Opyn Squeeth (oSQTH) is a unique kind of token that gives holders a leveraged ETH position with unlimited upside. Over the short-term, the token can be used to speculate on movements of ETH to the upside. People who are long ETH pay a funding rate to people who are short ETH. This is reflected in the long-term value of oSQTH. To go short, and earn the funding rate, it is sufficient for users to borrow oSQTH. In the event of side-ways movement of ETH, oSQTH value will decrease through time, allowing borrowers to repay their loans at a reduced cost (and therefore profit by earning the funding rate paid by people taking a long position).
Owing to the way that oSQTH works, it does not pay to hold oSQTH over the long-term if ETH does not continue to rise. Its value will always decrease due to the funding mechanism. However, the Euler protocol does exactly this when it takes a fraction of the interest paid by borrowers and keeps it in reserve. This does not benefit Euler users in any meaninful way, since the protocol does not gain any security from long-term holding a depreciating asset, and lenders receive a reduced income from making oSQTH available.
I would therefore suggest the oSQTH market reserve factor is set to zero. The current oSQTH reserves could perhaps be added to Uniswap as tail liquidity to help provide additional security to the oracle.
This makes a lot of sense, since Euler wouldn’t be actively managing exposure to funding rate, to allow the full return to go to lenders without building a position.
Just to stir the pot, would there be value in converting the oSQTH into a short squeeth position then lending the generated oSQTH instead of selling it.
This would involve
1, selling oSQTH for ETH
2. generating oSQTH against ETH
3. lending oSQTH
In such a case,
borrowers would pay funding plus normal borrow rates funding would be neutral, and utilization would offset generate market neutral return.
This has the ability to be liquidated, so its possible that if utilization is too high that would make it difficult to repay the loan, but would grant exposure to arbing the rates.
Or would it make sense to put Squeeth in something like Opyn’s crab strategy?
Only issue with crab is its not deploying assets on Uniswap V3, nor would it facilitate more lending liquidity on Euler, so the most benefit to Euler would be to simply not take it so lenders can provide more liquidity.
My suggestion above would be similar to the crab, but instead of selling squeeth it would lend it.
When Crab borrows squeeth against ETH to go short squeeth its relatively neutral funding, owing what it receives. To offset this it sells, squeeth for ETH, so that it can target more funding coming in than out, (plus rebalances once opperational).
If we borrow squeeth against ETH and lend squeeth, the funding is relatively neutral but now we have deeper lending liquidity, and and arbitraging interest as squeeth likely consistently more borrow demand than ETH.
It would also hedge losses from strong upward price swings since we would be volatility neutral i believe.
Could even be an interesting structured product. Though maybe set reserve to zero until such a product is up.