OnX Alpha Vaults

OnX alpha vaults is the third and final core pillar of the OnX Finance product offering complementing OnX Lending and onSynthetics.

As OnX Finance’s objective is to become a platform agnostic hub for Internet bonds and interest earning tokens, OnX alpha vaults are an essential piece to enable users to unlock the potential of composability of passive income in DeFi.

What are Internet Bonds?

A Bankless article from November 5th 2020 defines Internet Bonds as digital work agreements involving:

1) lending capital for the right to provide work and earn rewards (perpetual bond characteristic)

2) co-owning the Proof-of-Stake protocol (equity characteristic)

3) providing public infrastructure (node validators) by consenting to a set of rules in exchange of payment of rewards.

The Internet Bond market potential

The Proof-of-Stake staked value market accessible to Ankr was approximately $102bn mid-March, which was at the time 4 times larger that the Total Value Locked (TVL) in Decentralized Exchanges and almost 8 times larger than the TVL on lending platforms.

OnX Finance started onboarding ETH2 bonds from Ankr (aETH) and will onboard additional ETH2 bonds from other platforms as an agnostic platform, but the current market size of ETH2 bond is still at the moment limited when compared to other proof-of-stake platform where most of the value is staked and not interoperable with DeFi without Internet Bonds.

How to unlock the full value of Internet Bonds?

Liquid staking through synthetic staked tokens is not only a way to provide liquidity to ETH staking, but also an essential element for staked tokens to earn additional passive income within the DeFi ecosystem through liquidity farming, bonus rewards and lending.

Unlocking the composability of passive income potential from Proof-of-Stake staking rewards needs to be wrapped into an Internet Bond (synthetic staked token) to further interact within the DeFi ecosystem.

Prime Brokerage is often referred as a package of services offered by banks to Hedge Fund managers. For example, those banking services enable Hedge Fund managers to use any bank as custodian for its assets, trade with any broker, and borrow funds with several banks at the same time in an open architecture.

Retail investors often do not have access to the same variety of financial providers.

Staking tokens with CeFi (e.g., Kraken, Coinbase) represent similar limitations than most retail investors face in traditional finance. Internet Bonds makes staked assets liquid and interoperable within DeFi, which allows investors to enhance their passive income potential.

Proof-of-Work mining vs. Passive income in DeFi using Proof-of-Stake staking

Most institutional investors currently consider Bitcoin mining as a safer strategy to generate passive income, which is perceived as a safer strategy during bear markets. However, Bitcoin mining becomes increasingly competitive, which requires miners to operate in countries with lower cost of electricity, which often have increased geopolitical risks (e.g., Kazakhstan, Russia, Georgia, etc.).

On one hand, mining equipment required to mine Bitcoin is a depreciating asset, not very liquid and difficult to leverage.

On the other hand, passive income in DeFi requires to stake assets that tend to appreciate over time, easy to leverage, accessible to a wider range of investors and provider higher returns than Bitcoin mining.

OnX alpha offering

The first series of OnX alpha will be ETH2 vaults using Liquidity Pool tokens to maximize the potential of composability of passive income, while offering low impermanent loss risk.

The first vault will be a SushiSwap Liquidity Pool token with the aim to reinvest the Sushi farming rewards as well as xSushi farming rewards on OnX.

The aim of OnX alpha ETH2 vaults is to provide compounded APY on ETH2 bond automated passive income strategies. The benefit for vault capital providers would be to split the gas fees cost related to reinvesting the periodical rewards across all vault capital providers, as well as automate the passive income strategy for greater conveniency.

Our vision is that OnX alpha vaults should be perceived as ETH2 automated asset management investment modules that can be used to diversify across a wider range of ETH2 bond passive income strategies to mitigate liquidity risk in one single liquidity pool.

Furthermore, as the impermanent loss of OnX alpha ETH2 vault strategies will be low, the objective would be to consider OnX alpha vault tokens as collateral to enable using OnX lending (borrowing ETH).

Synergies among the three core pillars of OnX Finance product offering

As OnX alpha vaults come to complete the core OnX Finance product offering, each product range — OnX lending, onSynthetics and OnX alpha — is intended to create demand for each other in line with the concept of composability of passive income.

As such, the main vision short-term is that OnX vault capital providers should be able to use OnX alpha vaults (several weeks after initial launch) as collateral, which creates demand for OnX lending. Similarly, after upgrading onSynthetics to reach onEthereum (onE) price parity vs. ETH, onE borrowing should be enabled to allow users buying ETH2 bonds borrowing onE as an alternative to ETH.

Next steps

We expect to completion of the OnX alpha ETH2 vaults to occur during the month of May. More details will follow about the exact date of the release.

The vaults will include:

aETH/ETH SLP
stETH/ETH SLP

The aim of those strategies is to farm the SLP tokens on Sushiswap, as well as automate the following steps periodically:

a) stake the Sushi rewards on SushiSwap,

b) farm the xSushi tokens on OnX Finance, and

c) stake OnX rewards

Benefits:

The gas fee cost of these strategies is amortized among all vault capital providers, which makes the strategy more cost efficient
Automate reinvestment process
Higher APY through compounding farming rewards
Possible to collateralize OnX alpha ETH2 vaults in the future (e.g., aETH/ETH SLP, stETH/ETH SLP)