Backtesting Results

Backtesting Parameters

  • Backtesting Period - 1st January 2022 to 1st January 2023

  • Underlying Asset - ETH

  • Strategy - Twin Peaks

  • Base Coupon - 4%

  • Bonus Coupon - 10.72%

  • Max APY - 14.72%


Tests were run on historical price data for the year 2022. Our analysis shows that depositors would have earned a 7.052% yearly return, with full protection of their funds. The deposited ETH would have generated a cumulative return as illustrated below.

The Twin Peaks strategy generated a return of 7.052% on the staked capital

The vault outperformed the base coupon rate 48.077% of the time, with an average option payoff of 6.24%. Below is a breakdown of the hit rate of the strategy for the same period.

Comparison with DOVs (High Risk)

Decentralized options vaults (DOVs) generate yield by selling options against the collateral staked in the vault. However, despite their initial traction, DOVs have generated poor returns for depositors and have seen a significant drop in users and TVL since inception. This is mainly due to the financial inviability of the current strategies employed by DOVs.

There are two methods for profitably employing options-selling strategies. The first is volatility arbitrage, a complex strategy conducted by sophisticated options market makers. The second is yield enhancement on top of directional exposure, which is how DOVs typically run their strategies. The two most common DOV strategies are call overwriting—selling fully collateralized calls on an underlying token like ETH—and cash-secured put selling—selling fully collateralized puts using USDC as collateral.

First, we have focused on the covered call strategy for generating yield from volatile assets such as ETH and WBTC. The major drawback of this strategy is the upside risk, as selling a call limits the potential for profit. If the underlying asset experiences significant growth in value, the strategy experiences a loss vs. simply holding the asset. This means that although the only attractive feature of volatile assets is their upside potential, this same upside exposure presents capital risks to the DOV strategy.

We have used Ribbon Finance's ETH covered call historical data and Stake DAO's ETH covered call v2 historical data for the same 1-year time period of 1st January 2022 to 1st January 2023. Below are the results of how the strategy played out in that period.

As can be seen from the graph above, both protocols have generated a negative return over a 1 year period and have even underperformed further during times of high volatility. Similarly, our analysis of the put-selling strategy showed steep losses over a 1 year period. The main risk in a put-selling strategy is that the capital experiences losses when the market falls below the put option strike price and the losses are virtually uncapped. Below is an illustration of the returns of the put-selling strategy for the same period of 1st January 2022 to 1st January 2023.

As is evident from the graph above, the deposited capital experienced extreme losses of over -27.19% which were exacerbated due to the severe drawdowns in the market in 2022. In both option selling strategies, not only is the yield generated insignificant but the capital itself is at high risk due to the short position on the volatility of the underlying. In both these strategies, the principal is exposed to limitless losses when the market rallies or plunges, making them economically unfeasible as a sustainable income source.

For a more rigorous analysis of the option-selling strategies employed by DOVs, check out this article

Comparison with Lending (Low Risk)

Decentralised lending pools create algorithmic money markets to consolidate liquidity for lending and borrowing. How much interest a borrower needs to pay on their loans, and how much interest a lender can receive in return, is determined by the protocol formulas which are based on supply and demand. The supply and demand are quantified through the pool utilisation rates which increase the supply and borrow rates as the utilisation increases.

A historical analysis of the utilisation rates of popular pools such as WETH and WBTC reveals that the utilisation for these pools has never crossed the 60% mark. Over the entire pool lifetime, demand has waned behind the supply and left most of these pools underutilised with measly interest rates for both the borrowers and the lenders. Below is an illustration of the historical return rates for ETH lending across Aave and Compound.

As can be seen from the graph, decentralised lending pools have returned less than 1.2% on an annual basis. The measly interest rates have underperformed even traditional low-risk securities such as treasury bills over the long run.


The Twin Peaks vault presents an all-weather investment opportunity through principal-protected structured products. Investors looking to safely profit from the market's volatility without any capital risks will benefit immensely from investing in the vault, which consistently outperforms both risky alternatives such as option selling as well as safer alternatives such as lending.

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