Introduction

Y2K Finance’s most generic description is a decentralized “peg exotic marketplace” offering products to hedge, trade, leverage, or otherwise speculate on pegged assets. It is an incubator project of the New Order DAO, and will launch on Arbitrum. At launch, it will establish a new approach to reliable, trustless on-chain depeg protection.

The first available product will be “Earthquake” bringing binary options-style vaults for betting on or against depeg events. “Tsunami” and “Wildfire” will follow soon after and introduce a GLP-esque product powered by CDOs as NFTs and a secondary market for trading Earthquake risk positions (respectively).

In the long run, Y2K intends to build a comprehensive product stack for market participants seeking exposure to the performance of stablecoins, liquid staking derivatives, and token wrappers.

The Problem

Pegged assets naturally risk losing peg at any moment. No matter the reason for depeg events, they all ironically have one common denominator… people get pegged! This leads to a demand not only for some form of coverage, but tools for speculating on pegged assets as well.

The market for these products is extremely bare, leaving users without an outlet for hedging against their pegged assets depegging. Not only this, but a market for hedging or speculating on something like the Terra collapse would have brought about a huge profit opportunity for many.

The Goal

Y2K will bring together both sides of the trade on pegged assets: those betting on a depeg occurring and those betting against a depeg occurring. It strives to natively integrate CAT bonds for regular DeFi investors, DAOs, and institutions alike looking to buy and sell coverage. So not only can Earthquake vaults be used by individuals looking to hedge or speculate, but Earthquake can scale even further to enable protocols to fully customize “insurance” vaults and sell protection on their native pegged asset(s).

Y2K will keep expanding its ambitious cluster of products with additions like depeg forecasting, options, insurance vault auto-compounders, peg arbitrage vaults, a lending market for risk tokens, multichain support, and more.

How Does It Work? Y2K’s Core Product Earthquake

Earthquake vaults will only accept ETH collateral and each follow a basic three-component format:

Epoch: the start and end date of a vault lockup period

Strike: if a vault’s asset deviates below strike price, a liquidation event will trigger

Pegged Asset: the underlying asset for which risk is being traded

Users can play either side of a pegged asset on Earthquake. Depositors of the Hedge vault pay a premium to hedge against a potential depeg event, while Risk depositors are their counter-party who risk their collateral in exchange for premium payments.

Hedge depositors choose a strike price and are instantly paid out with the ETH in the Risk vault should the vault’s asset depeg below strike. With that said, hedgers always lose their initial ETH deposit to pay Risk depositors a premium even if a de-peg occurs.

Risk depositors similarly choose a strike and have their ETH deposit liquidated if a de-peg occurs below the strike price. They are paid a premium every epoch, only receiving their ETH deposit back if the asset remains above strike the entire epoch. Either payout is determined by the proportion of TVL between vaults, which brings two primary scenarios.

If there is more ETH in Risk (let’s say at a 100E-10E ratio), then Hedge depositors will receive roughly a 10x payout relative to their deposit (minus fees). Similarly, should there be more ETH in Hedge, then Risk depositors will receive a 10x premium payout and Hedgers will only receive a 0.1x payout. Although scenarios exist where hedgers may not be at least fully covered, the chances of this are diminished with the attractive arbitrage opportunity up for grabs to market participants.

Some of the Collateral vault contents are strategically deployed during every epoch to earn additional yield for depositors. Fees are taken from all payouts/yield strategies and collected by the Y2K Treasury, bringing constant cashflow to the protocol and token holders whether de-pegs occur or not!

How Does it Work? Analyzing Tsunami

What we know about Tsunami so far is that it is an extremely loose concept. As it stands, the idea is to create a CDO-powered debt market that will model GMX’s GLP product. It is expected to accept a range of collateral into a host liquidity pool such as stablecoins, ETH, and derivatives. This collateral is then used to take out debt (e.g. mint stablecoins) and earn yield, and depositors receive a “CDO NFT” to represent their deposit and corresponding cashflow.

On top of this yield, the CDO NFT passes back exclusive access to a bot for liquidating under-collateralized Tsunami positions. This bot captures MEV in the process to grant additional yield to the liquidator.

Tsunami leverages Earthquake ETH collateral to backstop positions near liquidation before their CDO NFT is put up for auction. It is speculated to use strategies like auctioning order flow and arbitraging pegged collateral, harboring a diverse source of real yield for Tsunami depositors.

How Does it Work? A Look at Wildfire

Wildfire is yet another facet of Y2K that allows users to trade tokenized Earthquake risk positions on a secondary market even after an epoch’s initial deposit period has ended. 0x Protocol has stated before that they will launch on Arbitrum after the release of Arbitrum Nitro. 0x will power Wildfire’s central limit order book (CLOB), so Wildfire will be ready for launch once this happens.

With Wildfire, users can effectively “take profit” or “stop out” during any point in an epoch by trading these tokenized vault positions. Whether they change their mind or just missed a deposit period, users still have a way to hedge or take on new risk. However not without penalty, as tokenized positions are only redeemable for just a small fraction of the actual payouts to epoch-long depositors.

The Team and Partnerships

As a New Order DAO incubator project, Y2K will have the support of the usual DeFi bigbrains like 0xSami, dcfintern, knowerofmarkets and more. It recently announced a partnership with Sturdy Finance which will use Y2K to offer peg insurance to its users.

Because it is un-launched, Y2K has no other officially established partnerships, but its framework presents the opportunity for seamless integrations of other protocols by exclusively offering them fully-customizable insurance vaults for their pegged assets.

Tokenomics

$Y2K Price: N/A

Market Capitalization: N/A

Circulating Supply: N/A

Total Supply: N/A

While there are little details from the team, it has been said not to expect Y2K’s token to release alongside the protocol at launch. There are no details on a public sale yet, but as of right now both a “Champions” role and a “Doomslist” exist in the Y2K Discord.

It is also known that Y2K will pursue an Initial Farm Offering (IFO) model for fairly distributing $Y2K, emitting escrowed $Y2K for Earthquake depositors over 137 weeks total. This esY2K is unlockable once the release of vlY2K and $Y2K bonds hit, expected sometime later this year.

Most importantly, what we know is $Y2K will follow the widely-supported veToken model for protocol governance and collecting fees. As such, the potential for a bribe market for veY2K holders is naturally established too. Here’s all the released details from Y2K’s first Medium post:

Fee Revenue a. 5% fee from risk collateral yield. b. 0.25% fee from premiums and collateral deposits.

veY2K a. Conviction locking for our strongest supporters and heaviest users. b. Emissions allocations to incentives usage of specific vaults. c. Revenue boosting based on lock duration. d. Marketplaces for veY2K.

Governance and Bribery a. Governing power over addition of new assets and derivative products. b. Opportunities to generate yield by selling rights to projects seeking inclusion.

Conclusion

Ultimately, Y2K meets a demand that has little to no product supply. Earthquake’s hedging vaults, Tsunami’s capital efficient approach to debt and onchain liquidations, and the Wildfire secondary speculation market all accommodate this need in new, innovative ways.

Not only that, but this product suite generates a steady cashflow for the protocol and token holders alike, appealing to the “real yield” narrative spinning up in DeFi today. The exigency is there, and the expansive tool-belt that Y2K offers for speculating on pegged assets seems like the perfect solution.

Header Artist Credits to ArrogantKei

Special thanks to Bumzy and crypwalk

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DISCLOSURE: I hold the $Y2K token and am affiliated with Y2K Finance. I was not asked to write this article. The information provided in this article is solely for educational purposes and should not be considered financial advice. The views expressed in this article are my own and do not necessarily reflect the official policy or position of any company or organization. I have not been compensated in any way for writing this article. Readers should always conduct their own research and seek professional advice before making any financial decisions.