Understanding Yieldbasis in One Article: A Leverage Liquidity Engine that Eliminates Impermanent Loss - ChainCatcher

Source: Alea Research Compiled by: Zhou, ChainCatcher

Yieldbasis may be one of the most anticipated DeFi projects in the fourth quarter.

The project was created by Michael Egorov, the founder of Curve Finance, with the goal of transforming constant-product AMM liquidity pools into “arbitrage trading” that is resistant to impermanent loss (IL), starting with Bitcoin. YieldBasis does not accept the premise that LPs must bear IL, but maintains a constant 2x leveraged position in the BTC/stablecoin pool, tracking the price of BTC at a 1:1 ratio while still earning trading fees.

Curve has provided a credit line of $60 million in crvUSD to launch three BTC pools, utilizing the same dynamic fee sharing and governance mechanism inspired by Curve's veCRV model.

This article will examine how YieldBasis eliminates impermanent loss, its leveraged liquidity engine and fee design, as well as the recent Legion sale, which raised nearly $200 million in FDV through performance-based allocations.

Eliminate IL using liquidity leverage

Impermanent loss has always been a burden for providing liquidity to DEXs. Projects like Uniswap v3 offer concentrated liquidity to alleviate impermanent loss, while other projects subsidize liquidity providers through token issuance (LP).

YieldBasis solves the IL problem by transforming a dual-asset AMM into a single-asset arbitrage trade, ensuring that the liquidity pool always holds a net exposure of 100% BTC (through 2x leverage), while borrowing stablecoins to provide funding to the other side. This approach is similar to basis trading in TradFi, where users borrow cash to purchase futures or spot, profiting from the funding spread and price fluctuations.

Key Concepts:

Deposits and Loans: When a user deposits BTC, the protocol quickly borrows an equivalent amount of crvUSD in USD and adds these two assets to the Curve BTC/crvUSD pool. The resulting LP tokens will be used as collateral to borrow crvUSD and repay the flash loan, with a remaining 50% debt/50% equity position (2x leverage).

Rebalancing AMM and virtual pools: As the price of BTC fluctuates, rebalancing AMM and virtual pools exposes small price differences, thereby incentivizing arbitrageurs to restore a 2x leverage ratio. When the price of BTC rises, the system mints more crvUSD and LP; when the price of BTC falls, the system repays debts and destroys LP. Arbitrageurs profit from the price difference, aligning their incentive mechanisms with the health status of the pool.

Linear exposure: By maintaining a constant 2x leverage, the position of liquidity provider (LP) will increase linearly with the BTC price, rather than being proportional to its square root. This means that the exposure of liquidity provider (LP) will match the BTC price at a 1:1 ratio, while still earning Curve trading fees.

Curve Flywheel

This design also fully leverages the ecosystem flywheel of Curve. YieldBasis directly borrows crvUSD from Curve's credit line (if approved).

The trading fees for the BTC/crvUSD pool are provided to YieldBasis liquidity providers (LP) and veYB holders in the form of dynamic management fees. Of these fees, 50% is used for rebalancing, and the remaining 50% is distributed between the unstaked liquidity providers (LP) and veYB based on their staking share of ybBTC. If many liquidity providers (LP) stake to earn YB issuance, the management fees will increase, resulting in more fees being paid to veYB. However, if the amount staked is low, the BTC-valued fees received by the liquidity providers (LP) will be higher.

This mechanism balances the incentive system and rebuilds the measurement system of Curve.

$5 million Legion and Kraken Launch funding

Yieldbasis recently completed a $5 million financing through Kraken and Legion (accounting for 2.5% of the total supply), with an FDV of $200 million. Of this, $2.5 million is allocated to Legion's “contribution-based” public sale, and $2.5 million is allocated to Kraken Launch. These tokens will be 100% unlocked at TGE.

Public sales are divided into two phases:

Phase 1: Reserve up to 20% of the tokens for users with a high reputation score on Legion (based on on-chain activity, social engagement, and GitHub contributions, etc.).

Phase Two: Open the remaining quota simultaneously on Kraken and Legion, first come first served.

The launch of Legion received 98 times oversubscription. The final processing involved excluding witches and robots, and adopted a “two-end weight” distribution approach:

Allocate more funds to top contributors (those who can increase TVL, bring visibility, contribute to the codebase, etc.);

At the same time, it has allowed thousands of other companies to receive some allocation, combining the advantages of angel round financing with a broad distribution.