General
For general questions frequently asked about the stSTXearn strategy and token.
Q. How does the stSTXearn strategy work?
A. The strategy alternates between buying and selling options based on a simple trend following system (5 week moving average; MA).
If in a positive trend (price > 5 week MA), we buy a binary call strip (20 and 50 delta) —> investors get cheap upside exposure to a naturally upside biased asset like STX.
If in a negative trend (price < 5 week MA), we sell a binary call (33 delta) —> investors get a base yield from the premium but without tail risk.
Q. Is the stSTXearn strategy open to the public?
The stSTXearn strategy is currently only accessible to a private whitelist.
We are exploring the possibility of opening the strategy up publicly.
Q. Why STX? Why not BTC or an alternative?
A. Stacks is the first smart contracting layer for Bitcoin and by extension the natural home of Bitcoin DeFi.
The Clarity smart contracting language has an optimal mix of expressibility and built-in security that streamlines the development process of non-custodial, trust-minimized applications like ours.
We've also backtested all assets and have strategies that perform well for BTC (as well as other assets). Similar strategies like the binary call strategy described above as well as European Reverse Knock-outs (ERKO) and European Reverse Knock-ins (ERKI).
We have plans to bring BTC denominated strategies to market with/after the sBTC release.
We’re always thinking about adding new assets and strategies but this takes time as we run our detailed backtests to ensure everything is to our standards.
We can also trade options for a different asset than the deposit asset. For example, we could do a stSTX denominated strategy that trades BTC options but we're keeping it simple and focused on STX for now.
Q. What inspired the stSTXearn strategy?
A. Our approach has a number of unique angles (strictly no tail risk, trend following, fully non-custodial, BTC focus, tokenization, etc.) that have not been done before in other ecosystems.
That being said, our main inspirations were products available on the Solana and Ethereum ecosystems. While those products made the grave error of exposing their depositors to the Turkey problem (tail risk) but their overall approach and early success gave us a number of good ideas to work with.
Q. How are the stSTXearn fees structured?
A. The fee structure consists of a 1% annualized management fee and a 10% performance fee. If the weekly strategy is profitable, the weekly performance fee is charged on the premiums earned and the weekly management fee is charged on the assets managed by the strategy. If the weekly strategy is unprofitable, there are no performance fees charged.
For more information about fees, please refer to this section.
Q. Are depositors to the stSTXearn strategy at risk of loss of principal, impermanent loss, or other market related risks?
A. In the stSTXearn strategy the maximum portfolio loss is 2% in any epoch.
Hermetica sells options which typically comes with taking on a lot of tail risk. We mitigate this risk by only selling binary options. The binary option structure allows the strategy to generate yield without any significant tail risk (the max risk per epoch is hard coded to 2%).
Q. Is upside limited in the stSTXearn strategy?
A. The strategy does not limit your upside, the max risk per epoch is strictly limited to 2%. No other tail or hidden risks.
In a bull trend the strategy buys a binary call strip with one at-the-money barrier and one far-out-of-the-money barrier. The ATM option is designed be hit frequently whereas the OOTM option captures big moves. The payouts for binary options are always defined.
In a bear trend the strategy sells binary call options. This brings a steady yield without tail risk exposure. You can read about the strategy in more detail here.
Q. What does fully non-custodial mean in the context of the stSTXearn token?
A. Simply put, it means that we can’t access more than 2% of funds per epoch and neither would an attacker.
Even if all our systems are compromised, including deployer and admin keys for our smart contracts, an attacker would not be able to access the funds in the strategy.
Q. Where does the yield come from? For someone to profit, someone has to lose - who is losing?
A. Market makers pass on the risk of the options they trade to the rest of the market, their profit comes from the spread. The risk is distributed across the market. There are always winners and losers in every market, but it's not like a single person/entity is taking the other side of our position.
The primary differentiation here is that we're using binary options, which creates much clearer payout structures vs naked options. Long options has a losing profile over time because you're actually buying expensive volatility. Buying a binary call strip however eliminate the volatility aspect of the long call, and instead give you a pure probability structure.
Q. Is the stSTXearn strategy backtested?
A. Yes, we arrive on the final structure after going through a litany of strategies.
The backtest results of the chosen strategy are shared publicly and speak for themselves in our opinion (obviously not a guarantee of future returns).
The historical performance of the stSTXearn strategy can be found here.
Q. How did you guys do your backtest? What assumptions did you make since historical vol data for altcoins is hard to come by?
A. Market makers won’t give us historical data and no one was quoting STX historically, so our backtests inherently contain assumptions.
We've done two backtests:
With vol. estimates based on BTC. We use historical BTC vol + an exponential buffer for altcoins. So, for example, 40 BTC vol is 44 altcoin vol, 100 btc vol is roughly 130 alt coin vol.
With fixed strike prices.
With fixed strike prices:
Long 50 delta at 1% above spot
Long 20 delta at 15%-17.5% above spot (15% begin of trend / 17.5 3 weeks in bull trend)
In a bear trend (price > 5 week MA):
Short 33 delta at 7%-10% (10% begin of trend / 7% 3 weeks in neutral/bear trend)
We assume 67% funding in a bull trend and 5% funding in a bear trend.
To note is that the results from the second backtest (fixed strikes) gives worse / more conservative results, so this is the one we are using in our communications.
Our backtests are a work in progress. It’s important to remember that we are conservative in our assumptions and we've a good understanding of what prices don't work and will stop trading for the strategy if we get quoted prices above expectations.
Q. Where can I see historical performance?
A. You can review historical performance from the strategy's analytic's page. You can also review historical backtest data for specific tokens in the respective sections of the docs
Q. What asset are yields paid in? How often are rewards distributed?
A. Yields are paid in the same underlying deposit asset. Yield for the stSTXearn strategy is paid in stSTX.
The strategy runs on a weekly epoch; profit and losses are realized on a weekly cadence and accrue automatically to the token.
Q. Why automation via smart contracts?
A. A certain level of financial acumen is required to execute the strategies successfully and therefore, in the traditional financial system, they have mainly been employed by financial institutions and sophisticated high net worth individuals.
We believe that by automating the execution using Clarity smart contracts, we can make these strategies available to a much wider audience.
This is a crucial step towards a truly open and democratized financial system - a financial system that makes sophisticated options strategies accessible to anyone with a Bitcoin/Stacks wallet, all without needing to give up custody of assets.
Q. What are structured products?
A. Structured products are pre-packaged investments instruments that give easy access to derivatives strategies to achieve specific investment goals, like generating yield on Bitcoin.
Q. Is stSTXearn multichain?
A. The stSTXearn strategy only operates on the Stacks blockchain.
USDh will be released on Bitcoin L1 via Runes and we're actively monitoring other L2s and will opportunistically launch our products on chains that gain traction.
Q. Is Hermetica audited?
A. Yes, the stSTXearn contracts have been formally audited by Thesis Defense. All issues reported in the audit report have been resolved. Future audits are planned and we're committed to security in all our engineering processes.
Despite being audited, we still advise our users to exercise caution and only risk funds they can afford to lose.
Q. Is Hermetica always going to use the same oracle for the contracts?
A. Our current contract uses Pyth for our oracle.
We may choose another oracle for future contracts. The price validation may change slightly, but the principle for our oracles of choice remain the same: A trusted decentralized oracle provides the attestation / signature for a price data payload which is then verified on-chain.
Q. What is the risk of faulty or malicious price data provided by the oracle?
A. The price data is only used for profit calculations, it can't be used to transfer funds.
The worst scenario would be an epoch with 0 profit. In that instance, we should remediate with the counterparty who sold us the options contracts off-chain.
Q. Is there counter-party risk by using market makers for the options?
A. Our strategies have risk built in.
The stSTXearn strategy, for example, only allows for 2% per week to be deployed. If the market maker / counterparty is insolvent or nefarious the maximum depositors are able to lose is 2%.
Hermetica's contracts are also designed so that any funds are unaffected in the event of a compromise.
Q. What happens in the counterparty is delinquent?
A. If the counterparty is delinquent the epoch would be transitioned manually.
If the counterparty would like to remedy, they could use deposit-funds to make the correct payment.
Q. Is the epoch time frame deliberate? Will Hermetica allow for changes in the epoch time-frame depending on volume, user demand, etc.?
A. While the epoch time-frame can be changed from a purely technological perspective, they are chosen deliberately.
In fact, the epoch time-frame is integral to make each strategy work. The epochs for each strategy are selected for their significantly higher backtested APY.
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