"Manage risks, and returns will follow" is one of the few widely accepted principles in investing. Today, we're introducing ARP2, the second DeFi project by Airdrop Reference, which embodies this principle to the fullest.

ARP2 is a project designed to manage risk and generate returns through extreme rebalancing, and it’s open to everyone free of charge. By joining ARP2, you not only have the chance to earn through rebalancing but also receive Airdrop Reference Points (1 point per day for each ARP2 held), which are described in more detail in the Airdrop Reference White Paper.

Now, after almost two months of testing, how has ARP2 performed?

Very well. ARP2 has delivered over 6% in extra Bitcoin returns for me.

1. ARP2’s Outstanding Performance

Since its inception on August 29, 2024, ARP2 has achieved a cumulative increase of 16.62% in just under two months.

During the same period, ARP2’s main component, TBTC, rose by 9.97%. TBTC is a decentralized BTC, which we’ll discuss in detail later.

ARP2’s secondary asset, JLP, increased by 3.88%. JLP is a tokenized portfolio launched by the decentralized exchange (DEX) Jupiter on Solana, similar to a crypto fund. More details on this will also follow.

A simple comparison reveals that ARP2’s strategy of asset allocation and extreme rebalancing has allowed it to outperform both BTC and JLP, surpassing BTC by 6.65% and JLP by 12.74%.

So, how does ARP2 achieve such remarkable performance? What’s the principle behind it?

2. What Drives ARP2’s Performance?

Is it really all about rebalancing? Yes.

Rebalancing sounds a bit mysterious, but it’s actually a simple and effective investment strategy. Put simply, rebalancing means periodically adjusting the weight of each asset in a portfolio based on market changes to maintain target ratios. This approach is designed to spread risk while capitalizing on market fluctuations.

Imagine you’re investing in two volatile assets, A and B. These assets rarely sit still: in a bull market, one might soar while the other lags behind or even declines slightly. And in a downturn, the two could experience different drops.

A rebalancing strategy is like a diligent caretaker, constantly adjusting the balance between these two assets so your overall returns are more stable and higher. When A rises significantly, a portion of the gains is shifted to B, and when B rebounds or A cools down, funds are readjusted. By going back and forth, the returns increase as gains aren’t tied to just one asset.

In ARP2, TBTC and JLP play the roles of A and B, which is why ARP2 has outperformed them both.

The underlying principle here is simple: “Buy low, sell high.” In this context, “low” and “high” are relative to other assets in the portfolio. Yale’s endowment fund strategy is a classic case of this approach.

In 1985, David Swensen became the chief investment officer of Yale’s endowment fund. By adopting a successful rebalancing strategy, Swensen achieved an average annual return of 11.4%, even amid the financial crisis of 2008.

In short, a rebalancing strategy is about diversified investment, buying low, selling high, and making periodic adjustments.

Managing risk brings returns naturally. Rebalancing is a direct application of this philosophy.

This is also why ARP2 can deliver not only gains from price increases but also additional profits through market volatility, maximizing returns.

Having explained the principles of rebalancing returns, let’s see how the Symmetry platform enables ARP2’s extreme rebalancing.

3. How Does ARP2 Rebalance?

With the help of Symmetry, ARP2 rebalances every hour, selling assets that exceed their target weight by over 1% and using the proceeds to buy undervalued assets.

Let me explain with an example: click the link to view ARP2’s transaction records. You'll see two transactions with an interval of 1 hour.

Click the record from 5 hours ago. You’ll see that in this transaction, 0.00003041 TBTC was exchanged for 1.993007 USDC.

In the record from 4 hours ago, 1.991015 USDC was exchanged for 0.588784 JLP.

Symmetry handles all these adjustments automatically—I didn’t intervene at all.

Symmetry is an innovative on-chain asset management platform with a current TVL of $5.38 million. It allows users to manage crypto portfolios effortlessly, diversify assets, and maximize returns through “extreme rebalancing,” with rebalancing available as frequently as every hour. ARP2 takes advantage of this feature.

This hourly rebalancing is possible for two reasons:

• First, Symmetry is built on Solana, known for its low transaction fees;

• Second, Symmetry earns intermediary fees on rebalancing trades, about 0.05% per transaction, which accumulates significantly over time.

From its trading volume of $250 million, Symmetry has earned $125,300 in transaction fees so far.

However, users creating asset portfolios do incur costs, including protocol creation fees, which are a key source of Symmetry’s revenue.

Creating ARP2 cost me 0.28902 SOL, which is around $50 at the price of $170 USDC/SOL.

Now that we’ve covered the mechanics of rebalancing, let’s discuss why I chose TBTC and JLP for ARP2.

4. Why TBTC and JLP?

I didn’t choose the more common WBTC for one reason: it’s centralized. For details, see: What If WBTC Is No Longer Reliable?

4.1 Decentralized TBTC

TBTC is a decentralized Bitcoin token created on Ethereum. However, unlike traditional “pegged” tokens, TBTC uses a decentralized minting process: users themselves can lock real BTC on the Bitcoin network through smart contracts to receive an equivalent amount of TBTC.

Through this minting process, TBTC retains BTC’s price characteristics and scarcity, while also allowing BTC to participate in Ethereum-based DeFi activities like lending, trading, and staking. This innovation lets Bitcoin users utilize BTC without selling it, increasing asset liquidity.

The Keep Network, which manages BTC custody and exchange via distributed nodes, reduces centralized custody risk. Since TBTC is decentralized, it’s not reliant on any single institution, greatly enhancing security and user autonomy.

4.2 JLP Instead of ETH

JLP was chosen instead of ETH for rebalancing. Its current price is 3.682, and simply holding it yields an annual return of 28.84%.

I’ve covered JLP in detail in my introductory guide to perpetual contracts. Here’s a brief recap:

The JLP token (Jupiter Liquidity Provider) represents a share in the liquidity pool (JLP Pool) on the Jupiter platform, consisting of popular crypto assets like SOL, ETH, WBTC, USDC, and USDT. This pool provides leveraged funds for traders. When traders use leverage on Jupiter, they borrow from the JLP Pool.

JLP’s value is influenced by three factors:

• Portfolio Value: JLP’s value fluctuates with the market value of these five assets.

• Trader Profits/Losses: Since the pool acts as the counterparty to traders, their profits or losses affect the pool’s overall performance.

• Fee Revenue: 75% of the fees from leveraged trades (opening, closing, slippage, lending, and transaction fees) are distributed proportionally to JLP holders.

The annual yield (APY) for JLP is based on the revenue from trading fees, which are reinvested into the pool every hour. This model allows JLP holders to profit continuously from trading activity, as shown by the long-term uptrend in JLP’s price, illustrating that the market is hard to beat.

JLP provides a way to align with market forces, so it’s a worthy choice in my rebalancing portfolio.

5. How to Participate in the ARP2 Project

Getting started with this project is simple; you only need to deposit USDC. Here’s a quick overview:

5.1 Joining ARP2

Unlike ARP1, ARP2 is based on Solana, so you’ll need the following:

• Wallet: A Solana-compatible crypto wallet, like Phantom;

• Browser: Chrome is recommended;

• Crypto assets: Make sure you have USDC and at least 0.1 SOL as reserve funds and for gas fees.

Click the provided link, which will open the page shown below.

Enter the amount of USDC you wish to deposit and click the Deposit button. A confirmation window will appear.

Note the 0.00562 SOL fee indicated by the arrow in the image. This is a temporary hold that will be refunded. After clicking Confirm, a new prompt will appear, as shown below.

Here, you’re asked if you’d like to rebalance. Since ARP2 rebalances hourly, you don’t need to click Rebalance; simply click Mint instead.

Look at the arrow in the image, indicating the refund of +0.00562 SOL, which was the amount held in the initial confirmation. Click Confirm to complete your deposit.

5.2 Exiting ARP2

First, ensure your Solana wallet has at least 0.1 SOL, as this will be needed later.

Redeeming ARP2 is as straightforward as joining. On the right side of the page, click the Redeem tab, which will open the page shown below.

Enter the amount of ARP2 you want to redeem, then click the Redeem button, which will trigger a confirmation window in your wallet, as shown here.

The arrow shows a fee of -0.07194 SOL, which is a temporary hold and will be refunded shortly. Click Confirm in this window, and a new prompt will appear, as shown below.

If you don’t want to convert your TBTC and JLP into USDC, simply click Claim in the window above to proceed. A final confirmation will appear, as shown below.

The screen shows that redeeming 0.1 ARP2 will result in 0.0001 TBTC and 1.0312 JLP. Note the arrow showing the refund of +0.07194 SOL, which was previously held. Click Confirm in this final window to complete your ARP2 redemption.

Conclusion

ARP2’s returns stem not only from asset price gains but also from market volatility, allowing for a more composed and sustained approach to crypto investing.

Nonetheless, even with ARP2’s impressive performance, I

don’t recommend going all in. Never put all your eggs in one basket; limit any single crypto investment to 5% to 20% of your total assets.

As mentioned, manage risks and returns will follow. Rebalancing manages risk, and limiting exposure to any single project is also a form of risk management.

Finally, here’s the ARP2 project address: CTo82xKyKZczd1WQbDeua5Yz1HmTTUvb5x47QWZbFnLz. I’ve already donated 2 ARP2, worth around $250, as my second contribution to the Airdrop Reference project.

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About Airdrop Reference

Airdrop Reference is an innovative blockchain education and promotion platform aimed at spreading basic blockchain knowledge and helping ordinary users understand and participate in the development of blockchain technology. The mission of this project is to lower the entry barriers to blockchain, promote high-quality blockchain projects, and allow more people to enjoy the benefits of the Web3.0 era.

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