D2.finance Response to Arbitrum DAO Delegates’ Feedback and Revised Proposal
Executive Summary:
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ETH++ and RODEO++ vaults from February 23rd to March 8th were in withdraw only mode (with no trading activities). The spike on the data, mentioned by delegates, was only due to the fact that vaults were not within the trading epoch. As of April 18, we have now traded over $11.35 million volume across Arbitrum protocols + $14mil volume in lyra options alone with a 75% ROI on the ETH++ strategy since inception, demonstrating our ability to drive volume and perform without incentives per our strategy mandate.
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Outside the periods when the vaults were closed, we observed an organic and accelerating trend in volumes even spread out in different weights between different protocols, which correlates with the available opportunities.
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We have provided detailed descriptions of our ARB++ strategy and its positive impact not only on the protocols we are integrated with but the ability to act as a buffer for ARB, especially at scale
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Based on a simple regression analysis of historical data, our milestones are not only achievable but also conservative, especially when considering Lyra’s trading volumes, which are not reflected in Dune data.
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Evaluating other protocols who passed the screening, our metrics in terms of TVL / ASK or Volumes and especially retention stickiness rates look robust, as ETH++ has 100% retention.
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D2 Finance will update our Grant Multi-sig address to 0x6f1e46C80b8e1C528B05801a5668C01D9f99d258
Grant Size Modification: D2 Finance is committed to taking feedback from the council seriously and has such amended our grant ask to 100K ARB
LYRA++ Vault Data in Million USD notional ( we traded about 1000 ETH contract since March 3rd)
Raw inputs from https://api.lyra.finance/public/margin_watch?subaccount_id=1207
As Lyra is not compatible with Dune, all screenshots for manual verification are in appendix.
ETH++ Vault performance has returned 75% ROI since inception and notably provides excellent returns during vs ETH during marketing volatility and downturns per strategy mandate.
Detailed Feedback from D2:
We want to take this opportunity to thank our advisors (Castle Cap) and the screening council for their valuable feedback regarding our proposal. Below we address the feedback and implement suggested changes to strengthen our proposal towards the overarching goal to grow D2 and Arbitrum through mutual benefit and composability within the ecosystem .
1. Addressing the “Spike” in Metrics and Achieving Stickiness
Delegate’s Concern: Metrics spikes and concerns over user retention and liquidity stickiness post-incentivization.
Response: The observed ‘spike’ in D2 Finance’s trading metrics during late February was not related at all with GMX grant simply the vaults were not trading (only small helper vaults like Lyra ++ were trading).
Specifically, the temporary cessation of trading activities for our ETH++ and RODEO++ vaults from February 23rd until March 8th was aligned with broader operational objectives, including refining our application for the Arbitrum DAO grant, enhancing our front-end interface, and bolstering our trading team with experienced hires, such as a new Chief Risk Officer.
This period of strategic pause was instrumental in solidifying D2 Finance’s foundations for long-term growth within the Arbitrum ecosystem. This pause was fully communicated in our discord, used as the primary communication channel to vault participants.
It’s noteworthy that during this interlude, we maintained a 100% retention rate for ETH++, underscoring the deep trust our users place in our protocol’s direction and management. Furthermore, the decision to temporarily pause Rodeo++, despite its impressive performance (yielding an 11% return in a single month, equivalent to an annualized rate of over 100%), was a testament to our commitment to optimal resource allocation and ecosystem synergy, particularly in response to the unavailability of sufficient leverage for the platform’s strategy.
Our approach to protocol management—characterized by careful security measures and strategic cap adjustments—has not only ensured operational security and performance but has also cultivated a loyal user base appreciative of our long-term vision and responsive strategy adaptation.
Moreover, our trading strategies are designed to be flexible and responsive to market conditions. For instance, our strategy’s adaptation in early February allowed us to capitalize on favorable volatility conditions, resulting in significant trading volumes on GMX due to gamma to delta hedging activities leading up to the February 23rd expiry. Upon relaunching ETH++ in March under vastly different market conditions , with higher volatility ( Implied Volatility went from mid 50s to mid 80s), we shifted our focus towards strategies that emphasized gamma and vega neutrality.
This strategic adaptability, combined with our commitment to user security and protocol performance, reinforces the intrinsic value D2 Finance offers to its users and the broader Arbitrum ecosystem. The diagram below, while a simplification, illustrates the strategic considerations and adjustments made in response to evolving market conditions.
ETH++ Vault performance has returned 75% ROI since inception and notably provides excellent returns during vs ETH during marketing volatility and downturns per strategy mandate.
2. Lack of Information on ARB++ Vault Strategy
Delegate’s Concern: Insufficient details were provided on the actual strategy employed by the ARB++ vault.
Response: The ARB++ vault employs a strategy that maintains delta exposure ranging from 20% to 60% of ARB, designed to navigate market conditions efficiently while minimizing downside volatility while keeping ARB upside. ARB++ acts as a natural buyer in “market dumps’ ’ hence if ARB++ achieves reasonable TVL, it can work as a shock absorber for the ARB ecosystem. Example of last week trading in GMX for ARB++:
In our ongoing efforts to maintain transparency and foster understanding of our strategic initiatives, D2 Finance regularly publishes detailed communications about our trading strategies and vault operations.
For example, our Medium article on the launch of the ARB++ vault was included in the original proposal as a detailed breakdown of the strategy.
https://medium.com/@D2.Finance/d2-finance-arb-market-launching-on-camelot-b05a36e0665a
The medium offers an in-depth look at the underlying mechanics and strategic objectives of this particular financial instrument. This level of detail is a testament to D2 Finance’s commitment to transparency and aligns with our goal to deliver long-term, risk-adjusted performance to our investors.
Additional 100% on Chain guaranteed that anyone can check the strategy themselves in real time.
E.g. this is the ETH++ address which has a longer track record to verify compliance with the strategy mandate
https://arbiscan.io/address/0x5daf411ec6ce243416ec9250188682c285fc0a76
https://medium.com/@D2.Finance/d2-finance-eth-market-launching-on-camelot-5e420cff0181
It is important to clarify that the strategies we employed exclusively on Arbitrum are meticulously designed to align with our mandate and are distinct from those suggested by Wintermute, which we acknowledge might not be optimal. Our strategies are formulated with the primary goal of optimizing risk-adjusted returns, ensuring the stability and growth of our vaults in the long term. This strategic direction not only differentiates us but also underscores our dedication to delivering value to the Arbitrum ecosystem and our investors.
3. Concerns Over TVL and Reward Distribution
Delegate’s Concern: The grant size exceeds current TVL and concerns over ARB rewards benefiting a small group of users.
Response: The decision to cap TVL was a deliberate security measure, ensuring the vault’s integrity and performance could be maintained without compromising user assets. This cautious approach reflects D2 Finance’s commitment to security and its strategic plan for controlled growth.
- The cap on TVL is a deliberate security measure (to ensure compliance) until our upcoming DAO vote to enable deposits from our front end. We anticipate exponential growth in TVL at that time, which will implemented prior to grant streaming.
- We’ve adjusted our ARB request to 100,000 ARB putting the TVL/Grant ask in line with protocols who passed the screening round
When comparing claiming ARB concentrations vs https://www.openblocklabs.com/app/arbitrum/claims we display a decent distribution which is set to expand with the opening of our Front End access to the wider market participants.
The grant is seen as an enabler for expanding the TVL cap responsibly, thereby allowing a broader user base to benefit from the protocol’s offerings without diluting the security or performance.
This strategy aligns with the principle of prioritizing user security while fostering inclusive growth within the Arbitrum ecosystem.
4. Justification for Requested Grant Size and Expected Native Yield
Delegate’s Concern: The requested grant size was ambitious, and the expected native yield of the strategy vault wasn’t considered, which could offset the need for the amount of ARB requested.
Response: D2 Finance’s approach to generating native yield is deeply rooted in sophisticated active trading strategies, similar to those utilized by market makers and asset management firms. These strategies are inherently subject to market volatility and are designed to capitalize on this volatility to achieve a positive expected value (EV) over the long term. Thus we do not have a base yield at the start of an epoch; instead, our yield is dynamically generated based on the performance of our active trading strategies.
The request for specific grant size from the Arbitrum DAO is timed with the release of the new FE, ensuring that the grant distribution process will be streamlined and accessible, moving beyond the current limitations of depositing solely through Arbiscan for compliance reasons which limited TVL up to now. With that friction removed we believe we can have exponential growth.
With that saide, as noted above we have taken council feedback to heart and adjusted our ARB request to 100,000 ARB putting the TVL/Grant ask in line with protocols who passed the screening round
Such strategic foresight is vital for a growing operation like D2 Finance. The initial phases of our strategy’s implementation play a pivotal role in shaping market perception and bolstering user confidence.
New Front End Design: In progress
Closing Notes
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We observed an organic and accelerating trend in volumes which correlates with the available market opportunities.
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Our milestones are not only achievable but also conservative which benefit the Arbitrum ecosystem.
D2 Finance thank the council for their valuable feedback and under that considerations, update our grant request to 100,000 ARB
Appendix:
Lyra screenshots from manual verification. (we do not have any software that is not essential on trading workstation, thus we apologies for the quality)
