The Vaults Don't Create Yield. They Structure It.

Justin Roberti and Dingo are joined by Saffron head of research Rx to explain how Saffron Vaults structure rather than generate yield, how fixed and variable participants assume different risks, and what users should understand about Uniswap v3 before entering a vault. Dingo also discusses the Clarity Act and the regulatory landscape in the US for crypto.

Justin Roberti (00:08)
Good morning, good morning, good morning—or good afternoon, as the case may be.

Everyone out there, this is Justin Roberti. We’re going to begin in just a minute. Thank you so much for joining us today.

We’ve got a lot of snow here, so my internet may go out again, but let’s go ahead and get the show kicked off.

Dingo, let’s jump right in.

There has been a lot of interest around Bitcoin lately. It is around $67,000 at the time of recording, nearly half its all-time high from last October, and down 31% over the past year.

That has been a major point of contention, and I’m hearing some speculation that we aren’t necessarily at the floor yet. We’ll see where this goes.

It seems inevitable that a lot of macroeconomic trends are affecting Bitcoin.

Dingo published an article—or a short blog post—this week that I thought was great, discussing one of the factors affecting it: the Clarity Act.

Let’s jump into that a little bit, Dingo.

In your blog entry, you frame clarity as drawing clean lines. Why has it been so difficult for Congress to draw those lines for so long?

Is there simply more willpower to do so now?

Dingo:
It’s interesting.

I’m not as close to it these days, but from around 2022 through 2024, it felt as though nobody could agree on whose problem it was to solve.

There didn’t seem to be much willpower.

Under the previous administration, we didn’t have regulation so much as regulation by enforcement, which was incredibly unsettling for people trying to build innovative technology in the space.

Essentially, you have the two regulators: the SEC and the CFTC.

They were both waiting to see whether the other would blink first, and Congress wasn’t exactly rushing to force the issue.

Now that crypto was part of the current administration’s platform, it has become a scramble to resolve it.

I think a lot of the framework has already been figured out, but that’s how Washington works. Problems often aren’t addressed until the pressure becomes high enough.

One of the major obstacles—and something I discussed in the blog post—is that Coinbase and many banks can’t agree on stablecoin yield.

Banks have traditionally held a monopoly over yield on fiat deposits. They have enormous control over how that yield operates.

Introducing a competitor that can typically offer higher rates through DeFi makes the banks’ position a little less secure than they assumed it would be.

I think introducing competition is healthy.

But drawing clean lines was always going to require someone to give something up in order to make the system more understandable for the government, regulators and end users.

It also raises questions about who has oversight, who collects fees and who has enforcement authority.

It’s a messy labyrinth.

I think they now feel extraordinary pressure to resolve it because crypto was one of the current administration’s campaign platforms.

The industry has also been hurting badly since at least October 10, and perhaps a little before that last year.

Based on what I’m seeing online and hearing from people with sources in Washington, they’ve set a deadline to reach some kind of resolution by the beginning of next month.

I think that is optimistic.

I also hope the resolution doesn’t involve Coinbase, Brian Armstrong and the industry conceding on stablecoin yield, because I think that issue is extremely important.

Justin:
Do you think this ultimately comes down to TradFi becoming more open-minded toward crypto over the past year or two, while still not wanting to lose deposits?

They don’t want to create a system in which they can be outcompeted.

Dingo:
I think that’s part of it.

It’s almost like having a strange new kid your parents are forcing you to play with, but you don’t want to share your toys with them.

Justin:
The nerdy, awkward kid—although we’re all nerds here.

Dingo:
Exactly.

I would say that’s a major component.

The banks haven’t really faced this kind of competition, especially as power has increasingly consolidated at the top.

The introduction of competition, particularly around stablecoin yield, is probably a major reason we were supposed to have a resolution last month and still don’t.

One moment it’s off the table, and the next it’s back on.

Then the administration suddenly sets a deadline for the beginning of March.

Who knows?

Justin:
Have you found it interesting that stablecoin yield appears to be more threatening than the actual trading side of crypto?

It’s a funny issue to get hung up on, especially when yield is already such a major narrative this year.

What do you think the resolution will look like?

Dingo:
Stablecoin yield has turned into such a major issue because it represents a kind of crossing-the-Rubicon moment.

It is the point where crypto stops being merely an asset class and begins offering services that compete with banks.

Trading Bitcoin may look strange and speculative to a traditional regulator, but it isn’t necessarily an existential threat. It is simply an unusual asset.

Yield-bearing stablecoins are different.

If I can hold something that looks like a dollar, spends like a dollar and pays me 4% or 5%, without needing a bank, then I may no longer need a high-yield savings account.

I use a Goldman Sachs account that pays around 3.5%.

Banks can compete, but they don’t want to have to compete.

Yield-bearing stablecoins directly challenge the core model of retail banking.

At that point, crypto is no longer a niche product. It potentially becomes a competitor to checking and savings accounts.

Justin:
Absolutely.

For what is ostensibly a free-market economy, TradFi has been a fairly closed shop for a long time.

Its position is well protected, with wealth tending to consolidate as it often does under capitalism.

Do you think Project Crypto will change that dynamic?

Will we see better cooperation between the SEC and CFTC?

Dingo:
I’m optimistic.

There is more conversation happening than there used to be.

But I would describe it as cautious engagement rather than genuine cooperation.

Both agencies are still very aware of the stakes.

What has changed is that they are receiving political signals from the White House and Congress that they need to stop leaving the matter unresolved.

As I wrote at the end of my blog post, the crypto lobbying groups have a significant amount of dry powder they can place behind candidates.

Neither Republicans nor Democrats want to find themselves in the metaphorical crosshairs of that.

Our industry is passionate, especially the people supporting DeFi.

We don’t want to give up stablecoin yield.

For some people, that issue alone could influence how they vote, just as crypto influenced votes in 2024.

A lot of politicians understand that.

There is pressure, but we’ll have to see whether it translates into real cooperation.

I think we’ll receive a definitive answer this year.

Without getting too deeply into politics, these next few months are important ahead of the midterm elections.

Things need to get done now, or they could remain locked in limbo depending on how the elections go.

Justin:
Perhaps we’ll see the triumphant return of Gary Gensler, Dingo. We can always dream.

Dingo:
No. I’d rather not.

Justin:
People were incredibly unhappy with him.

The anger was so palpable that I started memorizing Gary Gensler facts just to tease people.

Did you know he once completed a 50-mile ultramarathon?

Dingo:
I don’t know anyone in crypto who has anything positive to say about how he handled the industry.

It was a very nerve-racking period for people trying to build.

I’m glad we’re through that, and I’m glad we’re reaching a point where, although the waters could still be choppy depending on the resolution, we are in a much better position than we were under the previous administration.

I think the government understands the industry better now.

Hopefully, we’ll see more favorable treatment going forward.

Justin:
Certainly more favorable than simply dragging people into court whenever regulators wanted to make a point.

That was an ill-advised approach under the previous administration.

Let’s bring Rx up.

Rx, you should be able to unmute your microphone. Are you with us?

Rx:
Hello. Are you able to hear me?

Justin:
Yes, you sound great.

Rx is Saffron’s head of research and has a brilliant understanding of the vaults, crypto and economics more broadly.

We’re very excited to have you on the show. Thank you for joining us.

Rx:
Thank you.

Justin:
Let’s jump into it.

Rx, you’re in a great position to speak authoritatively about the vaults.

A lot of people hear “vault yield” and may assume that Saffron is creating the returns.

Can you explain why the yield actually comes from the underlying instrument rather than the vault itself?

Rx:
That’s a good question.

The Saffron protocol we created for this product merely structures the yield from the underlying instrument in two different ways.

We take the yield from the instrument and direct it toward one side of the contract based on an agreement between the two participants.

If that sounds confusing, I can clarify.

Saffron Uniswap Vaults represent a contract between two different parties.

One side enters with a liquidity position, meaning they are the liquidity provider.

The other side enters by purchasing the yield from that position.

How do they purchase it?

They pay for the yield upfront.

It is a bet—not in the sense of a casino bet, but a financial bet.

In either case, the yield is generated only by the underlying instrument.

It must come from the fees earned by the Uniswap position on which the contract is based.

Saffron then adds a structural layer on top of that instrument.

We don’t need to generate the yield ourselves. We simply direct it in different ways according to the contract.

Does that make sense?

Justin:
Absolutely.

If the vault isn’t creating the yield, what is it doing?

I understand that it is essentially managing and redistributing risk, but let’s explain that in a way the audience can easily understand.

Rx:
Saffron Vaults offer two different opportunities.

If you enter as the liquidity provider, you receive one type of opportunity.

If you enter as the person purchasing the yield, which is the other side of the contract, you receive a different opportunity.

When you sell your future yield, the contract allows you to receive payment upfront from the other participant.

If I own a Uniswap liquidity position and enter it into a Saffron Vault, I receive a fixed payment upfront in exchange for renting the future yield to the other side of the contract.

In that sense, the income becomes risk-free because it is fixed and paid upfront.

It isn’t even exposed to the risk of something later happening to the contract because the money is already available to you.

The contract then holds your position for the agreed period and releases it back to you later.

You are exchanging the possibility of receiving a higher or lower future yield for certainty at the beginning of the contract.

If you take the other side of the contract, it is a completely different game.

On the fixed side, the owner of the liquidity position receives the agreed yield no matter what.

On the variable side, there are situations in which the participant may not be profitable.

That is why the fixed rate offered when entering the vault is extremely important.

The variable participant’s thesis is that the pool will generate more yield than the fixed side is asking for.

If that happens, the variable participant earns a profit.

Because nobody knows the future, if the pool generates less than what the variable participant paid, that participant may incur a loss.

The variable side is variable, just like many other DeFi instruments.

The fixed side is fixed.

You receive the exact amount agreed upon.

If market activity increases dramatically, the fixed participant does not receive additional yield. The variable participant receives the benefit of the excess.

Justin:
Let me hand the next question to Dingo.

Dingo:
To contextualize this for the audience, how should participants in Saffron Vaults think about the risk of the underlying yield source?

We’ve discussed potential expansion to Solana and Aerodrome, but let’s keep it confined to Uniswap v3 for now.

How should users evaluate and interact with that risk?

Rx:
That is the core question when entering a vault from the variable side and purchasing the yield.

You need to understand the underlying instrument.

For example, if you’re buying a farm that sells coconuts, you need to understand the coconut market.

If you’re buying a car wash, you need to understand the car-wash market. It isn’t enough to understand the building itself.

The same is true for Saffron Uniswap Vaults.

If you enter one of these instruments, you need to understand the underlying product, which in this case is Uniswap v3.

Then you need to become a little bit like a magician because you must attempt the holy grail of mathematical finance: predicting the future.

Can you predict how much yield a pool will generate?

That is where things become difficult.

To summarize it in one sentence, you need to look at a vault’s proposed fixed rate and decide whether you think the underlying pool will generate more or less yield over the duration of the contract.

If you believe, based on your research and calculations, that the underlying product will generate more, then you may choose to enter.

If you believe it will generate less, you can skip it and look at the next opportunity.

I expect we will have many vault opportunities offered by fixed-side participants, so there should be plenty of choices.

Different risk appetites will be attracted to different types of underlying pools.

For example, there is one type of risk associated with a pool composed of stablecoins.

If you consider a USDC/USDT pool, the prices are unlikely to vary significantly, and the yield may remain comparatively stable.

That may make the yield easier to predict than with another pair.

If you have two memecoins, or a memecoin paired with ETH, the position will be more volatile and harder to predict.

Users can select according to their risk appetite.

Some opportunities are easier to predict than others, but the more difficult ones may also provide the highest potential returns.

Dingo:
To summarize, much of it comes down to the specific assets in the Uniswap v3 pair and their tendency toward volatility.

Stablecoins would typically be the least volatile.

Bitcoin may be less volatile than a memecoin, for example.

It is almost a cascading spectrum of risk.

I’d like to return to what you said about evaluating the fixed rate and determining whether it is attractive, but I’ll turn it back over to Justin first.

Justin:
I’m loving this discussion, and I think the audience will as well.

A lot of people are experiencing pain right now.

This downturn looks more like institutional deleveraging than something driven by retail.

Given today’s slow, grinding correction, what mistakes do users make when they don’t understand the instrument behind the yield?

I’m trying to identify practical ways to approach these vaults during a down market, because that seems like the stress test for both the vaults and everything else in the space.

Rx:
I would answer from the perspective of the variable side, because the participant purchasing the yield is affected more severely than the fixed side.

If you see a very high fixed rate that is significantly above the pool’s general APR, you should be cautious.

We should also discuss APR figures reported by public resources later.

You should examine the historical APR of the pool through DeFiLlama, the Uniswap website or another source.

If the requested fixed rate is significantly higher than that historical APR, you may want to avoid it because the pool may not generate enough yield to cover it.

Of course, the yield could increase, in which case you might miss an opportunity. That is part of the game.

I am personally more conservative when taking risk.

I would be more interested in vaults where the requested fixed rate is similar to the reported historical APR, particularly if I don’t know how to perform more advanced calculations.

If you do understand more advanced calculations, there are other things you can do with publicly available data.

We can discuss those in another episode.

Dingo:
There’s no need to release all of that information at once.

A lot of this is already at the deep-dive level, and the audience may benefit from having a week to digest it.

Do the same general principles apply when evaluating whether a fixed rate is attractive?

How should someone judge whether the fixed rate is good enough to enter from the variable side?

Rx:
This is a general truth about any phenomenon: you cannot know the future. You can only study the past.

You need to examine the pool’s performance over the past days, weeks or months.

You have to choose the time horizon you want to study.

If everything remains the same, there is no reason for the instrument’s behavior to change dramatically.

Even stochastic phenomena tend to display similar dynamics under similar conditions.

When you look at a Uniswap pool, its performance is based on market forces influencing it.

Because you cannot observe or quantify every market force, you examine historical data and try to understand whether those forces are shifting in one direction or another.

Then you make a prediction.

If you have no other information, the best available metric may simply be what happened recently.

That isn’t a holy grail, but it is better than selecting a vault completely at random.

You might examine the Uniswap website for the relevant pool, look at its APR and assume that it probably won’t change dramatically over the next few days.

That is true most of the time.

Of course, black swans and other unexpected events occur.

In general, you hope the market forces remain similar enough for the pool to continue behaving in a similar way.

Sometimes those forces change, and the pool’s performance changes with them.

Those are the variables you need to understand better in order to make stronger decisions about whether to enter a vault.

Does that help?

Dingo:
Yes.

You mentioned DeFiLlama.

Are there other tools that an ordinary community member can consult to obtain the fullest possible picture?

Nothing will provide a crystal ball, or everyone would become a millionaire.

But are there other techniques users can apply to make more informed decisions about how a particular Uniswap v3 position may perform over time?

Rx:
The first thing to understand is that the yield generated by a Uniswap pool is primarily driven by trading volume, not simply volatility.

The two may be correlated, but not always.

You need people trading heavily through the pool.

Selecting randomly is bad.

Following false information may be even worse.

If you’re guided by information that isn’t true, you will make bad decisions.

If you sincerely believe fire doesn’t burn, you may place your hand in it and get burned.

You need to be selective about where your information comes from.

We have extensively studied several publicly available sources for pool-performance data.

DeFiLlama doesn’t do a bad job.

The difficulty is that it’s extremely hard to use a single number to explain the performance of a Uniswap v3 pool.

The yield generated by the pool depends heavily on the specific liquidity position and the price when the user enters.

The statistician George Box famously said, “All models are wrong, but some are useful.”

It is an elegant way of saying that every model is incomplete, but some are still useful.

The reason models are incomplete isn’t that everything is always wrong. It is that our vocabulary and measurements cannot perfectly describe a phenomenon.

If I asked you to describe an object on your desk, you could use as many words as you wanted and still never provide a perfectly complete description.

But you could provide a description that was useful enough for me to identify or recreate it.

The same principle applies when we reduce the performance of a financial instrument to a number.

One way to estimate a pool’s performance is to take the fees generated by the pool and divide them by its total value locked.

That was a reasonable approximation for Uniswap v2.

But with v3, liquidity can be placed in different parts of the price range, which makes the calculation more complicated.

What range are you reporting?

DeFiLlama uses certain assumptions, such as a plus-or-minus-30% range.

I don’t know exactly how frequently it resets that calculation.

The point is that DeFiLlama may provide a useful first approximation of a pool’s performance, but it is far from perfect.

It may be useful even though it is wrong in some respects.

Dingo:
That’s a great point.

For people listening afterward who hear terms such as target range or price range and feel their eyes beginning to glaze over, I understand.

I’ve written an article that we’ll probably publish within the next week explaining why Uniswap v3 positions differ from v2, how price ranges work and how they can affect performance.

It isn’t the same as v2.

It is more customizable and gives users much greater control over the specific risk they want, although it is more complicated.

Think of this conversation as a teaser for that article.

I love the expression, “All models are wrong, but some are useful.”

Rx:
One more thing: Uniswap v3 is interesting because, if you want, you can emulate v2 by placing your liquidity across the entire possible range.

But that isn’t as efficient as it could be.

A useful technique is not only to look at the reported APR, but also to examine the liquidity distribution around the current price on the Uniswap website.

That can give you a sense of how concentrated the liquidity is and how much of the TVL sits within a specific range.

From that, you can form a rough mathematical estimate of what the yield might be if market conditions remain similar.

Generally, the narrower your range, the higher your potential yield.

But the narrower the range, the greater the chance that the price will move outside it and you will stop earning yield.

That isn’t a problem for the fixed side because the fixed participant already received payment.

It is a problem for the variable side because that participant already paid the fixed rate but may no longer be earning yield.

There are different problems on each side.

The fixed side isn’t immune from every problem either.

Participants enter the Uniswap position with tokens, and the contract places those tokens into an LP position.

It therefore makes sense to compare that position with the alternative of simply holding the tokens.

This is where impermanent loss, or divergence loss, becomes relevant.

It is the intrinsic loss that can occur in a liquidity position due to price changes after entering it.

Those losses are still borne by the fixed side.

Every LP position has drawbacks.

Uniswap still has billions of dollars in total value locked, so people have learned to understand and manage those risks.

Dingo:
I would love to explore that more deeply with you during a future episode, especially after we publish more resources for the community.

A good portion of the audience probably understands Uniswap v3 positions well.

But people who are new or at an intermediate level in DeFi will benefit from resources such as the upcoming article.

That will provide more context for what you’re explaining because this is deep material.

You’ve done a good job breaking it down.

Justin, do you have one final question?

Justin:
Thank you so much for your time, Rx.

Part of why we thought it would be valuable to have you on is that I see the discussions you have with the core team.

The level of knowledge is incredibly deep, and it’s helpful and exciting to have you on the show.

I like to reduce things to something simple and practical.

The entire Web3 space is always telling people to do their own research.

What are the basic things people should understand before entering any vault?

What would you prescribe to someone who is new to this and trying to perform proper due diligence?

Rx:
You read my mind. I was about to say exactly that.

This show is for our community, and we aren’t entirely sure how familiar everyone is with Uniswap v3.

In the future, you will see more products from us and other DeFi projects that are built on top of existing instruments.

Whenever something depends on an underlying product, the key is understanding that underlying product.

You don’t buy bonds connected to the housing market if you don’t understand the housing market.

That would be a poor decision.

The homework I would propose is to understand Uniswap v3.

I’d also like to volunteer Dingo, since he is writing an article about it, to aggregate resources from other teams that explain Uniswap v3.

We don’t need to reinvent the wheel. There are already excellent resources available.

If you want to use Saffron Uniswap Vaults to balance risk within your portfolio, you should understand Uniswap v3, liquidity concentration, impermanent loss and yield.

That may sound overwhelming, but it isn’t an enormous amount of material.

It might require a month of research.

But once you understand it, you’ll be able to recognize strong opportunities and use these more sophisticated instruments to balance your portfolio.

This is the future of DeFi: increasingly sophisticated instruments.

As a community, we are early.

The more sophisticated and educated we become, the better positioned we’ll be to move forward.

Dingo:
That is part of the larger series I’m planning to create as a written resource.

It may also be useful to revisit some of these points after the material is published.

What Rx is describing is more technical and complicated, but it is not insurmountable.

Anyone can learn it, and I’m confident this community can.

We are early to these ideas.

That has been a theme throughout Saffron’s previous products.

With Saffron’s earlier fixed vaults, the market may not have been ready for them yet.

Now, as regulation becomes clearer and DeFi users become more knowledgeable, I think the market will soon be ready for us to roll this out.

This is a phenomenal tool for balancing a portfolio, but users should understand how Uniswap v3 positions operate.

My goal over the next month is to publish several articles that help explain that.

If you’re listening to the recording and have difficulty with a particular part of Uniswap v3, send me a message on Telegram.

I would be happy not only to answer the question, but also to include it among the topics I focus on over the next few weeks.

Justin:
People can also submit questions for the show.

We’ll certainly have Rx back soon because there is a great deal more to discuss about the vaults.

I like to end with something slightly lighter and more of a curveball.

Rx, what do you find elegant and exciting about the vaults?

I know you take measured positions and we aren’t asking you to simply praise them, but what do you find especially interesting about how they are structured?

Rx:
There is a philosophical aspect.

Instruments like this are traditionally kept behind regulatory guardrails within traditional finance.

As part of the financial revolution made possible by crypto, one of our goals is to democratize access to these instruments.

Interest-rate swaps, which are essentially what we’re developing here, are among the most widely used contracts in the world.

They represent an enormous amount of outstanding value within traditional finance.

Being able to provide access to that kind of instrument to anyone is what motivates us to continue doing this work.

On a more practical level, the vault gives the variable participant leveraged exposure to yield relative to the fixed rate.

To use simple numbers, imagine the fixed rate is 10%.

If the vault ultimately generates 12%, the variable participant earns a 20% return relative to the amount paid for the yield.

The same dynamic also applies on the downside.

With strong calculations, the participant may significantly increase the opportunity for profit.

The fixed side also receives payment upfront, which is invaluable in DeFi or any other financial system.

Receiving money upfront allows the participant to act on other opportunities that arise.

Instead of waiting until the end of the period to receive the yield, the fixed participant can begin using that money immediately and benefit from the additional time.

Both sides gain different opportunities from the way the instrument is structured.

That is the core value of the product, in my opinion.

Dingo:
I want to add something quickly.

I was looking at crypto Twitter during the discussion, and there are rumors about the issue we discussed at the beginning.

It appears that preventing yield on idle stablecoin balances may become a core part of the compromise.

If that goes through, users may no longer be able to leave stablecoins sitting on Coinbase and earn yield passively.

However, that does not appear to prevent participation in structured stablecoin-yield products.

We’ll have to see how the final language develops.

But if users can’t simply leave stablecoins idle on an exchange and earn yield, that could drive more engagement with DeFi.

If someone is participating in a structured on-chain product, this could potentially be bullish for us.

I wanted to mention that before we close.

Justin:
That’s great to hear.

It’s always a pleasure to have Rx on.

Thank you so much for your time today, sir.

Ultimately, there is no such thing as eliminating risk entirely.

But these vaults provide opportunities for people to control, divide and assume risk in different ways.

That is especially important in the kind of market we’re entering now.

Hopefully, the downturn won’t last too long and Bitcoin will recover.

Thank you again for joining us, Rx. It has been great having you.

Rx:
Thank you.

Justin:
Thank you, Dingo, and thank you to everyone who tuned in today or will be listening afterward.

Having Rx on provided all the alpha we have for today.

He does an excellent job explaining the vaults, and it’s exciting to hear.

We’ll be back again next week at the same time, Friday at 1 p.m. Eastern.

Thank you, and we’ll see you then.

Take care, everyone.

Dingo:
Take it easy, guys.