In the world of DeFi, few projects have garnered widespread attention like Yield Basis since its launch. This is a new protocol launched by Curve Finance founder Michael Egorov in 2025, featuring multiple technological innovations - eliminating Impermanent Loss, circular leverage, stablecoin demand creation, BTC liquidity release, governance token value capture, and more.
Its complex mechanism design and multi-layer narrative structure are both anticipated and provoke cautious thinking. On one hand, the protocol attempts to address the core issue of Impermanent Loss that has long plagued AMM liquidity pools, which is considered a 'holy grail-level' breakthrough for liquidity providers; on the other hand, the project's strategic intentions and the historical controversies surrounding the founder have also sparked market discussions. For example, Egorov was once on the brink of liquidation due to massive borrowing positions, raising community concerns about systemic risks in DeFi; he has also faced questions from investors regarding governance issues.
These factors intertwine to make Yield Basis a phenomenon-worthy project for in-depth study. This article will analyze the technical principles, operational mechanisms, token economic model, and strategic motivations of Yield Basis from a professional perspective, and objectively assess its potential risks.
???? The technical principles of Yield Basis
Basic Settings
Before diving into the analysis, it is necessary to clarify the asset allocation of Yield Basis. This protocol is designed for specific currency pairs (x, y), and theoretically, x and y can be any Token, but the effectiveness of the mechanism is only reflected under specific combinations:
x: A volatile asset for value storage, mainly BTC, ETH, etc. The current market focus is primarily on the situation where x is BTC. It is important to note that since BTC is not an Ethereum native asset, Yield Basis actually uses Wrapped Bitcoin. Although Wrapped Bitcoin has various forms (such as WBTC, cbBTC, etc.), this article uniformly refers to it as wBTC. This "wrapping" feature significantly impacts the security and stability of Yield Basis, which will be elaborated on in the following chapters.
y: stablecoin asset. Since Yield Basis serves its own Curve ecosystem, "the肥水不流外人田", here y must be Curve's own stablecoin crvUSD.
The setting for this (wBTC, crvUSD) applies to the entire article, and we won't repeat it later.
Core Issues and Mathematical Principles
In traditional Automated Market Makers (AMM), the core challenge faced by Liquidity Providers (LP) is Impermanent Loss. This loss arises from the passive market-making behavior of LPs: when asset prices change, arbitrageurs "correct" the prices in the pool through trading, causing LPs to always be in an unfavorable situation of "selling low and buying high", which undermines the willingness of token holders to provide liquidity.
From a mathematical perspective, in traditional AMMs, the value of LP is proportional to the square root of the price of token x:
Based on the constant product formula x \times y = L^2 and the price relationship P_x = \frac{y}{x}, it can be derived that: x = \frac{L}{\sqrt{P}}, y = L\sqrt{P}
The total value of the LP combination is: V = xP + y = \frac{L}{\sqrt{P}} \times P + L\sqrt{P} = 2L\sqrt{P}, which confirms the conclusion that "the value of the entire LP is proportional to the square root of the price of Token x".
When the price changes by a factor of d, the value of the LP becomes: V_{LP} = 2L\sqrt{Pd}
If the assets are not deposited in the pool as LP, then the asset value after price changes should be: V_{hold} = xPd + y = (d+1)L\sqrt{P}
V_{LP}-V_{hold}=L\sqrt{P}(2\sqrt{d}-d-1)=-1\times L\sqrt{P}(1-\sqrt{d})^2, always less than 0, always suffering losses, this is the source of Impermanent Loss.
Michael Egorov believes that the root of Impermanent Loss lies in the fact that the value V of LP and the asset price P are not linearly related, but rather proportional to the square root of P, i.e., V \propto \sqrt{P}. If a linear relationship V \propto P can be achieved, Impermanent Loss can be fundamentally eliminated. This is the mathematical theoretical foundation of the entire Yield Basis.
Yield Basis as an intermediary
The goal of Yield Basis is to elevate the dependence of LP position value on price from \sqrt{P} to P, with the specific implementation path being:
LPs, please stop providing liquidity directly to the DEX pools. Give your assets (like wBTC) to me (Yield Basis) first.
I (Yield Basis) will perform an "optimization" operation internally, and then provide the optimized Liquidity combination to the DEX (following the principle of "not letting the肥水流外人田", this DEX is Curve CryptoSwap).
After my "optimization" of this liquidity, its value will no longer be proportional to the square root of the wBTC price, but will instead have a linear relationship with the price of wBTC. In this way, isn't Impermanent Loss eliminated?
LP gains the same price exposure as holding coins while still earning trading fees. This sounds almost ideal: earning fees without incurring Impermanent Loss. No wonder many people call Yield Basis the "ultimate strategy" that LPs have been dreaming of.
How does the magical effect come about?
So, how does Yield Basis work its magic to turn "LP value proportional to the square root of price" into "LP value linearly proportional to price"? The answer lies in what it creates, the so-called "Compound Leverage".
The specific operation is as follows: When a user provides $100 worth of wBTC, Yield Basis will use this wBTC as collateral to borrow $100 worth of crvUSD. Then, it will package this $100 wBTC and $100 crvUSD together into an LP position and place it into the Curve pool. In this way, the total value of the LP position provided by Yield Basis is $200, which is twice the value of the assets initially provided by the user, that is, 2x leverage. Yield Basis states that it is this 2x leverage that creates a linear relationship between the LP value and the wBTC price.
Why can a simple 2x leverage achieve such amazing results? The white paper contains a lot of formulas, but the core logic is not that complicated. A simple integral formula is enough to illustrate this:
Yield Basis uses 2x leverage, making the yield rate of leveraged LP value Vl twice that of unleveraged LP value Vu, i.e., \frac{dV_l}{V_l}=2\frac{dVu}{Vu}.
Integrating both sides of the above yield equation, we get ln(V_l)=2ln(V_u)+C, thus obtaining V_l \propto (V_u)^2.
We know that the value of an unleveraged LP Vu is proportional to the square root of the wBTC price (P), that is, V_u \propto \sqrt{P}.
Substituting V_u \propto \sqrt{P}, we get V_l \propto (\sqrt{P})^2, which means V_l \propto P.
Look, the value V_l of the leveraged LP is now linearly related to the price P of wBTC, and the Impermanent Loss has "disappeared".
The key to the above mathematical derivation process lies in "integration", which implies that \frac{dV_l}{V_l}=2\frac{dVu}{Vu} this leverage yield formula must be continuously maintained in order to be able to "accumulate".
When the price of wBTC rises, the value of the wBTC collateralized by users also increases, and Yield Basis needs to borrow more crvUSD;
When the price of wBTC drops and the value of the collateral decreases, Yield Basis must automatically repay part of the crvUSD debt.
In short, this dynamic rebalancing must always be carried out, and the actual LP invested in Curve must always be twice the user’s own assets in order to allow the 2x leverage effect to be "continuously executed," resulting in a compound-like effect. This is the origin of the term "compound leverage" and the true source of the magic of Yield Basis.
⚙️ System Operation Mechanism
Initial Leverage Construction Process
User Deposit: Users deposit a single asset, such as 1 wBTC, into the smart contract of Yield Basis.
Flash Loan Borrowing: The Yield Basis protocol uses 1 wBTC deposited by the user as collateral to borrow an equivalent amount of crvUSD (for example, crvUSD worth $100,000) through a Flash Loan from Curve's lending protocol Llama Lend.
Provide Liquidity: The protocol immediately deposits the 1 wBTC provided by the user along with the borrowed crvUSD into the wBTC/crvUSD liquidity pool of Curve CryptoSwap AMM.
Generate LP Token: This deposit will generate an LP Token, which represents a liquidity share worth 2 wBTC (1 wBTC + crvUSD worth 1 wBTC) in the pool.
Repaying the Flash Loan: Yield Basis uses this newly generated and more valuable LP Token as collateral to initiate a standard CDP (Collateralized Debt Position) loan in Llama Lend, borrowing an amount of crvUSD equivalent to the first step Flash Loan amount.
Close the Loop: The protocol uses the CDP loan to repay the original flash loan, thereby completing the entire leverage construction loop.
Minting Derivatives: Ultimately, users will receive a derivative token named ybBTC. This token represents the user's ownership in the 2x leveraged LP position.
Through this series of automated operations, users only need to deposit one type of asset to seamlessly obtain a market-making position worth twice the value of their deposit.
Dynamic Rebalancing Mechanism (Releverage)
The core of the system is dynamic rebalancing. When the price of BTC fluctuates, if no adjustments are made, the leverage ratio will deviate from 2x, disrupting the linear exposure characteristics. To address this, Yield Basis introduces "leverage rebalancing AMM" to automatically adjust positions.
Price Increase Situation: The rise in wBTC price has led to an increase in the value of collateral, with the actual leverage ratio being below 2x. The rebalancing AMM will automatically borrow more crvUSD, similar to "adding to positions in the direction of the trend," causing the debt to occupy half of the total position again.
Price Drop Situation: Crises generally occur during downturns, so the author will elaborate on the Releverage process when the price of wBTC drops. According to the examples provided in the official documentation:
Initial State: BTC price is $100,000, the leveraged LP consists of 1 wBTC (user asset) and 100,000 crvUSD (debt), with a total value of $200,000 and 2x leverage.
Price Drop: BTC fell to $90,000, total value of LP is $190,000, debt remains at 100,000 crvUSD, leverage ratio rises to 2.11>2, need to deleverage.
Position Sale: Releverage AMM sells part of the position. The LP position to be sold corresponds to 0.053 wBTC + 5,300 crvUSD underlying assets, worth 0.053\times 90000＋5300＝10070 USD, but to attract arbitrageurs, Releverage AMM sells this LP position at a discounted price of 10,000 crvUSD.
Arbitrage Execution: The arbitrageur believes there is a profit to be made, paying 10,000 crvUSD to acquire wBTC equivalent to the sold position, which is 10070/90000 = 0.112 wBTC.
Leverage Recovery: After adjustment, the LP position becomes $180,000 ($90,000 wBTC + $90,000 crvUSD), restoring 2x leverage.
Note that in this case, arbitrageurs obtain wBTC as their profits. The attitude of arbitrageurs towards these wBTC profits, holding or selling, becomes a key factor in whether Yield Basis can operate stably during BTC price fluctuations.
???? Token economic model
Three-layer Token Architecture
ybBTC: A certificate of rights for users who deposit BTC, representing ownership of a 2x leveraged LP in the BTC/crvUSD liquidity pool. As the underlying LP earns trading fees while deducting borrowing interest and arbitrage costs, the value of ybBTC continues to grow. ybBTC can be freely transferred and traded, allowing users to exit by selling.
YB: The governance token of the Yield Basis protocol. Users can choose to stake ybBTC, forgoing the right to directly receive transaction fee earnings, in exchange for YB token rewards. This design offers two revenue models:
"Creditor" model: Hold ybBTC to continuously earn a share of transaction fees in "real money";
"Equity" model: Stake ybBTC to obtain YB, currently "liquidity mining", expecting YB appreciation for higher capital gains.
veYB: This is the vote-escrowed version of the YB governance token. Users can lock their YB for a certain period (up to 4 years) in exchange for veYB. The longer the lock-up period, the more veYB is obtained in exchange, and veYB cannot be transferred or traded during the lock-up period. In exchange, veYB holders have governance rights over the protocol, including the most important voice in decisions such as parameter adjustments and fund usage. More importantly, similar to ybBTC, veYB can also share in the protocol's fee income. This mechanism is similar to Curve's veCRV mechanism, encouraging everyone to become a long-term stakeholder in Yield Basis, achieving the goal of 'reducing YB selling pressure and maintaining YB price.'
Profit Distribution Mechanism
Yield Basis has achieved 2x leveraged LP positions, naturally receiving the previous 2x fee income, and with Impermanent Loss eliminated, aren't the LPs of Yield Basis just able to "lie down and count money"? Wake up, there is no such good thing in the world. The profit distribution model of Yield Basis is as follows:
Total Revenue: The leveraged LP positions provided by Yield Basis earn trading fees in the Curve pool. According to Curve's rules, 50% must be distributed to veCRV holders, and the remaining 50% belongs to the Yield Basis protocol, which constitutes the "total revenue" of Yield Basis.
Gross Profit: The operation of Yield Basis also requires payment of costs. First, there is the borrowing cost incurred when borrowing crvUSD while constructing leveraged LPs. Secondly, during BTC price fluctuations, there is the re-leverage cost to maintain 2x leverage (for example, discounts paid to attract arbitrageurs). The total income of Yield Basis, minus the above two costs, gives the "gross profit" of Yield Basis.
This "gross profit" will be distributed between ybBTC holders and veYB holders, with the portion allocated to veYB referred to as Admin Fee. The proportion of the Admin Fee is determined by the formula f_a=1-(1-f_{min})\sqrt{1-\frac{s}{T}} , where f_{min} is the minimum management fee rate, s is the amount of ybBTC that has been staked, and T is the total amount of ybBTC.
From the profit distribution method described above, we can know the following points:
????Impermanent Loss has not really been "eliminated", but rather "transferred"????. Yield Basis replaces the original Impermanent Loss with two new costs: borrowing costs and rebalancing costs.
When the staking rate is low (s/T→0): The management fee rate approaches its minimum value, meaning that most of the profits will flow to the non-staked ybBTC holders, incentivizing them to continue providing liquidity.
When the staking rate is high (s/T→1): the management fee rate f_{a} approaches 100%, meaning almost all protocol income is withdrawn and allocated to veYB holders, leaving the "real yield" for non-staked LPs increasingly minimal. This, in turn, will force the remaining LPs to join the staking army to avoid their own yields being diluted.
???? Strategic Motive: Make crvUSD Great Again
On the surface, Yield Basis addresses the issue of Impermanent Loss from the perspective of LPs. However, a deeper analysis reveals that Yield Basis is playing a game of "openly repairing the road while secretly crossing the river," laying out a big plan for crvUSD.
Background Analysis
As the stablecoin launched by Curve, the development of crvUSD has been lukewarm. According to data from websites like Blockworks, as of August 2025, the market capitalization of crvUSD is approximately $126 million, while the emerging stablecoin USDe has already surpassed $12 billion in market capitalization, showing a significant gap.
CrvUSD aims to emulate the successful path of USDe by attracting users through providing yields. The yield of USDe comes from the staking income of its collateral assets (such as stETH) and the funding rates of perpetual contracts. In contrast, crvUSD has targeted another piece of the pie — the LP fees of DEX. Through the complex design of Yield Basis, it attempts to eliminate the biggest concern of LPs, "Impermanent Loss," using "no loss earning fees" as a marketing gimmick to create strong market demand for crvUSD.
Attract BTC Liquidity
The Yield Basis team has a fundamental assumption: there are a large number of BTC holders in the market who are not satisfied with merely holding BTC, but wish to earn interest on their BTC, for example, by becoming LPs. However, they have been hesitant to act due to fear of Impermanent Loss. Now, Yield Basis claims to have solved this issue, essentially extending an olive branch to these individuals: "Deposit your BTC, it won’t be worse than just holding the coin, and you can also earn fee income for free!" This is expected to unlock a significant amount of BTC liquidity that has been stagnant in the past.
Whenever a user deposits WBTC worth 1 dollar, Yield Basis will automatically lend out crvUSD worth 1 dollar, forming a leveraged LP that is deposited into the Curve CryptoSwap liquidity pool. This is equivalent to using WBTC as collateral to issue crvUSD. Even better, the lent-out crvUSD is directly locked in the Curve LP pool, creating a huge "reservoir" that will not flow into the market causing sell pressure, thereby significantly reducing the risk of crvUSD decoupling.
How much liquidity can be attracted for crvUSD? Some are optimistic, believing that the potential liquidity is the entire market value of BTC, which would be in the trillions of dollars. However, the author is not so optimistic. In the author's view, Yield Basis is just playing up the traditional narrative of BTCFi, and the current development status of the BTCFi track being "tepid" already indicates that the "yield demand of BTC holders" is a false proposition. Are BTC holders really willing to risk their "digital gold" for that little interest, to be the "first to eat the crab", and try various complex new protocols?
Therefore, the author believes that recently, the liquidity scale that Yield Basis can attract is equivalent to the scale of Wrapped Bitcoin that already exists on Ethereum. For example, the leading player WBTC has issued 127.2K tokens, valued at 14 billion USD, while the second place cbBTC has also issued about 50.7K tokens, valued at approximately 5.6 billion USD. Adding them together, it amounts to a market of several tens of billions of USD. Nevertheless, considering that crvUSD currently has an issuance volume of only about 100 million USD, attracting billions in new liquidity can significantly enhance the scale of crvUSD, create user stickiness, and kickstart the flywheel, which is exactly what crvUSD urgently needs.
Build BTC→USDC highway
Attracting BTC liquidity only solves the issue of crvUSD issuance, but if crvUSD cannot be endowed with differentiated use cases and cannot provide users with a compelling reason to use crvUSD, the failure of crvUSD, which is indistinguishable from others in the fiercely competitive stablecoin arena, is merely a matter of time.
The scene targeted by Yield Basis is the exchange scenario of wBTC → USDC (or other major stablecoins). There is no doubt that wBTC can be directly exchanged for USDC, but due to the issue of Impermanent Loss, it leads to insufficient liquidity in the wBTC → USDC pool. Additionally, with the large price fluctuations of wBTC, the slippage loss from direct exchanges is relatively high.
The ambition of Yield Basis is to create the most economical and lowest slippage exchange path in the entire market with wBTC → crvUSD → USDC.
Section One (WBTC → crvUSD): If the concept of Yield Basis is successful, a large number of wBTC holders will rush in to provide liquidity, which will greatly enhance the depth of the WBTC/crvUSD pool on Curve, naturally leading to lower trading slippage.
Second Section (crvUSD → USDC): The Curve platform is already known for its efficient exchanges between stablecoins. To ensure the liquidity of this section, Yield Basis plans to "bribe" USDC holders with 25% of YB tokens, incentivizing them to provide liquidity for the crvUSD/USDC pool.
Once the comprehensive cost of this path (slippage + fees) is at its lowest, it is equivalent to creating a "highway from BTC to stablecoin". In the future, all users who want to exchange WBTC for mainstream stablecoins (like USDC) will choose this route. As a result, crvUSD is embedded into a critical trading segment, creating a rigid demand for crvUSD. Whether it's traders looking to cash out or LPs wanting to earn fees, they cannot do without crvUSD. The strategy of Yield Basis, "borrowing USDC as a stage to perform crvUSD", has created a unique and indispensable application scenario for crvUSD.
⚠️ Risk Assessment
Despite depicting an enticing prospect, Yield Basis is, after all, a complex innovative experiment, facing numerous risks and challenges. In summary, there are several aspects worth following:
systemic binding risk
Yield Basis tightly binds several core components of the Curve ecosystem - the exchange Curve CryptoSwap, the lending protocol LlamaLend, and the stablecoin crvUSD. This is a "shared fortune and shared loss" structure. Any issue in one link may trigger a chain reaction.
Limitations of Backtest Results
The backtesting simulation based on the historical data of BTC/USD over the past 6 years shows that the average annualized return (APR) of this strategy can reach 20%. Even in bear markets, it can maintain a return of about 10%, while during the bull market peak in 2021, the return rate can even reach 60%. Sounds tempting, right? But don't forget, this is just a simulated result.
Moreover, this simulation itself has flaws. For example, one of the costs, the borrowing interest rate of crvUSD, is fixed at 10% in the simulation backtest, which is obviously a very fragile assumption. The success of the protocol itself is precisely the fundamental reason for destroying this assumption. If the Yield Basis protocol is highly successful, it will create massive and rigid borrowing demand for crvUSD. This will greatly increase the borrowing utilization rate of crvUSD in Llama Lend, leading to its actual borrowing interest rate far exceeding the assumed 10% in the model. As the borrowing interest rate is a cost of the Yield Basis strategy, the surge in costs will seriously erode the net APR of the entire strategy, possibly even turning it negative.
This is a typical "success paradox": the more successful the protocol, the higher its operating costs (borrowing interest), which makes its attractiveness to users (net APR) lower. This inherent reflexivity is one of the most important risks to consider when evaluating the long-term profitability of the project.
The risk of wBTC price decline
We mentioned earlier that when the price of WBTC falls, the system needs arbitrageurs to help rebalance. This mechanism has an important prerequisite assumption: arbitrageurs, after acquiring WBTC at a discounted price, must have confidence in WBTC and be willing to hold it, waiting to sell after the price rebounds. In this way, the actions of arbitrageurs can help stabilize the market.
But what if there is extreme panic in the market, and arbitrageurs get discounted wBTC but are also afraid of holding it and choose to sell it immediately in the market? What will happen then? This not only fails to stabilize the price but, because they acquired wBTC at a lower cost, they are willing to sell at even lower prices, further exacerbating the selling pressure in the market, creating a terrifying death spiral.
This risk is especially deadly for wrapped assets. If arbitrageurs receive real BTC, based on the "Bitcoin belief," they may indeed choose to hold it. But what they receive is wBTC, a wrapped asset that relies on the custodian's credit. This concern about the custodian may shake the confidence of arbitrageurs at critical moments. This concern is not alarmist; WBTC has previously triggered a crisis of trust in the community due to changes in custodial institutions (such as its association with Justin Sun), leading mainstream platforms like Coinbase to reassess the risks.
The risk of YB price decline
The original intention behind the design of the YB Token is to allow users to use part of their current earnings to exchange for expectations regarding the future development of the project. If everyone has confidence in the future of Curve and Yield Basis, they will lock YB and enjoy future governance rights and dividends. However, if the price performance of YB is poor, for example, if the market feels pessimistic about the future appreciation potential of YB, it will trigger a series of problems.
Firstly, no one is willing to lock up YB; everyone wants to immediately receive the yield dividends from ybBTC. As the number of people receiving dividends increases, this will lead to a decrease in the actual yield rate for each LP, thereby weakening the attractiveness of WBTC liquidity.
Secondly, the previously mentioned plan to use YB to "bribe" USDC holders will also fall through. If YB is not valuable, it cannot guarantee the liquidity of the crvUSD/USDC pool, and then the entire story of building the "BTC→USDC highway" cannot continue.
the de-pegging risk of crvUSD
Finally, the most fundamental risk. The entire design of Yield Basis is built around crvUSD. If crvUSD experiences a serious depegging for any reason (such as a hack, collateral depreciation, regulatory impact, etc.), it means the foundation of the entire project will collapse. At that time, the "BTC→USDC highway" will instantly collapse, and the value of tokens such as YB and veYB will immediately drop to zero.
???? Conclusion
Yield Basis has consolidated many innovative elements in the DeFi field in recent years, where we have seen new solutions to the AMM Impermanent Loss problem, as well as bold attempts at complex leverage mechanisms and Token economic design. Ideally, Yield Basis provides LPs with a solution close to "risk-free yield enhancement": eliminating the yield gap with simple coin holding while enjoying revenue sharing from transaction fees.
But this is not a free lunch. The actual returns for LPs need to deduct borrowing interest and the cost of maintaining leverage, and they also have to share the profits with the protocol. More importantly, the fate of this protocol is closely tied to the success or failure of crvUSD. It is both the hope for crvUSD to achieve mass adoption and could also become a risk source that drags down the entire Curve ecosystem.
Investors must be fully aware that Yield Basis is not a zero-risk arbitrage paradise. Its smooth operation heavily relies on the market environment—requiring continuous ample trading volume and appropriate fee differentials; otherwise, LP returns may not be sufficient to offset borrowing and rebalancing costs. In extreme market conditions, the protocol mechanism may face impacts beyond the scope of design assumptions, leading to chain risk transmission.
It is especially important to note the deep binding relationship between crvUSD and YB Token in the system. If either side encounters a problem, it will directly impact the other. This relationship is reminiscent of the once-collapsed Terra/Luna ecosystem; although the mechanisms are different, the highly reflexive systemic risks are worth being cautious about.
Overall, Yield Basis represents an important innovative attempt in the DeFi yield space, integrating multiple elements such as liquidity mining, leveraged yields, and ve governance, providing new ideas for the problem of impermanent loss, and injecting new development momentum into the Curve ecosystem. However, just as the iron law in traditional finance states that high returns come with high risks, Yield Basis is not a guaranteed profitable investment holy grail. Its success will ultimately depend on the market's acceptance of its value proposition and the overall developmental resilience of the crvUSD ecosystem.
This article is based on public information analysis and does not constitute investment advice. Cryptocurrency investments carry significant risks; please make decisions cautiously, DYOR.
If you like this article, feel free to follow, like, and share your support!
View Original
This page may contain third-party content, which is provided for information purposes only (not representations/warranties) and should not be considered as an endorsement of its views by Gate, nor as financial or professional advice. See Disclaimer for details.
"Building a road in the open while secretly crossing the river, will Yield Basis make crvUSD great again?"
In the world of DeFi, few projects have garnered widespread attention like Yield Basis since its launch. This is a new protocol launched by Curve Finance founder Michael Egorov in 2025, featuring multiple technological innovations - eliminating Impermanent Loss, circular leverage, stablecoin demand creation, BTC liquidity release, governance token value capture, and more.
Its complex mechanism design and multi-layer narrative structure are both anticipated and provoke cautious thinking. On one hand, the protocol attempts to address the core issue of Impermanent Loss that has long plagued AMM liquidity pools, which is considered a 'holy grail-level' breakthrough for liquidity providers; on the other hand, the project's strategic intentions and the historical controversies surrounding the founder have also sparked market discussions. For example, Egorov was once on the brink of liquidation due to massive borrowing positions, raising community concerns about systemic risks in DeFi; he has also faced questions from investors regarding governance issues.
These factors intertwine to make Yield Basis a phenomenon-worthy project for in-depth study. This article will analyze the technical principles, operational mechanisms, token economic model, and strategic motivations of Yield Basis from a professional perspective, and objectively assess its potential risks.
???? The technical principles of Yield Basis
Basic Settings
Before diving into the analysis, it is necessary to clarify the asset allocation of Yield Basis. This protocol is designed for specific currency pairs (x, y), and theoretically, x and y can be any Token, but the effectiveness of the mechanism is only reflected under specific combinations:
The setting for this (wBTC, crvUSD) applies to the entire article, and we won't repeat it later.
Core Issues and Mathematical Principles
In traditional Automated Market Makers (AMM), the core challenge faced by Liquidity Providers (LP) is Impermanent Loss. This loss arises from the passive market-making behavior of LPs: when asset prices change, arbitrageurs "correct" the prices in the pool through trading, causing LPs to always be in an unfavorable situation of "selling low and buying high", which undermines the willingness of token holders to provide liquidity.
From a mathematical perspective, in traditional AMMs, the value of LP is proportional to the square root of the price of token x:
Michael Egorov believes that the root of Impermanent Loss lies in the fact that the value V of LP and the asset price P are not linearly related, but rather proportional to the square root of P, i.e., V \propto \sqrt{P}. If a linear relationship V \propto P can be achieved, Impermanent Loss can be fundamentally eliminated. This is the mathematical theoretical foundation of the entire Yield Basis.
Yield Basis as an intermediary
The goal of Yield Basis is to elevate the dependence of LP position value on price from \sqrt{P} to P, with the specific implementation path being:
LP gains the same price exposure as holding coins while still earning trading fees. This sounds almost ideal: earning fees without incurring Impermanent Loss. No wonder many people call Yield Basis the "ultimate strategy" that LPs have been dreaming of.
How does the magical effect come about?
So, how does Yield Basis work its magic to turn "LP value proportional to the square root of price" into "LP value linearly proportional to price"? The answer lies in what it creates, the so-called "Compound Leverage".
The specific operation is as follows: When a user provides $100 worth of wBTC, Yield Basis will use this wBTC as collateral to borrow $100 worth of crvUSD. Then, it will package this $100 wBTC and $100 crvUSD together into an LP position and place it into the Curve pool. In this way, the total value of the LP position provided by Yield Basis is $200, which is twice the value of the assets initially provided by the user, that is, 2x leverage. Yield Basis states that it is this 2x leverage that creates a linear relationship between the LP value and the wBTC price.
Why can a simple 2x leverage achieve such amazing results? The white paper contains a lot of formulas, but the core logic is not that complicated. A simple integral formula is enough to illustrate this:
Look, the value V_l of the leveraged LP is now linearly related to the price P of wBTC, and the Impermanent Loss has "disappeared".
The key to the above mathematical derivation process lies in "integration", which implies that \frac{dV_l}{V_l}=2\frac{dVu}{Vu} this leverage yield formula must be continuously maintained in order to be able to "accumulate".
In short, this dynamic rebalancing must always be carried out, and the actual LP invested in Curve must always be twice the user’s own assets in order to allow the 2x leverage effect to be "continuously executed," resulting in a compound-like effect. This is the origin of the term "compound leverage" and the true source of the magic of Yield Basis.
⚙️ System Operation Mechanism
Initial Leverage Construction Process
Through this series of automated operations, users only need to deposit one type of asset to seamlessly obtain a market-making position worth twice the value of their deposit.
Dynamic Rebalancing Mechanism (Releverage)
The core of the system is dynamic rebalancing. When the price of BTC fluctuates, if no adjustments are made, the leverage ratio will deviate from 2x, disrupting the linear exposure characteristics. To address this, Yield Basis introduces "leverage rebalancing AMM" to automatically adjust positions.
Price Increase Situation: The rise in wBTC price has led to an increase in the value of collateral, with the actual leverage ratio being below 2x. The rebalancing AMM will automatically borrow more crvUSD, similar to "adding to positions in the direction of the trend," causing the debt to occupy half of the total position again.
Price Drop Situation: Crises generally occur during downturns, so the author will elaborate on the Releverage process when the price of wBTC drops. According to the examples provided in the official documentation:
Note that in this case, arbitrageurs obtain wBTC as their profits. The attitude of arbitrageurs towards these wBTC profits, holding or selling, becomes a key factor in whether Yield Basis can operate stably during BTC price fluctuations.
???? Token economic model
Three-layer Token Architecture
ybBTC: A certificate of rights for users who deposit BTC, representing ownership of a 2x leveraged LP in the BTC/crvUSD liquidity pool. As the underlying LP earns trading fees while deducting borrowing interest and arbitrage costs, the value of ybBTC continues to grow. ybBTC can be freely transferred and traded, allowing users to exit by selling.
YB: The governance token of the Yield Basis protocol. Users can choose to stake ybBTC, forgoing the right to directly receive transaction fee earnings, in exchange for YB token rewards. This design offers two revenue models:
veYB: This is the vote-escrowed version of the YB governance token. Users can lock their YB for a certain period (up to 4 years) in exchange for veYB. The longer the lock-up period, the more veYB is obtained in exchange, and veYB cannot be transferred or traded during the lock-up period. In exchange, veYB holders have governance rights over the protocol, including the most important voice in decisions such as parameter adjustments and fund usage. More importantly, similar to ybBTC, veYB can also share in the protocol's fee income. This mechanism is similar to Curve's veCRV mechanism, encouraging everyone to become a long-term stakeholder in Yield Basis, achieving the goal of 'reducing YB selling pressure and maintaining YB price.'
Profit Distribution Mechanism
Yield Basis has achieved 2x leveraged LP positions, naturally receiving the previous 2x fee income, and with Impermanent Loss eliminated, aren't the LPs of Yield Basis just able to "lie down and count money"? Wake up, there is no such good thing in the world. The profit distribution model of Yield Basis is as follows:
From the profit distribution method described above, we can know the following points:
???? Strategic Motive: Make crvUSD Great Again
On the surface, Yield Basis addresses the issue of Impermanent Loss from the perspective of LPs. However, a deeper analysis reveals that Yield Basis is playing a game of "openly repairing the road while secretly crossing the river," laying out a big plan for crvUSD.
Background Analysis
As the stablecoin launched by Curve, the development of crvUSD has been lukewarm. According to data from websites like Blockworks, as of August 2025, the market capitalization of crvUSD is approximately $126 million, while the emerging stablecoin USDe has already surpassed $12 billion in market capitalization, showing a significant gap.
CrvUSD aims to emulate the successful path of USDe by attracting users through providing yields. The yield of USDe comes from the staking income of its collateral assets (such as stETH) and the funding rates of perpetual contracts. In contrast, crvUSD has targeted another piece of the pie — the LP fees of DEX. Through the complex design of Yield Basis, it attempts to eliminate the biggest concern of LPs, "Impermanent Loss," using "no loss earning fees" as a marketing gimmick to create strong market demand for crvUSD.
Attract BTC Liquidity
The Yield Basis team has a fundamental assumption: there are a large number of BTC holders in the market who are not satisfied with merely holding BTC, but wish to earn interest on their BTC, for example, by becoming LPs. However, they have been hesitant to act due to fear of Impermanent Loss. Now, Yield Basis claims to have solved this issue, essentially extending an olive branch to these individuals: "Deposit your BTC, it won’t be worse than just holding the coin, and you can also earn fee income for free!" This is expected to unlock a significant amount of BTC liquidity that has been stagnant in the past.
Whenever a user deposits WBTC worth 1 dollar, Yield Basis will automatically lend out crvUSD worth 1 dollar, forming a leveraged LP that is deposited into the Curve CryptoSwap liquidity pool. This is equivalent to using WBTC as collateral to issue crvUSD. Even better, the lent-out crvUSD is directly locked in the Curve LP pool, creating a huge "reservoir" that will not flow into the market causing sell pressure, thereby significantly reducing the risk of crvUSD decoupling.
How much liquidity can be attracted for crvUSD? Some are optimistic, believing that the potential liquidity is the entire market value of BTC, which would be in the trillions of dollars. However, the author is not so optimistic. In the author's view, Yield Basis is just playing up the traditional narrative of BTCFi, and the current development status of the BTCFi track being "tepid" already indicates that the "yield demand of BTC holders" is a false proposition. Are BTC holders really willing to risk their "digital gold" for that little interest, to be the "first to eat the crab", and try various complex new protocols?
Therefore, the author believes that recently, the liquidity scale that Yield Basis can attract is equivalent to the scale of Wrapped Bitcoin that already exists on Ethereum. For example, the leading player WBTC has issued 127.2K tokens, valued at 14 billion USD, while the second place cbBTC has also issued about 50.7K tokens, valued at approximately 5.6 billion USD. Adding them together, it amounts to a market of several tens of billions of USD. Nevertheless, considering that crvUSD currently has an issuance volume of only about 100 million USD, attracting billions in new liquidity can significantly enhance the scale of crvUSD, create user stickiness, and kickstart the flywheel, which is exactly what crvUSD urgently needs.
Build BTC→USDC highway
Attracting BTC liquidity only solves the issue of crvUSD issuance, but if crvUSD cannot be endowed with differentiated use cases and cannot provide users with a compelling reason to use crvUSD, the failure of crvUSD, which is indistinguishable from others in the fiercely competitive stablecoin arena, is merely a matter of time.
The scene targeted by Yield Basis is the exchange scenario of wBTC → USDC (or other major stablecoins). There is no doubt that wBTC can be directly exchanged for USDC, but due to the issue of Impermanent Loss, it leads to insufficient liquidity in the wBTC → USDC pool. Additionally, with the large price fluctuations of wBTC, the slippage loss from direct exchanges is relatively high.
The ambition of Yield Basis is to create the most economical and lowest slippage exchange path in the entire market with wBTC → crvUSD → USDC.
Once the comprehensive cost of this path (slippage + fees) is at its lowest, it is equivalent to creating a "highway from BTC to stablecoin". In the future, all users who want to exchange WBTC for mainstream stablecoins (like USDC) will choose this route. As a result, crvUSD is embedded into a critical trading segment, creating a rigid demand for crvUSD. Whether it's traders looking to cash out or LPs wanting to earn fees, they cannot do without crvUSD. The strategy of Yield Basis, "borrowing USDC as a stage to perform crvUSD", has created a unique and indispensable application scenario for crvUSD.
⚠️ Risk Assessment
Despite depicting an enticing prospect, Yield Basis is, after all, a complex innovative experiment, facing numerous risks and challenges. In summary, there are several aspects worth following:
systemic binding risk
Yield Basis tightly binds several core components of the Curve ecosystem - the exchange Curve CryptoSwap, the lending protocol LlamaLend, and the stablecoin crvUSD. This is a "shared fortune and shared loss" structure. Any issue in one link may trigger a chain reaction.
Limitations of Backtest Results
The backtesting simulation based on the historical data of BTC/USD over the past 6 years shows that the average annualized return (APR) of this strategy can reach 20%. Even in bear markets, it can maintain a return of about 10%, while during the bull market peak in 2021, the return rate can even reach 60%. Sounds tempting, right? But don't forget, this is just a simulated result.
Moreover, this simulation itself has flaws. For example, one of the costs, the borrowing interest rate of crvUSD, is fixed at 10% in the simulation backtest, which is obviously a very fragile assumption. The success of the protocol itself is precisely the fundamental reason for destroying this assumption. If the Yield Basis protocol is highly successful, it will create massive and rigid borrowing demand for crvUSD. This will greatly increase the borrowing utilization rate of crvUSD in Llama Lend, leading to its actual borrowing interest rate far exceeding the assumed 10% in the model. As the borrowing interest rate is a cost of the Yield Basis strategy, the surge in costs will seriously erode the net APR of the entire strategy, possibly even turning it negative.
This is a typical "success paradox": the more successful the protocol, the higher its operating costs (borrowing interest), which makes its attractiveness to users (net APR) lower. This inherent reflexivity is one of the most important risks to consider when evaluating the long-term profitability of the project.
The risk of wBTC price decline
We mentioned earlier that when the price of WBTC falls, the system needs arbitrageurs to help rebalance. This mechanism has an important prerequisite assumption: arbitrageurs, after acquiring WBTC at a discounted price, must have confidence in WBTC and be willing to hold it, waiting to sell after the price rebounds. In this way, the actions of arbitrageurs can help stabilize the market.
But what if there is extreme panic in the market, and arbitrageurs get discounted wBTC but are also afraid of holding it and choose to sell it immediately in the market? What will happen then? This not only fails to stabilize the price but, because they acquired wBTC at a lower cost, they are willing to sell at even lower prices, further exacerbating the selling pressure in the market, creating a terrifying death spiral.
This risk is especially deadly for wrapped assets. If arbitrageurs receive real BTC, based on the "Bitcoin belief," they may indeed choose to hold it. But what they receive is wBTC, a wrapped asset that relies on the custodian's credit. This concern about the custodian may shake the confidence of arbitrageurs at critical moments. This concern is not alarmist; WBTC has previously triggered a crisis of trust in the community due to changes in custodial institutions (such as its association with Justin Sun), leading mainstream platforms like Coinbase to reassess the risks.
The risk of YB price decline
The original intention behind the design of the YB Token is to allow users to use part of their current earnings to exchange for expectations regarding the future development of the project. If everyone has confidence in the future of Curve and Yield Basis, they will lock YB and enjoy future governance rights and dividends. However, if the price performance of YB is poor, for example, if the market feels pessimistic about the future appreciation potential of YB, it will trigger a series of problems.
the de-pegging risk of crvUSD
Finally, the most fundamental risk. The entire design of Yield Basis is built around crvUSD. If crvUSD experiences a serious depegging for any reason (such as a hack, collateral depreciation, regulatory impact, etc.), it means the foundation of the entire project will collapse. At that time, the "BTC→USDC highway" will instantly collapse, and the value of tokens such as YB and veYB will immediately drop to zero.
???? Conclusion
Yield Basis has consolidated many innovative elements in the DeFi field in recent years, where we have seen new solutions to the AMM Impermanent Loss problem, as well as bold attempts at complex leverage mechanisms and Token economic design. Ideally, Yield Basis provides LPs with a solution close to "risk-free yield enhancement": eliminating the yield gap with simple coin holding while enjoying revenue sharing from transaction fees.
But this is not a free lunch. The actual returns for LPs need to deduct borrowing interest and the cost of maintaining leverage, and they also have to share the profits with the protocol. More importantly, the fate of this protocol is closely tied to the success or failure of crvUSD. It is both the hope for crvUSD to achieve mass adoption and could also become a risk source that drags down the entire Curve ecosystem.
Investors must be fully aware that Yield Basis is not a zero-risk arbitrage paradise. Its smooth operation heavily relies on the market environment—requiring continuous ample trading volume and appropriate fee differentials; otherwise, LP returns may not be sufficient to offset borrowing and rebalancing costs. In extreme market conditions, the protocol mechanism may face impacts beyond the scope of design assumptions, leading to chain risk transmission.
It is especially important to note the deep binding relationship between crvUSD and YB Token in the system. If either side encounters a problem, it will directly impact the other. This relationship is reminiscent of the once-collapsed Terra/Luna ecosystem; although the mechanisms are different, the highly reflexive systemic risks are worth being cautious about.
Overall, Yield Basis represents an important innovative attempt in the DeFi yield space, integrating multiple elements such as liquidity mining, leveraged yields, and ve governance, providing new ideas for the problem of impermanent loss, and injecting new development momentum into the Curve ecosystem. However, just as the iron law in traditional finance states that high returns come with high risks, Yield Basis is not a guaranteed profitable investment holy grail. Its success will ultimately depend on the market's acceptance of its value proposition and the overall developmental resilience of the crvUSD ecosystem.