High Yield ETH Index (hyETH)

Overview

hyETH is designed to track and gain exposure to some of the highest ETH-denominated yields available within the DeFi ecosystem. Tokenisation abstracts away the complexity, management, and need for continual monitoring and trading for users.

Methodology

hyETH aims for yields above Lido’s 30d average staking rate. As of Jan 2025 Index Coop upgraded hyETH to run on Morpho’s vault infrastructure with Gauntlet selected as the risk manager. hyETH deposits WETH into a purpose run Morpho vault. Gauntlet will lend or “allocate” WETH across a selection of Morpho Markets as per the parameters and criteria below:

  • Target Pendle Principle Token (PT) markets that have fixed yields greater than the Lido staking rate (~3%)

  • Each selected Pendle Market TVL must be no lower than $5m

  • Each underlying contract must be open‑source and audited.

  • No single Morpho market will take up more than 1/3rd of the allocation

  • 91.5% or higher LLTV (max LLTV is defined by Morpho governance)

  • Adaptive Curve interest rate model

  • LST and LRT assets may also be allocated against, to supplement or substitute the PT regime depending on prevailing yield opportunities.

  • Future versions may tap non‑ETH blue‑chips (e.g., WBTC, stablecoins) when yields justify it.

  • All assets will be subject to Gauntlet’s discretion, due diligence and expertise as a highly qualified, experienced, professional risk manager.

The Index Coop retains ultimate control over the product and whilst unlikely can withdraw assets from the vault at any time if it is considered there is a material risk to users. The Index Coop also retains the power to select a new risk manager* and/or protocol or yield strategy/strategies, with the most material changes being subject to an $INDEX token holder vote via IIP. (*subject to any outstanding contractual agreements)

Maintenance

Gauntlet will dynamically manage the vault with the primary objectives focused on yield optimisation, borrow elasticity, market stability and align exposure with available liquidity. This helps to protect deposits while maximising returns.

Fees

20% Performance Fee | 0.00% Streaming | 0.00% Mint | 0.00% Redeem

Technical Implementation

hyETH is 100% allocated to this Gauntlet-managed Morpho Vault. The hyETH token acts as a wrapper around the vault, allowing any incentives distributed to the vault to be compounded back into the product. Learn more about Morpho Vaults here.

Details

Contract

Description

BaseManagerV2

used to operate, rebalance, and update contracts connected to the product; product-specific contract

FeeSplitExtension

connects the product to the Streaming Fee Module;

product-specific contract

AuctionRebalanceExtension

connects the product to the Auction Rebalance Module; product-specific contract

AuctionRebalanceModule

used to execute auction rebalancing for the product; protocol-wide contract

DebtIssuanceModuleV2_1

used to issue and redeem units of the product token; protocol-wide contract

StreamingFeeModule

used to charge and update fees on the product; protocol-wide contract

Cross-chain Implementation:

Risks

hyETH users should understand that they are supplying, also known as lending, their ETH assets to borrowers on Morpho in return for yield. The higher the borrow demand the higher the potential yields available.

‍ Risk for suppliers in lending markets comes primarily from insolvent debt. Insolvent debt generally happens when liquidators do not liquidate risky borrow positions (positions with health factor < 1) in a timely manner. This can happen when collateral asset prices are decreasing, and there is insufficient liquidity on-chain for liquidators to liquidate positions profitably. Remember that liquidators are rational, profit seeking entities and when market conditions render liquidation opportunities unprofitable, they will not liquidate underwater borrowers. In the case of an insolvent position within a Morpho Market, the losses are immediately socialized per rata to all suppliers to that market. This ensures there is no incentive to 'bank-run' the markets, providing more stability and long-term growth.

When deciding to reduce exposure to specific markets, the primary consideration is the potential for insolvent debt under large price drops and liquidity drops. If a market's exposure under an X% drop in the collateral asset price exceeds the liquidity available during a Y% liquidity crunch, action is taken to decrease exposure. X and Y is determined based on historical data, typically setting:

• X = the 99th percentile day-over-day price drop

• Y = the 99th percentile day-over-day drop in DEX liquidity over the past year.

By adhering to this principle, the risk manager aims to maintain near zero insolvency risk even under severe market conditions. In practice, this means managing the exposure such that the vault has minimal insolvent debt (ex: less than 10bps of total vault TVL) under market conditions as extreme as large price drawdowns and large liquidity drawdowns. The expected number of liquidations and the net volume over adverse price and liquidity scenarios are continually simulated. When expected insolvencies under the prescribed liquidity and price drawdown conditions exceed tolerance thresholds, the vault's exposure to the at-risk markets are reduced as much as possible. This entails reallocating liquidity from markets more likely to experience insolvency to a safer market early and often. If there are no suitable lending markets, Gauntlet will reallocate supply to the idle market.

Another risk associated with lending is liquidity risk. If the underlying markets are at maximum utilisation, hyETH users may be unable to withdraw their WETH. Morpho markets are designed to target 90% utilisation in order to maximise lent assets to earn yield but with enough left in the vault to handle typical day to day withdrawals. Users holding >10% of hyETH supply may wish to reduce their holding size in order to avoid this immediate issue, or understand that they may have to make multiple smaller withdrawals spread out over a short period of time whilst the vault adjusts and liquidity is replenished. For an in-depth overview of Morpho markets and utilisation see here.

In addition the following general risks may apply to this digital asset: full or partial loss of digital assets due to technical hacks, exploits, or failures that may occur at the protocol or smart contract level of a product’s infrastructure; restrictions placed on the digital assets by regulatory authorities in the end users region; loss of digital assets or loss of access to the digital assets due to decisions made by centralized providers of the underlying assets; full or partial loss of digital assets through standard product operations which can be hampered by unexpected market conditions; full or partial loss of digital assets due to changes to underlying product assets made by the originating protocols; full or partial loss of digital assets due to volatility, correlation, value at risk, and contagion risks; underperformance of digital assets due to deviation from intended methodology; full or partial loss of digital assets due to the volatility of underlying tokens.

Additional Resources

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