The Perp Vault strategy is a liquidity provision and trading strategy built around the Asset/USDC pair on leading decentralized and perpetual exchanges (e.g. GMX V2) to earn from trading fees and trader losses.
Profit mechanics and portfolio rebalancing
This vault earns yield from several complementary sources:
Trading fees: Every time traders open or close positions on the platform, a fee is paid. For Asset/USDC (a volatile asset pair), for instance on GMX V2, the base fee is approximately 0.05% of the position size if the trade moves the pool toward a balanced state, or 0.07% if it moves the pool further out of balance. These fees are collected by the liquidity providers on each trade, instantly boosting the pool's value → increasing the price of LP tokens.
Counterparty PnL (Trader losses and liquidation fees): The vault acts as the counterparty to traders – when traders lose on their leveraged positions, those losses translate into profits for the pool. Historically, the majority of retail leveraged traders are net losers, so over time these losses accrue to LPs. Additionally, if a trader’s position is liquidated, a liquidation fee is charged and added to the pool’s earnings. The vault thus gains from any negative PnL of traders and from one-time liquidation penalties.
Interest on loans: The strategy may deploy a portion of assets in lending markets or as margin liquidity to earn interest. For instance, idle USDC might be lent out on trusted platforms or used in structured products to generate yield when not needed for immediate trading liquidity. The vault seeks to capture any available interest for distribution to LPs, boosting its base return.
Options premiums: To enhance returns and manage risk, the strategy could use the controlled options. This can include selling covered put options on asset holdings to earn premium income. All options positions are taken under strict risk models (avoiding excessive leverage or naked exposure). The use of options is conservative and hedged (e.g. cash-secured puts), ensuring that it adds incremental yield without jeopardizing the core liquidity position. You’re never worse off – the only variable is how much you earn. The downside is limited to missing out on additional upside.
All these income streams together contribute to the growth of the vault’s LP token value. The LP token price rises as fees, interest, and trading profits accrue to the pool. And realized yield in asset can be calculated as the relative increase in the LP token price, adjusted for the change in Asset price between deposit and withdrawal:
A simple performance metric for the pool is its annual percentage yield (APY), calculated as:
The change in total pool value (and thus LP token price) at any given time is determined by the formula:
In other words, the pool's value increases with fee income and when traders as a whole lose money, and decreases if traders win on net (minus fees).
Impermanent Loss scenarios
Because the vault holds a 50/50 mix of Asset and USDC in the liquidity pool, impermanent loss (IL) is an important consideration.
Impermanent loss refers to the opportunity cost or value loss that occurs when the two assets in a pool change in price relative to each other. The pool continuously rebalances — if Asset's price rises, the pool automatically sells some Asset for USDC (reducing Asset exposure), and if Asset’s price falls, the pool buys more Asset with USDC (increasing Asset exposure). This keeps the ratio near 50/50, but it means the vault’s asset mix and value will diverge from a simple buy-and-hold of Asset.
To assess the effectiveness of LP relative to just hypothetical 50/50 Asset and USDC holding strategy, the performance indicator is used here. The benchmark of holding two assets (Asset/USDC) represents a geometric mean portfolio of the underlying tokens:
In summary, providing liquidity in Asset/USDC means sacrificing some upside in exchange for downside protection and steady income. This balanced approach often appeals to investors who want to monetize their assets while reducing directional risk.
Note: whether the strategy deposits USDC or Asset into the vault, it will end up with a 50/50 exposure to Asset and USDC in the pool. Thus, we consider preferred exposure choosing deposit asset – depositing Asset in this strategy gives a slightly more bearish/hedged exposure by converting half to USDC. The percentage yield on the LP token is the same for all depositors, but your returns measured in your deposit asset will vary based on Asset’s price movement
Impermanent vs. Permanent Loss: Impermanent loss is unrealized as long as funds remain in the pool – if the price of Asset returns to the entry level, the impermanent loss disappears. However, withdrawing while prices have significantly diverged from the entry point locks in the loss, making it permanent (realized). Over time, accumulated trading fees and yield can offset impermanent loss, especially with sufficient trading volume. In practice, IL remains a real risk during sharp one-way price trends, and short-term losses are possible. The strategy is best suited for a medium to long-term horizon, allowing realized yield to compensate for interim price divergence