Research: JLP APY prediction principle and interest rate trading arbitrage model

Original author: Sean Hu, founder of RateX

Original source: RateX

TLDR: This article covers three key areas

1. Understanding the nature and stability of JLP: The article introduces the principles of JLP and explains the reasons for stable and high returns.

2. Analysis and prediction of JLP's APY: By breaking down the composition of JLP APY (such as income sources and TVL), it helps readers understand the factors that affect APY and provides guidance on predicting short-term and long-term APY trends.

3. JLP income trading strategies: The article introduces a variety of trading strategies, including leveraged income speculation, fixed income investment, and APY-based arbitrage opportunities, providing readers with practical insights into income trading.

4. Learn about RateX, the industry's first leveraged interest rate trading protocol, and how to effectively use RateX to expand income.

Since the beginning of this year, JLP opportunities have been one of the most popular asset types in the Solana ecosystem. It not only has high returns, but also has stable value. Its super high risk return has become the preferred asset for many investors in the crypto bear market. This article will help readers understand the core of JLP and tell users how to profit by analyzing and predicting JLP's APY.

1. What is JLP?

JLP is Jupiter Perp's liquidity pool. The assets in the pool are composed of SOL, WBTC, ETH, USDC, and USDT. The latest composition ratio is as follows.

Target Weightage is the target set by the JUP team, and is adjusted by setting the Swap Fee or Mint/Redeem Fee. Current Weightage is the actual asset ratio in the current Pool. It can be seen that SOL accounts for the highest proportion of 45%, while ETH and WBTC each account for nearly 10%. The remaining 25% and 9% are USDC and USDT respectively.

How to understand the essence of JLP? JLP is essentially a combination of U-based and currency-based loan pools. We can divide JLP Pool into 2 parts. The first part is the Crypto part, and the second part is the stablecoin part.

For the Crypto part, there are 3 assets, SOL, ETH and BTC. The role of this part of assets is to lend to traders for long use. Traders borrow these assets and return the dollar value of the borrowed assets at that time. Therefore, for every additional long crypto transaction in the market, a part of the value of crypto in JLP becomes a dollar loan. When the Utilization of a crypto such as SOL becomes 100%, we can understand that all SOL in JLP has been converted into a dollar loan.

For the stablecoin part, it supports 2 types of US dollar stablecoins USDC and USDT. The role of this part of assets is to lend to traders for shorting. Traders borrow these dollars and return the amount of crypto worth the dollar at the time of borrowing. Therefore, for every additional short crypto transaction in the market, a part of the value of stables in JLP becomes a currency-based loan.

So we can simply get such a formula to calculate the real stablecoin ratio of JLP:

Real stablecoin ratio = real stablecoin number / TVL=

N represents the 3 assets in the crypto part, and m represents the 2 assets in the stablecoin part.

Through this formula, we can intuitively see that when the utilization rate of crypto assets is high (more long positions) and the utilization rate of stables assets is low (few short positions), the value of JLP is closer to a stablecoin pool. This means that when the bull market is in a bull market, the more leveraged longs are, the more stable the value of JLP is. Of course, JLP will have a certain degree of impermanent loss (that is, the value of the Pool is lower than the assets it holds in a bull market, but it is more stable).

On the contrary, when the utilization rate of Crypto assets is low (few long positions) and the utilization rate of stablecoin assets is high (more short positions), the value of JLP tends to be more like a Crypto pool. That is to say, in a bear market, if long positions decrease and short positions increase, the value of JLP is more like a crypto portfolio.

Of course, the reality is obviously not what we just mentioned. In a bear market, we see that the proportion of long positions in Jupiter perp is still much greater than short positions. When I wrote this article (September 5), the long-short ratio still reached 90%.

We can easily get the basic data of the current JLP Pool from here. According to our data analysis, the current real stablecoin accounts for 58.8%. This is also the core reason why we see that the value of JLP is so stable. When there are 60% stablecoins in the portfolio, its value is difficult to be unstable.

2. How to predict the APY of JLP

Let's look at another interesting point, the income data of JLP, which is reflected in the APY data they push every week. Although JLP is an asset whose income is accumulated in the unit net value, its income is mixed with the fluctuation of the asset value in the pool. However, we can still analyze it through the APY data provided by the official or on-chain data, and separate the income part from the value of JLP. Jupiter does not provide historical time series data of APY, but we have made a 7-day average APY curve based on the on-chain data. We can see that JLP's APY continues to be at a very high level of return, and the volatility is also not small. With the gradual expansion of JLP's scale and the market's bearish trend, there is a certain degree of downward trend, but it still remains around 30%.

Next, we will analyze the composition of JLP's returns and tell you how to predict JLP's APY trend in the short and long term.

First, the calculation formula for JLP's APY is very simple

APY = Earned Fees / TVL. This section will mainly analyze the two aspects of earned fees and TVL.

1. Composition of income sources in JLP:

According to Jupiter's official documents, we can see that the income sources of JLP are mainly the following factors

The exchange generates fees and yields in various ways:

· Opening and Closing Fees of Positions (consisting of the flat and variable price impact fee).

· Borrowing Fees of Positions

· Trading Fees of the Pool, for spot asset

· Minting and burning of JLP

75% of the fees generated by JLP go into the pool.

Thanks to Jupiter, we can see a breakdown of these revenue sources on-chain

These daily data form the basis of our forecast of JLP returns.

We see that pool_fees corresponds to borrowing fees of the positions, swap_fees corresponds to trading fees of the pool, oc_fees corresponds to opening and closing fees of positions, and liq_fees should correspond to liquidation fees.

This chart reflects the time series data of Jupiter Perps Fess from July 23 to the present. We can see that oc_fees account for an absolute majority, so we mainly study oc_fees.

According to the introduction of Jupiter's official website, Fee calculation for opening and closing positions involves the volume of these transactions, multiplied by the fee percentage of 0.06%. Of course, we know that this fee rate is dynamically adjusted by the official. Assuming that the fee percentage remains unchanged, we know that oc_fees is linearly related to the transaction volume. So as long as we can predict the transaction volume, we can predict oc_fees.

We can obtain the transaction volume of Jupiter Perps from the chain.

The following figure is the trading volume of DEX on Solana

We can see that the trading volume of Jupiter Perps is similar to the trading volume of DEX on Solana in trend, but it is obviously more independent. When the trading volume dropped sharply in July, the trading volume of Jupiter Perps still maintained a good level.

Therefore, when predicting short-term trading volume, we can accurately obtain Jupiter Perp's trading data by analyzing on-chain data, but when predicting long-term trading volume trends, we need to consider both the trend of Solana's overall trading volume (beta) and Jupiter Perp's independent growth ability (alpha) as a proven successful project.

2. TVL scale of JLP

After looking at the fee structure, let's look at TVL. This determines how much money is providing leverage and how many people are sharing the benefits with you. We can see from the figure below that JLP's TVL is growing steadily, and the Jupiter team's scale growth strategy for JLP is also relatively stable. They will set AUM Limit for JLP to control the scale to prevent TVL from fluctuating too much and impacting LP's income, which is itself a responsible behavior.

In general, as JLP's TVL cap continues to increase, its APY center will inevitably decline. However, considering the current bear market, the market trading volume has dropped by 50% since July. If the market recovers and the Jupiter Perp product itself is competitive, we believe that JLP's APY is likely to rebound within a certain period of time, and it is not impossible to return to a level above 50%-60% APY.

If you want to study short-term APY, for example, get an expected JLP APY before the official APY is announced, you can log in to the official website of RateX, click on JLP contracts in the market overview after the mainnet is launched, and we will provide JLP's leading APY data for users to refer to.

3. How to make a profit by predicting JLP’s APY

If you understand the above research method and think predicting APY is an interesting and simple thing, then you need to read the following content, which will tell you how to make money through RateX’s JLP yield trading function.

1. Leverage speculation on future APY.

RateX is a leveraged interest rate trading protocol that allows users to trade yield by synthesizing YT-JLP. In short, it creates a liquidity pool for JLP yield trading, and Liquidity Provider deposits JLP into this pool. Based on the deposited JLP, ST-JLP in the form of rebasing is generated for Liquidity Provider. The amount of ST-JLP is compounded according to the official APY data to ensure that the value of ST-JLP after the increase according to the APY provided by JLP is the same as the value of JLP. At the same time, based on the deposited JLP, the liquidity provider will mint YT-JLP from the protocol (generally speaking, depositing 1 JLP allows 1 YT-JLP to be minted). Based on YT-JLP and ST-JLP, RateX has built a YT/ST AMM pool for users. When a trader wants to use leverage to long YT, he deposits a margin (JLP), and the protocol creates ST-JLP for the user to buy YT-JLP in the AMM. On the contrary, if you want to short YT, you deposit a margin (JLP), and the protocol creates YT-JLP for the user to buy ST-JLP in the AMM. Currently, RateX can provide users with 10x leverage trading YT-JLP.

In the JLP-2411 contract (expiring at the end of November 24) on the RateX testnet, a deposit of 1 JLP can buy 148.94 YT-JLP-2411.

Since the price of YT follows the following formula:

This is a non-linear formula that does not look intuitive. When the implied yield is smaller, you can roughly assume that the rate of change of the YT price is the same as the percentage change rate of the Implied Yield (APY). (For example, for a contract with a maturity of six months, when the implied yield changes from 3% to 4%, the YT price change is about 4%/3%-1=33%. When it changes from 30% to 40%, the YT price change percentage is about 26%. There is a problem of sensitivity to the discount factor here.) If you are a mature investor, we still recommend that you calculate it yourself for more accuracy. Here is a very detailed explanation for YT.

2. Fixed income investment

RateX constructs PT assets based on YT and ST, PT=1-YT. Because YT is an asset whose value approaches 0 as it continues to receive yield, the value of PT will gradually approach a ST-JLP. If you choose to hold it until maturity, you will get a fixed income, which is a conservative passive income strategy.

You can also choose to do a PT spread strategy. If the price of YT falls (implied yield falls), the price of PT will rise, and you can choose to redeem PT immediately to get a higher annualized return.

You can also choose to do something similar to Kamino multiply, mortgage PT to borrow funds to continue buying PT, and form a higher return. Of course, after adding leverage, you have to be careful of liquidation risks.

3. Arbitrage Trading

There is also an arbitrage trading strategy based on predicting the APY within the YT interest payment cycle. Since YT is a time-decaying asset, its value is amortized according to the implied rate of return. We will recalculate the value of YT at the end of each interest payment cycle. If this part of the reduced value is not equal to the value of the yield you received, then you have the opportunity to arbitrage by predicting APY data. Suppose you buy a YT at an implied rate of return of 30%. In the next interest payment cycle, the implied rate of return is still 30%, and you receive an APY of 50%. However, the value of your YT decreases as the remaining time decreases according to the implied rate of return of 30%.

This means that the yield you receive exceeds the reduction in the value of YT. If you can sell YT at the market price immediately, you have obtained an arbitrage opportunity by predicting the APY within this interest payment range. However, this short-term arbitrage opportunity is small, and the implied yield of YT reflects the expected average APY within the remaining period, so the failure of interest payment cycle arbitrage may become a source of profit for longer-term strategy traders. Therefore, it is not recommended to participate unless you are a professional trader.

This article comes from a contribution and does not represent the views of BlockBeats.