Disclosure: This newsletter is for informational purposes only and does not constitute financial advice. Always DYOR before making any investment.

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High APYs aren’t Free

Market-making (MM) pools often advertise attractive APYs. That yield is not accidental. It exists because liquidity providers are absorbing impermanent loss risk. In other words, the “premium” in MM pools is compensation for taking on price divergence.

Impermanent loss (IL) occurs when the relative price between two pooled assets changes. Automated market makers maintain a fixed value ratio between assets. When price moves, the pool automatically adjusts balances to keep that ratio intact. The practical consequence is simple: as one asset rises, the pool reduces your exposure to it; as one asset falls, the pool increases your exposure to it. If prices do not revert, you end up worse off than if you had simply held.

Assume, for illustration, you deposit into a cbBTC–USDC pool when BTC is $60k:

• $60k cbBTC (1 BTC)

• $60k USDC

• Total = $120k

If BTC rises 10% to $66k:

• Holding = 66k (1 BTC) + 60K USDC = $126k

In a 50/50 pool, arbitrage traders buy BTC from the pool as price rises. To keep its ratio balanced, the pool automatically reduces your BTC exposure and increases USDC. After a 10% move, impermanent loss can vary but lets say for this case it is ~0.1%, so your LP position would be roughly $125.9k (before fees), which compared to the 126k from just holding, it leaves an IL of 100$.

This is why MM pools can offer high APYs. Volatility drives trading activity and fee generation, but those fees must first compensate for the structural drag created by price divergence. LPs are effectively selling upside in rallies and accumulating downside in crashes, so when markets moon or collapse, that drag compounds quickly, and the attractive APY on the dashboard can vanish into the cost of being systematically on the wrong side of momentum.

• yoETH: ⬆️ Increased Lido stETH exposure. The allocation engine increased exposure to Lido stETH and Origin stETH redemptions as base staking yields stabilized and secondary liquidity improved. With borrow demand cooling across some leveraged ETH venues, native and redemption-driven stETH exposure offered

  

• Reduced allocation to Reserve dgnETH. Capital was scaled back from Reserve dgnETH as its yield compressed and fell below competing ETH strategies.

  

• yoUSD: Increased exposure to Maple credit and Morpho sNUSD markets.

  Capital rotated into Maple’s syrupUSDC/USDC pool and the Morpho sNUSD principal token market to capture more competitive USDC-denominated yield. Maple is currently offering improved spreads driven by borrower demand, while the Morpho market benefits from active PT-sNUSD loopers borrowing USDC against principal tokens.

  

 View all vault allocations ↗

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