Risks

Contract & Counterparty Risk

ESPN depends on smart contracts and integrations with external platforms like Derive. As with all protocols, there is always a baseline of smart contract and counterparty risk, even when the underlying mechanics are sound.

Beyond those general considerations, ESPN’s performance fundamentally depends on market conditions. The two main edge case scenarios to consider are:

ETH Price Falling

Significant drops in ETH price over long periods of time can undermine ESPN’s option strategy. The vault MUST sell options on Derive at the same strike price as convertibles acquired from ETH Strategy (otherwise the strategy isn’t delta-neutral). In the event that ESPN strike prices are significantly OTM, premiums received from selling calls will be much lower, thereby lowering ESPN revenue.

ETH Volatility Collapsing

Volatility is a natural feature of digital assets. In a world where ETH becomes so ubiquitous that it behaved like a reserve currency with little volatility (ETH is money), option premiums would shrink and ESPN’s yield would fall. In practice, we view this scenario as highly unlikely. Even as ETH matures into a money-like asset, volatility would likely persist at levels sufficient to sustain option markets and ongoing yield streams for ESPN.