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Having your assets work for you, generating income on your behalf, is the lifeblood of any economy, and the Bitcoin economy is no exception.
The aftermath of the 2022 crisis taught us that for the Bitcoin economy to flourish, self-custody and transparency are needed in conjunction with yield generation.
Without a dependable method to easily generate yield it is challenging to envisage Bitcoin's expansion to billions of users. Thus, there is a pressing need for a solution that combines the principles of decentralization with practical, risk-managed yield generation on Bitcoin.
Historically, earning yield on bitcoin has been a perilous journey.
The primary venues that provided investors an opportunity to earn on their BTC balance, traditional CeFi services, DeFi protocols and derivative markets have all failed or fallen short.
At Hermetica, we see this as an opportunity to build something better.
The Hermetica Earn vault was created in collaboration with institutional investors, prioritizing risk management and providing access to market-tested derivative structures.
To build something better, it’s important to understand the shortcomings of existing products.
Holding your bitcoin with services like BlockFi, Celsius, and FTX seemed like a great idea…until it didn’t. Earning yield by “lending” to these platforms was easy, streamlined, and seemingly safe. However, few understood that assets held on these platforms were being rehypothecated and lent out to unsecured borrowers, without any regard for risk controls or their clients.
To avoid these pitfalls, we created trust-minimized systems that eliminate human judgment in the borrow/lend relationship, and instead use automated systems to manage risk. Enter DeFi.
DeFi protocols emerged as a groundbreaking alternative to “TradFi” banking systems; automating the lending process and creating new avenues for retail customers to act like microbanks to the ecosystem.
By providing liquidity (bitcoin, ether, alts, stables) the lender helps to “make” the market and, in return, can generate a yield. However, the way these AMM protocols function comes with one major issue: They are essentially a “short volatility” trade where you, as the lender, is betting on prices maintaining a range.
Anyone who has been in the crypto space long enough knows that price stability rarely endures. Not even so-called “stable” coins have remained very stable (RIP UST/Luna holders).
Derivative strategies have long been a staple in traditional finance markets. Basic covered call strategies and dated futures carry trades have provided a stable source of yield for decades. Actively managed derivatives strategies remain a lucrative yield generator for institutional investors, but access to them remains limited to institutions and high net-worth individuals.
For those that can invest, there are still major shortcomings. Most notably, unlimited risk profiles that can leave a bitcoin holder completely exposed should prices break out to new highs, and short call strikes require them to sell all their bitcoin.