Hedge Mode

Background

Vaultka V2 enables users to maximize capital efficiency through leveraging Jupiter Perpetual Liquidity Pool (JLP) tokens. However, leveraging JLP tokens, particularly when SOL makes up a significant portion of the pool, introduces heightened liquidation risks, especially during sharp price drops of SOL. JLP tokens typically contain 40-50% exposure to SOL.

When you leverage JLP, you borrow assets to amplify your position. The challenge lies in the fact that JLP’s value is closely correlated with SOL, meaning if SOL drops significantly, the value of JLP will also drop. This amplifies the risk of liquidation, especially with leveraged positions. In fact, if SOL declines sharply, the leveraged position could quickly breach its liquidation threshold due to JLP’s SOL exposure.

Currently, the SOL exposure in JLP is estimated to be about 47%, which suggests that, in theory, a 1% drop in SOL would lead to a 0.47% decline in the value of JLP tokens. Please note that this simplified beta estimate does not fully capture the true risk profile. Due to the dominant long open interest (OI) in Jupiter Perpetuals on SOL, there exists a natural hedge that mitigates the downside impact. As a result, while some raw calculations might sometimes indicate a sensitivity larger than 0.47, the effective SOL exposure for JLP is actually much lower.

Key Assumptions

When using Vaultka V2 to loop JLP at 6.66x leverage, you are essentially using your JLP as collateral to borrow USDC, and then reinvesting the borrowed funds into more JLP tokens. This strategy is designed to magnify yields by increasing your exposure to JLP. However, it also comes with an inherent risk: if the price of SOL falls sharply, the value of JLP will decrease, and the leveraged position could face liquidation.

Key assumptions to understand the risk involved:

• Loan-to-Value (LTV): When you deposit JLP as collateral, you can borrow up to 85% of the value of that collateral in USDC.

• Liquidation Threshold: The position will be liquidated if the debt rises to 90% of the collateral value. This means that as the value of JLP decreases, the amount you owe in USDC can quickly exceed the value of the JLP collateral, leading to liquidation.

• SOL-JLP Price Relationship: A straightforward beta calculation suggests that for every 1% drop in SOL, the value of JLP decreases by approximately 0.47%.

Note that this figure does not fully capture the true risk profile. Due to the dominant long open interest in Jupiter Perpetuals on SOL, there is an effective hedge that generally reduces the actual exposure of JLP to SOL price movements. While raw calculations might sometimes indicate a sensitivity of 0.47% (or even higher), the hedging effect means that the effective SOL exposure is considerably lower.

Price Relationships Example

If SOL drops by 11.83%, JLP will decrease by 5.56%. This drop in JLP could push the value of your leveraged position to the 90% liquidation threshold, at which point the position would be liquidated to repay the borrowed amount.

Features

To address the liquidation risk associated with SOL price drops, Vaultka V2 introduces Hedge Mode. This feature allows you to mitigate the potential loss by borrowing SOL instead of USDC. By borrowing SOL, users can purchase more JLP tokens, but this creates a partially hedged position.

The benefit of this approach is that SOL debt decreases more rapidly than JLP collateral when SOL prices fall. This reduces the Loan-to-Value (LTV) ratio, lowering the risk of liquidation. Essentially, Hedge Mode helps buffer the effects of a SOL price drop, giving the position more room to absorb market volatility before liquidation occurs.

Important Note: While Hedge Mode reduces liquidation risk in the event of SOL price drops, it is not fully protective. Other market factors, such as a decline in BTC or ETH prices, can still cause a drop in JLP value, leading to liquidation. The hedge mode only addresses the SOL-related risks.

How does it work

When Hedge Mode is activated, instead of borrowing USDC to leverage the position, you borrow SOL. Since SOL drops in value faster than JLP, this helps to offset the impact of a declining SOL price on your leveraged position. The overall impact is that the SOL debt becomes smaller relative to the JLP collateral, reducing the overall LTV and protecting you from being liquidated.

Here’s how it works in practical terms:

Without Hedge Mode: Borrow USDC to leverage JLP.

• If SOL drops, the debt in USDC remains constant, but JLP’s value decreases, increasing the risk of reaching the liquidation threshold.

With Hedge Mode: Borrow SOL instead of USDC to leverage JLP.

• As SOL declines, the value of the SOL debt decreases faster than JLP collateral, which helps lower the LTV and reduces the liquidation risk.

Hedge Mode provides an additional layer of protection, ensuring that your leveraged position can withstand more volatility in SOL prices before reaching the liquidation threshold.

Formula and Example Calculation

Example: Initial Position Without Hedge Mode

Let’s assume you start with $100 worth of JLP as collateral. With 6.66x leverage, you borrow $566 USDC.

• Your total collateral value is $666 (JLP).

• Your debt is $566 (USDC).

• The liquidation threshold is reached when your debt exceeds 90% of your collateral value, or when the collateral value drops to $629.00.

Thus, a 5.56% drop in JLP will trigger liquidation. Given the relationship that JLP drops 0.47% for every 1% drop in SOL, a 11.83% drop in SOL would be required to trigger liquidation.

Conclusion

By enabling Hedge Mode, you can significantly reduce the liquidation risk that comes with leveraging JLP positions in the face of declining SOL prices. This feature provides an essential safety mechanism by ensuring that your debt (SOL) decreases more rapidly than the collateral (JLP), maintaining a safer Loan-to-Value (LTV) ratio. However, it is important to note that this hedge only protects against SOL-related risks, and declines in BTC or ETH could still lead to liquidation.

This added protection helps keep your leveraged position stable during market volatility, allowing you to continue earning amplified yields without exposing yourself to unnecessary risk.