Source of Value Accrual
USDca Yield
Last updated
USDca Yield
Last updated
Yes. You have to stake your USDca with CAMP to accrue protocol-level yield.
No. The protocol's reserve fund is intended to cover any periods wherein the generated protocol yield is not positive to reduce the chance of amounts ever due from the user to the protocol or the reduction of backing assets.
The generated protocol yield is transferred to the staking contract in the form of USDca.
CAMP generates two sustainable sources of yield from the protocol backing assets:
Staking Ethereum
Native yield derived from proof-of-stake Ethereum presents the first opportunity to utilize derivative infrastructure at scale to create decentralized money, for a global decentralized financial settlement layer. Today, staked Ether and other Ether backed liquid staking derivatives are the only sufficiently sized trustless assets, that are variable and floating by nature, and which can provide a yield to support this product at scale.
Staking yields now present the first opportunity to provide large capital pools a unified basis trade solution across DEX and CEX markets. Combining the yield derived from staked ETH with both perpetual and expiring futures will enable investors to construct bespoke floating and fixed return profiles denominated in ETH or USD, and the emergence of a crypto-native yield curve.
Lido's staking APR may occasionally be lower than Ethereum's APR due to both Lido's staking rewards fee and the activation queue for ETH validators. As Lido's staking incentives are distributed across all stakers, if there is a significant rise in new stakers, the rate will temporarily decrease as more validators are brought on board.
In the initial stages, focus will be on staked ETH because it offers better unit economics for generating yields. However, throughout the lifespan of ETH, it has consistently exhibited a contango trend, allowing us to maintain a positive spread even when using raw ETH as collateral. This expansion would increase the potential collateral base from approximately c$112bn, considering 30% staked ETH (as of April 2024), to the full market capitalization of ETH.
CAMP will start with staked ETH, benefiting from its strong performance, and eventually include raw ETH in the backing. By doing so, CAMP can scale the market beyond $5bn while maintaining lower yields. As the staked ETH product matures, it will also bolster the reserve fund, providing a larger safety margin to cover periods of negative funding. This strategic approach allows CAMP to capture market opportunities and support greater growth, while delivering robust and flexible solutions.
On the asset side, the market capitalization of staked Ethereum is currently around c$101bn, accounting for approximately 27% of the total ETH market capitalization. However, we anticipate this percentage to rise to around 30% within the next months, aligning with the views of the Ethereum core research team. This growth, combined with the increasing popularity of Shapella, provides favorable conditions for expanding our collateral base. CAMP is agnostic to the specific LSTs and can adapt to the growth of DeFi LSD providers or exchange-native products.
The funding rate from the delta hedging derivatives positions Funding rates are periodic payments made to traders who are long or short depending on the difference between spot prices and perpetual contract markets. Consequently, traders will either pay or get funding based on open positions depending on demand for long or short positions. When the funding rate is positive, long positions pay shorts; when it is negative, short positions pay those long the contract. This mechanism aims to ensure avoiding long-term divergence in the prices of the two markets. Perpetual futures funding rates have two primary components: the interest rate and the premium. The venue determines how funding rates are calculated. Funding rates may exhibit sharp behavior during times of market volatility, they may go negative for significant periods but usually revert closer to zero or positive and display mean-reverting characteristics. The funding and basis spread yield can be floating or fixed depending on if the protocol uses non-deliverable or deliverable derivatives positions to hedge the collateral's delta. Historically, long positions have paid the funding rate to the short side, which on average will provide CAMP with an excess yield over ETH staking yield. The table below summarizes the distribution of funding rates since inception. We can see that the mean for open interest-weighted funding rates is 8.79% annualized, when combined with a stETH yield of 3% would provide a total yield of 11.79%. Using BTC figures, this combined yield sits on average at 10.63%.
If funding rates are deeply negative for a sustained period of time, such that the staked Ethereum yield cannot cover the funding and basis spread cost, the reserve fund will ensure solvency.
The basis spread from the delta hedging derivatives positions On the other hand, basis trading revolves around traders capitalizing on the price difference or spread between the spot price of a cryptocurrency and its futures contract price. When the futures price is higher than the spot price, it's referred to as 'contango’, and when the futures price is lower than the spot price, it's called 'backwardation'. By strategically buying and selling the spot and futures contracts, traders can profit from these differences. Similar to funding rates, the directionality of the basis depends on demand. As seen on the tables above, the mean OI weighted 3m futures basis comes in at 9.11% annualized for ETH and 6.75% for BTC.
As mentioned, the yield comes from a combination of stETH yields and futures arbitrage using either the funding rate or a basis trade. Various factors influence each of these yields over time.
Staked ETH
The yield from ETH liquid staking tokens can change over time due to various factors, including the staking reward rate, changes in network participation, and market dynamics. Yields have been trending down for stETH to start 2023 as a result of lower activity on Ethereum and an increase in the ETH staking rate from 15% to 27% year to date, both putting downward pressure on yields. This will be normal bear market behaviour for stETH yields and we expect them to pick up meaningfully as animal spirits return to Ethereum in the next bull market.
In periods of market volatility, the dynamics of supply and demand within the market for xETH tokens can lead to a depeg from the value of ETH. Market forces play a crucial role in determining whether xETH trades at a discount or a premium compared to ETH. After the Shapella upgrade, the liquidity of staked ETH tokens has drastically improved as holders can freely stake and unstake 1:1. Pre-Shapella we saw staked ETH tokens depeg multiple times from ETH due to an illiquidity discount, however post-Shapella these tokens have traded virtually always at peg as liquidity has been significantly de-risked.
Perpetual Futures Funding Rates
On average, funding rates have been paid to the short side However, there are times when funding can dip negative as sentiment sours, usually during black swan type events. We have chosen three of these recent events below: ETH Merge, USDC Depeg and USDT Depeg to see how funding rates reacted during these events.
We can see that deeply negative funding rates never persisted for longer than a couple of days, as funding rates exhibit mean reverting characteristics, usually reverting close to zero or positive, by design.
Negative funding is a point of instability of USDca, however the reserve fund will function to cover any losses that result in the excess yield between stETH and funding rates being negative, that is to say, when funding rates are more negative than c.-5% annualized. Referring to the statistics table earlier, we can see that this only occurs on 9.62% of days for ETH perpetual futures and 7.42% for BTC ones, while the reserve fund grows on all other days.
As for a longer term outlook for funding rates, as stETH proliferates further onchain, with borrow rates for ETH increasing to provide leverage against this, the natural rate of contango in ETH increases which should help to bring funding higher across the market.
This yield is generated through:
Consensus layer inflationary rewards.
Execution layer fees paid to Ethereum stakers.
MEV capture paid to Ethereum stakers
All of these sources of yield are paid and denominated in ETH. While the expected inflationary rewards are more predictable, the execution layer yield is more volatile as it is dependent on the activity at the base layer. In 2021 this yield averaged above 6% for Lido’s stETH, and this has trended towards 3-5% as the percentage of staked Ethereum has grown over time and activity has fallen since 2021.
Perpetual futures pay a funding rate in order to incentivize positions that counter current market demand. Funding rates function to account for the difference between the futures contract price and the price of the underlying. Historically, thanks to a demand for long-side leverage in crypto, perpetual futures have paid the funding rate to the short side.
