About ESPN
ETH Strategy Perpetual Note (ESPN) Vault
Volatility is good
Ethereum’s volatility has long been a feature of its market, yet DeFi has approached it defensively, treating it as a risk to hedge rather than an asset to harvest. What has been missing is a natural, structural seller of volatility. ETH Strategy fills that role, unlocking a new category of yield.
Options > Interest
Instead of paying interest, ETH Strategy rewards lenders with long-dated call options, a more powerful form of ETH exposure. When combined with selling shorter-dated options, this creates a steady stream of yield. ESPN takes this complex options trade and distills it into a single token. Just as Ethena productized the basis trade, ESPN transforms the volatility trade into a perpetual, compounding yield product.
The Trade
One side of the trade is native to ETH Strategy. ESPN loans ETH Strategy USD, but rather than receiving interest, they receive an ETH call option. This call option is inherently valuable but not liquid.
To extract yield from this long-dated call option, ESPN systematically sells shorter-dated call options on Derive. The symmetry between the long-dated convertibles acquired and short-dated calls sold keeps the strategy balanced in USD terms.
How it works
The Perpetual Note Vault works in three main steps:
Bonding: Swap USDS with ETH Strategy in exchange for a convertible note (a debt claim on the protocol plus an out-of-the-money ETH call option).
Covered Call Selling: Post the convertible note as collateral on Derive to sell new out-of-the-money (OTM) covered calls. The strike price of these calls is matched to the strike of the long call received from ETH Strategy. This symmetry ensures the overall position remains delta-neutral in USD terms.
Premium Allocation: Premiums earned from selling calls are distributed in two ways:
Liquidity Provider rewards for USDS/ESPN LPs.
Capital growth of the ESPN vault.
Vault Operation
The options acquired from ETH Strategy are long dated, and the options sold on Derive are short dated (known as a calendar spread). ESPN will roll the short dated options as they continue expiring out-the-money (OTM).
If the options expire in-the-money (ITM), the ESPN Manager will:
Exercise the call option bought from ETH Strategy, using the value gained to hedge losses from the call option sold on derive (net result of this action is if ESPN was managing say 100m USD equivalent, it will continue holding 100m USD equivalent. 100% delta neutral after netting out the two).
Continue the process outlined above from step (2). Namely
Swaps the 100m USDS with ETH Strategy again for a convertible note (a debt claim on the main protocol + an OTM call option on ETH).
Uses the convertible note as collateral to sell out of the money (OTM) covered calls on Derive.
The premium earned from selling the call options are used to
Pay rewards to USDS/ESPN LP
Increase the overall capital base for ESPN
How is this better than a simple Covered Call Strategy?
Unlike standard covered call strategies, ESPN hedges its short options with long options, not with naked ETH. This makes the whole strategy genuinely delta-neutral, and avoids the unfortunate situation where standard covered calls are fully exposed to downside risk. We can consider the setup similar to a covered call with downside insurance.
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