How Reflect Generates Yield
An extensive overview of the avenues of interest generation on deposits to Reflect Protocol.
Introduction to Decentralized Yield Generation
Reflect Protocol builds on-top of the interest bearing ‘Liquid Staking Token (LST)’ primitive tied directly to Proof of Stake Rewards, Maximum Extractable Value (MEV) and Priority Fees generated by Validators.
Reflect Protocol deems this as - Native Yield and combines it with Delta-Neutral Hedging to remove Solana (SOL) volatility.
What is Native Yield?
Native Yield in an extended definition is Interest generated from the operation and economic security of the blockchain itself. Validators and Stakers earn a percentage of total network revenues diversified into different streams as outlined below.
Proof-of-Stake Rewards
Staking on Solana involves locking up your SOL tokens to support the network’s security and operations. In return for staking your tokens, you earn a native yield, which is a portion of the rewards generated by the network.
Learn via Solana.com
Maximum Extractable Value (MEV)
By operating a Jito Network enabled client the Reflect Validator generates additional returns through the distribution of MEV tips paid by advanced onchain traders.
Learn via Jito Foundation.
Priority Fees
Priority Fees are the additional lamports sent by transaction submitters as an incentive for inclusion within a block. Validators aim to make the most economically positive blocks within the bounds of their ordering system to generate additional yield.
Learn via Solana.com
What is Delta-Neutral Hedging?
Delta-neutral hedging is a strategy that aims to balance positive and negative price movements in related assets, making the overall portfolio resistant to price changes of any magnitude. It involves taking offsetting positions in different but correlated instruments. For example, holding a cryptocurrency while simultaneously shorting an equivalent amount of futures on that same crypto. This approach allows investors to profit from other factors (like funding rates or yield) while effectively neutralizing exposure to price fluctuations in the underlying asset, whether small or large.
How does Funding Rate income/payments work?
Funding rates are periodic payments exchanged between long and short traders in perpetual futures markets. When the majority of traders are long, they pay a small fee to short traders, and vice versa. This mechanism helps keep the futures price aligned with the spot price. Traders can earn income by taking the less popular side of the trade, receiving payments from the dominant side. However, they also risk paying if market sentiment shifts.