How To Hedge Against Declining Interest Rates Using Uniswap v3

An Example of 3CRV Interest Rate Cash-Covered Call Options

There are several fixed-income solutions to hedge the fluctuating returns of curve LP positions like APWine, etc, that offer fixed income products for risk-averse investors to earn a fixed income and risk-tolerant investors to speculate on the CRV interest rates. This mechanism has a severe scalability issue and hence, most fixed income protocols have not been able to scale and reach the levels that they wanted. To put it simply, it’s the chicken and egg problem:

  1. No speculators = risk-averse lender cannot earn fixed income

Understanding Curve Finance

Curve is a decentralized exchange, originally designed to provide liquidity for stable coins and now for any similar and even non-related pegged assets in their v2 pools. Curve’s main purpose is to make it easy and cheap to exchange one stablecoin into another.

The Virtual Price Of The 3CRV LP Token

In simple terms, the virtual price of the 3CRV LP token is determined by the total $value of USDT, USDC and DAI in the pool divided by the total number of issued 3CRV pool tokens. The premium that 3CRV LP has over 1 LP token represents the expected value of future yield that one can earn in a year by being a liquidity provider at any point of time “t”.

Hedging 3CRV Interest Rates Using Perpetual Uniswap v3 Options

The solution is inspired by an article of Guillaume Lambert who is being quoted below:

Yield On Top Of Yield — USDC/3CRV Concentrated Liquidity On Uniswap v3 To Hedge Downside Of 3CRV Interest Rates

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