Perpetual futures (perps) have been the go-to solution for degen crypto traders to get leveraged long/short exposure to assets. It feels almost too powerful: just provide a price oracle, and a perps market enables you to speculate on anything you want: stocks, forex, tokens on other chains, etc.
It is therefore tempting to build perps for yield rates (e.g. Aave interest rates), which at first glance can unlock some powerful speculation, such as going 10x long or short on yield rates. This post explores why it’s impossible to build perps for yield rates and why yield speculation is fundamentally different from asset speculation.
Reason #1: You can manipulate yield rates with zero risk
Suppose we have a perps market for the Aave USDC interest rate. How much would it cost to manipulate this market in order to extract profit?
The answer is zero (or even negative)! All you have to do is open up a short position, and then deposit a ton of USDC into the Aave market to decrease the interest rate significantly. Depositing into Aave costs almost nothing; in fact, it allows you to earn interest, so the cost may be negative.You can argue that there’s the cost of capital, i.e. the cost of putting the USDC in Aave versus putting it somewhere potentially more productive, but the profits from the short position almost always make it worth it since you stand to drain most of the funds in the perps market.
Note that using a TWAP oracle doesn’t solve this issue; it just means it takes longer for the attacker to drain the perps market. The fact that people can counteract the rate decrease by borrowing assets doesn’t help either: it’s less capital efficient to borrow than to lend, you’re exposed to liquidation risks, and you’d actually be paying the attacker interest! Plus, given the minimal attack costs, the attacker can easily try again later if the attack fails, turning the attack into a war of attrition where the attacker has a significant advantage, which almost certainly results in the draining of the perps market.
Furthermore, such attacks are not only viable for perps markets where you can short yield rates, they’re also viable for “spot” markets where you can only take on a 1x long position on yield rates. An attacker simply needs to do the reverse as before: deposit into Aave to decrease the interest rate, open a spot position on the interest rate, and withdraw the deposited funds to increase the interest rate.
Manipulating asset markets is far more costly and risky, since you need to make huge directional trades. The fact that one can manipulate yield rates with essentially zero cost or risk is what fundamentally differentiates yield speculation from asset speculation. It’s the main reason why any financial instrument whose price is directly linked to yield rates is impossible, be it yield perps or yield spots.
Reason #2: The instant yield rate is undefined for some yield sources
Some yield sources, such as Yearn vaults and Lido stETH, discretely update the vault share price. For example, suppose there is a vault with 100 USDC and 100 shares, with 1 share = 1 USDC. The vault manager harvests the yield earned and puts it into the vault, adding 10 USDC to the vault, which causes the share price to suddenly jump to 1 share = 1.1 USDC. Depending on the position and size of the time window over which you measure the yield rate, the yield rate can vary from 0 all the way to infinity, meaning the yield rate is pretty much undefined.
Such yield sources cannot be supported by perp platforms, since you can’t have a yield rate oracle if the instantaneous yield rate is undefined.
Timeless is the best possible solution for yield speculation
For the above reasons, Timeless yield tokens represent the best yield speculation instruments we can ever get. Timeless yield tokens track long-term yield rates instead of instantaneous yield rates, using indirect market feedback instead of direct oracle-based pricing, and thus are not fatally susceptible to manipulation attacks like yield perps are.
Instead of relying on yield rate oracles, Timeless lets market participants reveal their beliefs about future yield rates via AMM pools, which avoids the aforementioned attacks and makes speculating on Yearn/Lido yield rates possible. If someone tried to tank Aave rates by making large deposits, participants in Timeless yield markets would see that this is an attack and choose to ignore this change in yield rates, which makes the change in yield token prices minimal. Of course, if the deposit is still there as time goes on, then market participants can update their long-term outlook on yield rates and trade accordingly, gradually updating the yield token prices. The yield token pricing is subjective and indirect rather than objective and direct.
The impossibility of yield perps presents a theoretical limit to what kinds of yield speculation instruments are possible, and Timeless is right on that limit.