The delta-1 basis strategy enables holders of LSTs/LRTs to keep full exposure to the base asset (e.g., LBTC/weETH) while earning yield from perp funding spreads.

To achieve this, the vault borrows USDC to buy more of the base asset (up to 2x), while hedging away the excess exposure via short perps to remain delta-1.

The underlying yield strategy is very similar: the deposited sUSDe is used to buy spot ETH/BTC, while shorting an equal amount of perps. The main difference is that sUSDe holders have no exposure to any price movements in ETH/BTC (i.e., delta neutral).

The 5 components of the automated delta-1 basis strategy are illustrated by the following example:

An LBTC holder deposits 1 LBTC (worth 100,000 USDC) into the vault as collateral.

The vault borrows 100,000 USDC against the base asset it holds to buy an additional 1 LBTC, targeting a leverage ratio of 2x. As a result, the vault now holds 2 LBTC and 100,000 USDC debt.

Immediately after buying the additional 1 LBTC on the spot market, the vault hedges the excess exposure by shorting 1 BTC-PERP. The vault now has a net delta of 1.0.

The vault is now earning Lombard points on 2 LBTC, staking yield on 2 LBTC, Derive trading rewards, and yield from the perp funding spread, while paying a borrow rate on the 100,000 USDC debt.

If the funding rate or borrowing costs shift unfavorably, the vault reverses steps #2 and #3 until it holds 1 LBTC, 0 USDC debt, and 0 short perp exposure.

*Note that the vault executes steps #2 and #3 in small sizes to ensure good pricing.

The delta-1 basis strategy is best suited for current and future holders of the supported LSTs/LRTs (e.g., LBTC/weETH).

Participating in the strategy enables holders to keep full exposure to price movements in the base asset (e.g., LBTC/weETH), earn LST/LRT points and staking yield (up to 2x), while also collecting perp funding spreads.

Notably, although the vault borrows USDC, it will not be liquidated, even if the price of BTC increases 10x or drops by 99%. This is because the gains on one leg offset the losses on the other. However, there is liquidation risk in the event of a large LST/LRT depeg.

The main risk of the strategy is an unfavorable shift in the funding rate and borrowing costs (i.e., funding rate < borrowing costs), in particular when there is low spot or perp liquidity. In a situation like this, the vault may take longer to exit the trade and could result in short periods of negative carry.

The combination of a delta-1 basis strategy with yield-bearing LSTs/LRTs (e.g., LBTC/weETH), unlocks new sources of yield. The calculation is as follows: