5 New Sommelier Vaults Now Capturing Governance Token Yield

Sommelier has introduced five new vaults that offer holders of governance tokens an opportunity to earn passive yield ranging from 2% to 4%. Supported tokens include 1inch, ENS, LINK, SNX and UNI.

The strategy itself was designed by data research firms Seven Seas Capital and Define Logic Labs, the team behind Real Yield ETH.

Existing governance tokens in DeFi offer minimal yield opportunities. Lending these tokens out on Aave, for example, will earn holders sub 1% yield. Sommelier’s new vaults are designed to fill that void, Zaki Manian, the company’s co-founder told Blockworks. 

These latest vaults are designed to capture the huge arbitrage opportunity in the ETH market, Manian explained. 

“There’s a massive amount of ETH sitting idly loaned out on protocols like Aave, and the borrow cost of ETH is around 4%. Meanwhile, yield opportunities on ETH are significantly higher. At a high-level, these gov token vaults capture that arbitrage and convert it into UNI, LINK, ENS, etc. yield,” he said.

When users deposit into these new vaults, their governance tokens are used as collateral to borrow ETH. That ETH is then deposited into Sommelier’s Real Yield ETH vault, where the assets generate yield through looped leverage and the optimization of tick range liquidity on Uni V3.

“Looped leverage does come with liquidation risk, but the Real Yield ETH vault is equipped to mitigate that risk by constantly monitoring market conditions and adjusting leverage ratios as needed,” he said.

Another important feature that these new vaults offer will be “gas holidays.”

The vault will be holding a simple position when rewards are being harvested, which means that the vault will periodically move into one associated governance token — lowering any gas costs. 

“The first window is the first 48 hours after launch, and then depositors will be notified when there are subsequent gas holidays. As with all Sommelier vaults, they’re non-custodial, so you can enter and exit at any time, but this helps people depositing smaller amounts who are more sensitive to high gas fees,” Manian said.

The first 40 addresses to deposit over $1,000 in liquidity in each vault will each be given an additional $25 in rewards. US-based traders will not have access to Sommelier vaults.

Updated June 6, 2023 at 11:01 am ET: Added clarification on vault usage.

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