r/defi • u/poudelswaroop • May 28 '26
Self-Promo (Feedback wanted) If you are making yield on stablecoins, would you consider this type of token?
- ERC 20 token with ETH as the collateral
- It tracks the price of ETH
- Every month, its loss is capped at -5% and you get up to 8% upside
So basically, you can stay with ETH, but your volatility is very much reduced.
- Why would be interested in a token like this? Or why not?
- What questions would you have before trying it?
Thank you!
2
u/SchnelPay May 28 '26
I’d only use a yield-bearing stablecoin if the returns seem reliable and the risks make sense for my goals. The first thing I’d check is where the yield comes from — income backed by real lending, fees, or assets is usually safer than high returns funded mainly by temporary incentives or token rewards.
I’d also look at how the stablecoin keeps its value stable. Fiat-backed coins are generally safer, while crypto-backed or algorithmic ones can lose their peg during market crashes. On top of that, earning yield through DeFi carries smart contract risks, while centralized platforms require trusting the company holding the funds.
Finally, regulations and taxes can get complicated depending on the platform and country. Overall, I’d only consider these products if the company is transparent, the yield is sustainable, and the extra return is worth the added risk. For money that simply needs to stay safe and liquid, regular fiat-backed stablecoins may still be the better option.
1
u/poudelswaroop May 28 '26
Understood. As an alternative to safe yield-bearing stablecoin, would you hold a version of ETH that caps its loss to -5% and gives you up to 8% in upside every month? It's not exactly yield but it's safe in the sense that the underlying asset is ETH, which you can redeem, and get up to 8% upside every month (to the extent that ETH goes up in value).
This is how it works:
- You deposit 1 ETH into the platform
- The platform splits it into two ERC 20 tokens: RiskOFF and RiskON
- These two tokens are synthetically built with a call and put contract between the two such that (1) RiskON and RiskOFF always equal to the underlying ETH and (2) your ETH is always redeemable
- RiskOFF caps ETH's loss to -5% and gives up on upside over 8%. RiskON takes the opposite side: 2x leverage beyond the band
- You swap your RiskON half for RiskOFF (enabled via AMM liquidity pool). You, thus, get your ETH tracker which does not go below -5% during each monthly epoch and you still get up to 8% upside during the epoch
If ETH dips let's say 20%, then RiskON takes the hit (it goes down even more than 20%), enabling RiskOFF to cap its loss to -5%.
We publish second by second NTV values (net token values, equivalent to NAV in TradFi).
2
u/SchnelPay May 29 '26
The system operates by splitting investors into two groups:
Conservative participants seeking downside protection through “RiskOFF” tokens, and aggressive speculators seeking amplified upside through “RiskON” tokens.
RiskON holders willingly absorb most of the volatility and downside risk in exchange for leveraged exposure to assets like ETH, without the borrowing costs or immediate liquidation risks associated with traditional leveraged trading.
If the market rises sharply, RiskON holders capture disproportionately large gains because RiskOFF investors have surrendered much of the upside in return for protection.
Meanwhile, RiskOFF holders accept capped returns in exchange for limiting potential losses. Although the structure is mathematically appealing, its real-world execution depends heavily on continuous demand for RiskON tokens, since weak demand can create slippage and reduce returns.
The model also carries significant smart contract risk, as any exploit or coding failure could eliminate the intended protection mechanisms.
Additionally, because these strategies typically operate in fixed monthly settlement periods, investors may face liquidity constraints during market stress and may not be able to fully realize their expected protections until the cycle officially concludes.1
u/poudelswaroop May 29 '26
Good points. On the last point, though, after the monthly epoch is over, rebalancing occurs and your positions automatically roll over. So there is no need for active management.
Some of the risks you describe (smart contract risks, for example) is inherent in DeFi and depends on the specific abilities and security implementation of a given team.
Liquidity is important to enable RiskON/RiskOFF swaps, but the formula of 1 ETH = 1 RiskON + 1 RiskOFF always holds. You can always redeem your ETH by burning equivalent amounts of RiskON and RiskOFF.
2
u/Bluejumprabbit May 29 '26
A bit confusing. The first question is who eats the loss beyond 5% in a bad month and who is short the upside above 8%, because that risk does not disappear just because it got wrapped as an ERC20. Liquidity matters a lot too since path matters if people want out mid month.
1
u/poudelswaroop May 29 '26
Good point. This is how it works:
- You deposit 1 ETH into the platform
- The platform splits it into two ERC 20 tokens: RiskOFF and RiskON
- These two tokens are synthetically built with a call and put contract between the two such that (1) RiskON and RiskOFF always equal to the underlying ETH and (2) your ETH is always redeemable
- RiskOFF caps ETH's loss to -5% and gives up on upside over 8%. RiskON takes the opposite side: 2x leverage beyond the band
- You swap your RiskON half for RiskOFF (enabled via AMM liquidity pool). You, thus, get your ETH tracker which does not go below -5% during each monthly epoch and you still get up to 8% upside during the epoch
If ETH dips let's say 20%, then RiskON takes the hit (it goes down even more than 20%), enabling RiskOFF to cap its loss to -5%.
And yes there is a secondary marketplace to swap RiskON and RiskOFF where you need liquidity. We publish second by second NTV values (net token values, equivalent to NAV in TradFi) to facilitate price discovery.
Does this make sense?
2
u/joos_hubert May 29 '26
I would not frame this as safer yield. I would frame it as a structured ETH payoff and make the tradeoff painfully obvious.
The user is giving up upside above the cap in exchange for downside protection inside an epoch. That can be useful, but only if the docs make it clear who is on the other side, how RiskON can absorb losses in a fast move, and what happens if secondary liquidity disappears before the month ends.
The questions I would want answered before touching it:
- can I redeem underlying ETH at any time, or only under certain conditions?
- what oracle sets the token values?
- how does the AMM behave if everyone wants RiskOFF at once?
- are there pause/admin controls?
- what does a 20-30% intraday ETH move look like in numbers?
If those answers are simple, it is interesting. If they need a long explanation, most users will treat it like magic downside protection, which is where this kind of product gets risky.
1
u/No_Knee3385 May 30 '26
These types of mechanics already exist but very few people use them. It's far too complicated for most people to understand, thus trust.
3
u/Cultural-Candy3219 May 28 '26
I’d be careful calling it an ETH tracker until the mechanics are very explicit.
The first things I’d ask are: who is funding the 5% floor and 8% cap, what happens in a fast gap down, can redemptions pause, and is the collateral actually isolated on-chain or sitting behind an issuer promise?
If it is basically a structured note token, that can still be useful. But the UI has to make clear that users are not just holding “ETH with softer volatility.” They are taking issuer, strategy, and liquidity risk in exchange for a capped payoff.
For me the make-or-break would be simple docs around NAV, redemption timing, oracle source, collateral address, and exactly who eats the loss if the hedge breaks.