Cega Finance is an industry-first DeFi exotic options protocol built on Solana and Ethereum mainnet. With serious backing from Venture Capitalist firms such as Pantera, Coinbase Ventures, and Solana Ventures, Cega’s mission to build safe high-yield investment opportunities for DeFi users is an attractive option for a variety of market scenarios.
This article investigates Cega’s inaugural exotic options product, the fixed coupon note, and describes in detail three financial products (or Vaults) that anyone can use to earn reliable USDC yield. We will assess the risk factors of each Cega Vault and use current market information to brainstorm strategies that will prove useful during various macro conditions.
Cega Fixed Coupon Note: An Exotic Option
In essence, Cega’s fixed coupon note (FCN) is a packaged exotic derivative offering based on a basket of underlying assets: notably, ETH, BTC, and SOL.
Put simply, a Cega FGN allows DeFi users who are at least moderately bullish on a 27-day timeframe to invest the stablecoin USDC in one of Cega’s audited Vaults. If the assets underlying each vault do not drop significantly in value to a price below a fixed percentage called a “Knock-In Barrier”, Vault investors receive their entire principal plus significant APY upon the expiry date of their Vault.
Cega FGNs and Vaults enable DeFi users to select a risk profile befitting their personal market bias and generate superior fixed yield (up to 200%+ APY) on 27-day stablecoin deposits, even if they have no understanding of TradFi puts and calls.
Downside Protection
Risk-management is quintessential in the world of financial derivatives.
Cega users are safe to enjoy the revenue yielded from Vaults with significant downside protection against market turns. In the most conservative Cega Vaults, one of the crypto assets underlying the FCN would have to fall more than 90% in 27 days to trigger a knock-in event. Otherwise, the entire principal is protected, as well as the promised yield.
Compounded Returns
At the end of the FCN term (e.g. 27-days), or when the underlying assets knock-out with positive price action, Vault users have the option to reinvest capital into a new Vault structure, thus compounding returns.
In a crab market - macro market conditions without definitive bullish or bearish bias - high-yield opportunities for stablecoin deposits are an effective way to preserve and grow capital in anticipation of future macro trends.
Governance: The $CEGA Token
In accordance with the maxims of DeFi, Cega incentivizes its community of investors, traders, quants, and statisticians to participate in the protocol’s growth. Cega’s roadmap includes implementation of a decentralized governance system with purview over a variety of parameters:
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Voting on product offerings - $CEGA token holders directly influence future asset baskets for vaults, as well as their risk tolerance
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Impact on statistical models - the Cega community is incentivized to learn more about exotic derivatives and influence the pricing capabilities of Cega Vaults
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Education - Cega’s growth plan begins with a set of derivatives experts, but continues with a process of onboarding educated users that will learn to flexibly represent market moves using derivative instruments
Vault Strategies - Pure Options, Bond + Options, and Leveraged Options Vaults
Cega currently offers a suite of three exotic options products for investors. Each Vault strategy defines a unique, varied risk-reward profile befitting of all investment styles.
Pure Options Vaults
Pure Options Vaults trade a version of the traditional FCN without an additional bond element. Without relying on bonds, investors can be assured that no user-deposited capital leaves the Cega smart contract.
The Pure Options Vault is an attractive option for investors who don’t want any exposure to lending risks.
Bond + Options Vaults
Bond + Options Vaults resemble TradFi FCNs: a portion of invested capital is lent to market makers in order to generate additional yield alongside the options premium.
A Bond + Options Vault is a conservative option for moderately- to positively-bullish investors who are willing to assume some small risk associated with lending to market makers.
Leveraged Options Vaults
Leveraged Options Vaults (LOVs) create pure options trading strategies allowing for high investor pay-off without requiring external liquidity used for leverage. Basically, LOVs enter Cega users’ staked USDC into multiple baskets instead of one. Multiple baskets generate magnified yield, but also carry magnified risk.
Using customized leveraged options, Cega LOV users can earn extremely high ROI (20% - 200%+ APY) on 27-day contracts. LOVs carry a higher risk, of course: higher leverage in an LOV makes the knock-in barrier more narrow. In a 5x leverage LOV where the knock-in barrier is 20%, a price dip greater than 20% in any of the underlying assets means that the investor will lose a portion of their capital upon the Vault’s expiry.
LOVs can be an attractive option for investors that are extremely bullish on a basket of assets for a certain timeframe, but should be avoided without extreme conviction.
Risk Assessment for Diverse Vault Structure
Let’s review in detail the types of risks associated with each of Cega’s Vaults:
Credit Risk
Credit risk occurs if a Vault market maker defaults.
This risk is most mitigated for investors using a Pure Options Vault or a Leveraged Options Vault.. A defaulted MM may not pay entirely the yield owed to depositors. However, 100% of deposited capital is collateralized onchain: it is not engaged in lending, and is not subject to credit risk.
Only Bond + Options Vault investors are exposed to credit risk on collateral. It should be noted that Cega is an industry leader in risk management practices, including signing ISDA legal agreements with all MMs, selecting only accredited MMs who pass KYC verification, and using Credora to actively monitor counterplay balance sheets.
Principal at Risk
All Cega vault investors take a moderately bullish perspective during their Vault period. Depending on the risk profile selected upon deposit, a significant market downturn that puts an underlying asset below the knock-in threshold will cause a loss of principal at Vault expiry.
Cega has performed thorough analysis of the past two years of knock-in events. Only 0.3% of Vaults have experienced a knock-in event of 50%. There have been no recorded incidents of knock-in events of 70%+ (e.g. all capital invested in Vaults with 70% or higher knock-in barriers has been returned in entirety).
Smart Contract Risk
Any DeFi user is necessarily exposed to the risk of smart contract vulnerabilities whenever depositing funds on-chain.
To ensure maximal security, Cega engages in DeFi best-practices, enlisting top firms to audit all of its smart contracts, and providing an ongoing retainer for new features.
The Ethereum smart contract was double audited by Ottersec and Zellic.
The Solana smart contract was audited by Ottersec and received security consultation from Zellic throughout the development process.
LOV - Magnified Loss Upon Knock-In
Due to the leveraged position, LOV investors face a higher loss of principal upon Vault expiry if a knock-in event occurs during its time frame. Such loss is magnified by the level of leverage (e.g. 2x or 5x), but cannot exceed the amount of invested capital during the vault deposit.
Did you deposit $1,000 to a 5x Vault only to see the underlying assets plummet 50%? Rest assured - you only lose your $1,000, and not your mortgage.
Flexible Investment Strategies
With a realistic understanding of associated risks, we can begin to develop valuable investment strategies that rely on Cega FCNs and Vaults.
As mentioned before, regularly investing in and compounding yield from conservative Vaults is an effective strategy to maintain and grow capital while waiting out market trends. Let’s take it one step further - what if you, an educated investor, has decided that the bear market is almost over, and that BTC ETH and SOL are about to enter a bullish trend for the foreseeable future?
Consider this strategy that I developed, but also recognize that it is not financial advice. DYOR.
Radiant Capital - Investing Borrowed USDC in Cega Vaults
Radiant Capital is a Layer-Zero-powered collateralized lending protocol built on Arbitrum. Users can deposit a variety of assets as collateral and borrow USDC against its value, earning APY for the amount deposited and the amount borrowed. Borrowed capital is at risk of liquidation if the price of the collateral drops and the borrowed amount is not repaid. It is speculated, but not confirmed, that Radiant will retroactively airdrop tokens to wallets that have provided capital and borrowed USDC over time.
Let’s say you think that the market has nearly bottomed out, and you are macro bullish on ETH. You deposit your ETH as collateral on Radiant and withdraw 30% of its value as USDC. Even if ETH rises 10x from here, you can pay off your original borrowed USDC balance to receive 100% of the current value of your ETH.
You now take your borrowed USDC, bridge it to Solana using Orbiter Finance (also suspected to retrodrop its users), and deposit that USDC into a Cega Vault befitting your appetite for risk. After 27 days, assuming your bullish bias was right, you can then withdraw your Cega investment + yield, or choose to compound it, along with any additional USDC borrowed from Radiant while the price of ETH rises.
You now are now 100% exposed to positive ETH price action during the bull market, earning APY from Radiant on the value of your ETH and the value of your borrowed USDC, earning APY from Cega (up to 200% with LOVs) for the value of your Vault deposit, and you are exposed to possible retrodrops from two leading EVM protocols.
With the flexibility of various Cega vaults, bull market investment opportunities like this are limited only by your imagination (and your appetite for risk).
Cega Community - Get Involved
Hopefully this article has elucidated the flexible use cases of Cega vaults. The Cega saga doesn’t end here - get involved today in preparation for $CEGA governance, and you will have an early role in contributing to the nascent growth of DeFi exotic derivatives!
Follow Cega on Twitter and join the conversation in Discord.
Visit the live Cega dApp to explore and experience DeFi FCNs using a variety of Vaults.
This DeFi deep dive is one of many educational articles published independently for DeFi enthusiasts like myself.
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See you out there, degens.
Cheers,
Locke
