Introducing Alpha Passive

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Indexes
  1. Introduction
  2. What is an index?
  3. Summary

Alpha Passive offers passive investment vehicles to help long-term investors capture DeFi trading fees, diversify their portfolios, and simplify their LP experience.

  • Alpha Passive is a suite of LP vaults for long-term investors. They are the first vaults to use an index as their LP strategy.
  • This means for the first time, investors can use passive investment vehicles to capture the trading fees within DeFi.
  • All vaults are the longest running, most secure, and highest performing products of its kind.
  • The vaults can also be used to benchmark the performance of other LP strategies.
  • All existing vaults offered by Alpha Vault will be included in Alpha Passive.

Introduction

Alpha Vault was the first LP vault to launch on Mainnet, and the first to use LP strategies to capture DeFi trading fees. Its success led to the creation of a new industry for LP strategies, and many providers within the industry are using the same techniques as Alpha Vaults to launch their own vaults.

To this day, Alpha Vault remains the only vault to consistently outperform, and the only strategy that is 100% on-chain.

Alpha Passive is the new home to the current vaults offered by Alpha Vault, because the vaults’ strategy is actually an index that helps long-term investors capture DeFi trading fees and minimise capital loss.

What is an index?

Strategies that satisfy three properties should be considered an index: (1) it is completely transparent, (2) it is investable, and (3) it is systematic ( ie it is entirely rules-based). The strategies used by Alpha Passive satisfy these requirements:

  • It is completely transparent

The vaults’ architecture, strategy, and performance metrics are on-chain and open sourced. It can be accessed and verified by anyone.

  • It is investable

Anyone can invest in any of the Alpha Passive vaults. Only an Ethereum wallet is required.

  • It is systematic

Alpha Passive has been live on Mainnet for nearly 10 months (for as long as Uniswap V3), and all the ranges were selected on-chain using a rules-based strategy, without any human intervention.

Alpha Passive are therefore the first vaults to use an index as its LP strategy, and all vaults have a long-term track record of outperformance, transparency, and convenience. Therefore, the Index Vaults offered by Alpha Passive share the same characteristics as other types of index investments (eg the S&P500), and this means for the first time, it is possible to build passive investment vehicles for LP strategies.

This key benefit, in addition to many others, are explained in the next section.

The benefits of Alpha Passive

Higher long-term returns

All indexes (eg the S&P500) have a long-term investment thesis (eg equity prices will increase), and generate higher returns by following a rules-based system (eg market-cap-weighted portfolios), rather than by making active decisions on what to buy and sell.

For Alpha Passive, the long-term investment thesis is trading volumes within DeFi will increase, and the rules-based system is an open source mean-reversion strategy that selects LP positions without human intervention.

By investing in an Index Vault offered by Alpha Passive, investors can earn higher long-term returns without having to actively manage their positions. This is shown in Alpha Passive’s track record over the past 10 months, during which it has consistently outperformed active managers and a full-range LP.

Easiest way to provide liquidity

Alpha Passive is the easiest way to provide liquidity to Uniswap V3, and therefore, it is also the easiest way to earn fee income.

Downside Protection

By investing in Alpha Passive, the investments (ie the LP shares) will outperform HODL when the market price decreases, and also outperform when the price increases, if the trading volume is high.

Lower volatility

LP shares are MUCH less volatile than either of the assets deposited by the LP. This means if LP shares are used as a collateral, it is possible to get a higher leverage or a larger loan, with lower risk of liquidation.

Benchmark performance against other LP strategies

Alpha Passive offers the first Index Vaults for LP strategies, with excellent coverage for the most popular pairs on V3 (ie ETH/USDC, ETH/USDT, and WBTC/USDC). As such, the vaults can be used as a benchmark for other LP strategies, similar to how index investments (eg the S&P500) are used as a benchmark for actively managed funds.

The risks

Prolonged price volatility

LP strategies in general are short volatility (ie investors are betting against volatility), and therefore, the LP shares are likely to underperform if the price increases or decreases for a long time without consolidating. Even though all Alpha Passive strategies have an inherent protection against volatility, there may still be capital losses (ie the impermanent loss) that cannot be recovered by the fees collected.

May underperform active LP strategies in the short term

Similar to all passive investments, Alpha Passive is for long-term investors, and may underperform actively managed LP strategies over a shorter time horizon.

Changes in the liquidity distribution

The distribution of liquidity on Uniswap V3 may change in a way that lowers performance, which means the strategy will need to be adjusted**. This has not happened yet (for over 10 months), but may happen in the future.

Strategy changes will be publicly announced in advance of any changes taking place.

**This is analogous to the S&P500 changing its indexing methodology to account for stock splits, special dividends, spinoffs, and other variables that could affect the index’s value.

Security risks

All vaults offered by Alpha Passive were audited, and did not have security incidences for over 10 months, but there are no guarantee it won’t happen. This is why all vaults are currently undergoing another audit, and a bug bounty is in place to ensure the code is being continuously monitored by the security community.

Summary

Alpha Passive are the first vaults to use an index as its LP strategy, and all the Index Vaults offered by Alpha Passive have a long-term track record of outperformance, transparency, and user convenience. These vaults can be used by developers to build passive investment vehicles, and by investors to capture DeFi trading fees, to diversify their portfolio, and to simplify their LP experience.

All the existing Index Vaults offered by Alpha Vaults met the criteria for inclusion in Alpha Passive, and Charm will be researching and launching more Index Vaults in the future.

If you are interested in working with Charm to build new indexes, or have any questions, don’t hesitate to reach out to us using the links below. We’d love to work with you to help long-term investors get the most out of their portfolios.

See you soon : )

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