates while still supporting the leveraged volatility trading features of the platform.
Impact on Total Value Locked (TVL): The introduction of the Hedged Theta Vault is projected to substantially increase the TVL and overall platform yields, reinforcing CVI’s position in the DeFi space.
In summary, the transformation from the Theta Vault in V3 to the Hedged Theta Vault in V4 exemplifies CVI's commitment to innovation and adaptive risk management, offering a more balanced and efficient trading environment for all participants in the ecosystem.