The DeFi options protocol Opyn plans to launch a new product called SQUEETH to help DeFi users hedge against impermanent loss

Author: Samuel Haig

Original Title: 《Opyn to Unveil Squared ETH Token as DeFi Derivatives Race Heats Up 》

Compiled by: Hu Tao, Chain Catcher

The decentralized options protocol Opyn is preparing to launch its Squared ETH or SQUEETH token, which is designed to hedge LP positions based on ETH on AMM platforms.

Opyn developer Joe Clark stated in a blog post on December 17 that SQUEETH is a "new DeFi primitive" that allows stablecoin/ETH liquidity providers to earn trading fees without being affected by Ethereum price fluctuations.

This tool will become a new member of Ethereum's growing decentralized derivatives ecosystem, enabling DeFi traders to hedge using yield tokens, leveraged tokens, structured options products, and futures contracts provided by decentralized protocols. Currently, Opyn has not announced the expected launch date for the product.

1. Perpetual Options

SQUEETH was first articulated in an August research paper based on Opyn and Paradigm Research. At that time, SQUEETH was described as a "perpetual option" that provides returns based on other price curves.

Clark's latest blog post notes that SQUEETH is now designed to overcome impermanent loss associated with providing AMM liquidity. Developers describe SQUEETH as a "quadratic" tool that improves hedging against "non-linear positions," such as tools executed based on curves, like AMM LP positions.

AMM liquidity providers deposit two equivalent assets into a liquidity pool and receive LP tokens representing their positions, which can be used to redeem the underlying assets. However, price fluctuations of the assets lead to rebalancing of the AMM pool, causing LPs to suffer different or temporary losses.

Impermanent loss refers to the situation where, when the price of only one asset in the AMM rises, the AMM protocol rebalances the LP position, resulting in a larger amount of the underperforming asset compared to the original deposit of the liquidity provider, while the amount of the appreciating asset is smaller.

The price of SQUEETH is designed to hedge this difference, with expected asset price fluctuations being proportional to the impermanent loss caused by price volatility.

SQUEETH offers two core utilities for stablecoin/ETH liquidity providers. First, liquidity providers can purchase Squeets while holding their LP positions to offset impermanent loss, allowing them to profit from ETH price gains while earning trading fees.

2. Trading Fees

When used in conjunction with short positions using futures contracts, SQUEETH can also be used to hedge against declines in ETH prices while still earning trading fees. Clark stated, "We can hedge any non-linear risk exposure quite accurately with linear tools (futures) and quadratic tools (SQUEETH)."

Developers pointed out that SQUEETH can also be used to hedge LP positions on Uniswap v3, as the purchase of SQUEETH corresponds to variable curvature with the concentrated liquidity ranges provided by v3.

While Clark acknowledged that "some residual cubic and higher-order terms" would have a "small impact" on the effectiveness of the hedging, he concluded that "the overall effect of the hedging is very good."

Below is a comparison of the curvature of USDC/ETH, SQUEETH, and ETH short positions in Uniswap v3 LP positions.

Source: Joe Clark