In the DeFi world, few projects have garnered as much attention upon launch as Yield Basis. This new protocol, launched by Curve Finance founder Michael Egorov in 2025, carries multiple technological innovations—eliminating impermanent loss, circular leverage, creating demand for stablecoins, releasing BTC liquidity, and capturing governance token value.
Its complex mechanism design and multi-layer narrative structure are both exciting and provoke cautious thought. On one hand, the protocol attempts to address the core issue that has long plagued AMM liquidity pools—impermanent loss, which is considered a "holy grail" breakthrough for liquidity providers; on the other hand, the project's strategic intentions and the founder's historical controversies have sparked market discussions. For instance, Egorov previously faced liquidation due to massive borrowing positions, raising community concerns about systemic risks in DeFi; he has also encountered investor skepticism regarding governance issues.
These intertwined factors make Yield Basis a phenomenon worthy of 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, while objectively assessing its potential risks.
???? Technical Principles of Yield Basis
Basic Setup
Before delving deeper, it is essential to clarify the basic asset configuration of Yield Basis. The protocol is designed for specific currency pairs (x, y), where theoretically x and y can be any tokens, but the mechanism's effectiveness is only realized under specific combinations:
x: Volatile assets that serve as value storage, primarily BTC, ETH, etc. Currently, the market's focus is mainly on the case where x is BTC. It is important to note that since BTC is not an Ethereum native asset, Yield Basis actually uses Wrapped Bitcoin (wBTC). Although there are various forms of wrapped BTC (such as WBTC, cbBTC, etc.), this article will uniformly refer to it as wBTC. This "wrapping" characteristic significantly impacts the security and stability of Yield Basis, which will be elaborated on in subsequent sections.
y: Stablecoin assets. Since Yield Basis serves its own Curve ecosystem, "the water from the rich land does not flow to the outsiders," the y here can only be Curve's own stablecoin crvUSD.
This (wBTC, crvUSD) setup applies throughout the article, and we will not 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 within the pool through trading, causing LPs to always be in a disadvantageous position of "selling low and buying high," which undermines the incentive for 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}, we can derive: x = \frac{L}{\sqrt{P}}, y = L\sqrt{P}
The total value of the LP portfolio is: V = xP + y = \frac{L}{\sqrt{P}} \times P + L\sqrt{P} = 2L\sqrt{P}, confirming 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 LP value becomes: V_{LP} = 2L\sqrt{Pd}
If the asset is not deposited in the pool as LP, then the asset value after the price change 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, which is always less than 0, always incurring a loss, and this is the source of impermanent loss.
Michael Egorov believes that the root of impermanent loss lies in the non-linear relationship between LP value V and asset price P, which is 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 Yield Basis.
Yield Basis as an Intermediary
The goal of Yield Basis is to elevate the dependency of LP position value on price from \sqrt{P} to P, with the specific implementation path as follows:
LPs, do not directly provide liquidity to the DEX pools anymore. First, give your assets (like wBTC) to me (Yield Basis).
I (Yield Basis) will perform some "optimization" internally and then provide the optimized liquidity combination to the DEX (following the principle of "the water from the rich land does not flow to the outsiders," this DEX is Curve CryptoSwap).
The liquidity I have "optimized" will no longer be proportional to the square root of the wBTC price, but will instead have a linear relationship with the wBTC price. In this way, isn't impermanent loss eliminated?
LPs gain the same price exposure as holding tokens while still earning trading fees. This sounds almost ideal: earning fees without incurring impermanent loss. No wonder many people claim that Yield Basis has achieved the "ultimate strategy" that LPs have long dreamed of.
How Does the Magical Effect Come About?
So, how does Yield Basis perform its magic, transforming "LP value proportional to the square root of price" into "LP value linearly proportional to price"? The answer lies in the so-called "Compound Leverage" it creates.
The specific operation is as follows: when a user provides wBTC worth $100, Yield Basis uses this wBTC as collateral to borrow crvUSD worth $100. Then, it packages this $100 wBTC and $100 crvUSD together into an LP position and deposits it into the Curve pool. As a result, 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, thus achieving 2x leverage. Yield Basis claims that this 2x leverage transforms the relationship between LP value and wBTC price into a linear one.
Why can such a simple 2x leverage achieve such a magical effect? The white paper contains a lot of formulas, but the core logic is not that complicated; a simple integral formula is sufficient to illustrate:
Yield Basis, through 2x leverage, ensures that the return rate of the leveraged LP value V_l is twice that of the unleveraged LP value V_u, i.e., \frac{dV_l}{V_l}=2\frac{dVu}{Vu}.
Integrating both sides of the above return rate equation gives ln(V_l)=2ln(V_u)+C, leading to V_l \propto (V_u)^2.
We know that the unleveraged LP value V_u is proportional to the square root of the wBTC price (P), i.e., V_u \propto \sqrt{P}
Substituting V_u \propto \sqrt{P} yields V_l \propto (\sqrt{P})^2, i.e., V_l \propto P.
See, the leveraged LP value V_l is thus linearly related to the price P of wBTC, and impermanent loss "disappears."
The key to the above mathematical derivation process lies in "integration," implying that the leverage return rate formula \frac{dV_l}{V_l}=2\frac{dVu}{Vu} must be continuously maintained to allow for "accumulation."
When the price of wBTC rises, the value of the wBTC collateral provided by the user also increases, and Yield Basis needs to borrow more crvUSD;
When the price of wBTC falls, the value of the collateral shrinks, and Yield Basis must automatically repay part of the crvUSD debt.
In summary, this dynamic rebalancing must always occur, maintaining the model where the actual LP deposited into Curve is twice the user's own assets, so that the 2x leverage effect can be "continuously executed," producing a compounding effect. This is the origin of the term "Compound Leverage" and the true source of Yield Basis's magic.
⚙️ System Operation Mechanism
Initial Leverage Construction Process
User Deposit: The user deposits a single asset, such as 1 wBTC, into the Yield Basis smart contract.
Flash Loan Borrowing: The Yield Basis protocol uses the 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.
Providing Liquidity: The protocol immediately deposits the user's 1 wBTC and the borrowed crvUSD into the Curve CryptoSwap AMM's wBTC/crvUSD liquidity pool.
Generating LP Tokens: This deposit generates an LP token that represents a liquidity share worth 2 wBTC (1 wBTC + crvUSD worth 1 wBTC) in the pool.
Repaying Flash Loan: Yield Basis uses this newly generated, higher-value LP token as collateral to initiate a standard CDP (Collateralized Debt Position) loan in Llama Lend, borrowing crvUSD equal to the amount of the initial flash loan.
Closing the Loop: The protocol uses this CDP loan to repay the initial flash loan, completing the entire leverage construction loop.
Minting Derivatives: Finally, the user receives a derivative token called 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 a single asset to seamlessly obtain a market-making position worth twice their deposit.
Dynamic Rebalancing Mechanism (Releverage)
The core of the system lies in dynamic rebalancing. When the price of BTC fluctuates, if no adjustments are made, the leverage ratio will deviate from 2x, undermining the linear exposure characteristic. To address this, Yield Basis introduces a "leverage rebalancing AMM" to automatically adjust positions.
Price Increase Scenario: An increase in the price of wBTC leads to a rise in the value of collateral, resulting in an actual leverage ratio lower than 2x. The rebalancing AMM will automatically borrow more crvUSD, similar to "adding to a winning position," making the debt occupy half of the total position again.
Price Decrease Scenario: Crises generally occur during price declines, so the author will elaborate on the Releverage process when the price of wBTC drops. According to the example 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, representing 2x leverage.
Price Drop: BTC falls to $90,000, the total value of the LP is $190,000, the debt remains at 100,000 crvUSD, and the leverage ratio rises to 2.11 > 2, necessitating deleveraging.
Position Sale: The Releverage AMM sells part of the position. The LP position to be sold corresponds to 0.053 wBTC + 5,300 crvUSD of underlying assets, valued at 0.053\times 90,000 + 5,300 = $10,070, but to attract arbitrageurs, the Releverage AMM sells this LP position at a discounted price of 10,000 crvUSD.
Arbitrage Execution: Arbitrageurs find it profitable, pay 10,000 crvUSD, and receive wBTC equivalent to the sold position, which is
10,070/90,000 = 0.112wBTC.Leverage Restoration: After adjustment, the LP position becomes $180,000 ($90,000 wBTC + $90,000 crvUSD), restoring the 2x leverage.
Note that in this case, the arbitrageurs gain wBTC as their profit. The attitude of arbitrageurs towards these wBTC profits, whether to hold or sell, becomes a key factor in whether Yield Basis can operate stably during BTC price fluctuations.
???? Token Economic Model
Three-Tier Token Architecture
ybBTC: A certificate of rights for users who deposit BTC, representing ownership in the 2x leveraged LP in the BTC/crvUSD liquidity pool. As the underlying LP earns trading fees and deducts 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 trading fee income in exchange for YB token rewards. This design provides two revenue models:
"Debt" model: Holding ybBTC continuously earns "real money" from fee sharing;
"Equity" model: Staking ybBTC to obtain YB, currently "liquidity mining," expecting YB appreciation for higher capital gains.
veYB: This is the voting-locked version of the YB governance token (vote-escrowed YB). Users lock their YB for a certain period (up to 4 years) in exchange for veYB. The longer the lock-up period, the more veYB received, and veYB cannot be transferred or traded during the lock-up period. In exchange, veYB holders have governance rights over the protocol, including decision-making on parameter adjustments and fund usage, among other important matters. More crucially, 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."
Revenue Distribution Mechanism
Yield Basis achieves 2x leveraged LP positions, naturally receiving double the previous trading fee income, and having eliminated impermanent loss, shouldn't Yield Basis's LPs just "lie back and count money"? Wake up, there are no such good things 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, constituting Yield Basis's "total revenue."
Gross Profit: The operation of Yield Basis also incurs costs. First, there is the borrowing cost of crvUSD when constructing the leveraged LP. Secondly, during BTC price fluctuations, there are costs for releveraging to maintain the 2x leverage (such as discounts paid to attract arbitrageurs). Yield Basis's total revenue, minus these 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 the 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 already staked, and T is the total amount of ybBTC.
From the profit distribution method described above, we can conclude 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 losses.
When the staking rate is low (s/T→0): The management fee rate approaches its minimum value, meaning that most of the revenue will flow to unstaked 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 that almost all protocol income is extracted and distributed to veYB holders, leaving the "real income" for unstaked LPs increasingly less. This, in turn, will force the remaining LPs to join the staking ranks to avoid their income being diluted.
???? Strategic Motivation: Making crvUSD Great Again
On the surface, Yield Basis addresses the issue of impermanent loss from the LP's perspective. 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 chess game" for crvUSD.
Background Analysis
As Curve's own stablecoin, the development of crvUSD has been lukewarm. According to data from sites like Blockworks, as of August 2025, the market cap of crvUSD is around $126 million, while the emerging stablecoin USDe has surpassed $12 billion during the same period, showing a significant gap.
CrvUSD aims to mimic the successful path of USDe by attracting users through yield offerings. The yield of USDe comes from the staking yield of its collateral assets (like stETH) and the funding rates of perpetual contracts. In contrast, crvUSD has set its sights on another pie—the LP fees from DEXs. Through the complex design of Yield Basis, it attempts to eliminate the biggest concern of LPs, "impermanent loss," using "earn fees without loss" as a marketing gimmick to create strong market demand for crvUSD.
Attracting BTC Liquidity
The Yield Basis team has a fundamental assumption: there exists a large number of BTC holders in the market who are not satisfied with merely holding BTC but wish to earn yield on their BTC, such as becoming LPs. However, they have been hesitant to act due to fears of impermanent loss. Now, Yield Basis claims to have solved this problem, effectively extending an olive branch to these individuals: "Deposit your BTC here; you won't lose compared to just holding it, and you can earn fee income for free!" This is expected to unlock a significant amount of previously stagnant BTC liquidity.
Whenever a user deposits $1 worth of WBTC, Yield Basis will automatically borrow $1 worth of crvUSD, forming a leveraged LP deposited into the Curve CryptoSwap liquidity pool. This is equivalent to using WBTC as reserves to issue crvUSD. Even more cleverly, the borrowed crvUSD is directly locked in the Curve LP pool, creating a massive "reservoir" that will not flow into the market and cause selling pressure, thus greatly reducing the risk of crvUSD losing its peg.
How much liquidity can be attracted for crvUSD? Some are optimistic, believing that the potential liquidity is the entire market cap of BTC, which would amount to trillions of dollars. However, the author is not so optimistic. In the author's view, Yield Basis is merely playing on the traditional narrative of BTCFi, and the "lukewarm" development status of the BTCFi track 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, being the "first to eat crabs," and try various complex new protocols?
Therefore, the author believes that recently, the scale of liquidity that Yield Basis can attract is roughly equivalent to the scale of Wrapped Bitcoin already existing on Ethereum. For example, the leading player WBTC has issued 127.2K tokens, worth $14 billion, and the second player cbBTC has also issued about 50.7K tokens, worth approximately $5.6 billion, totaling a few hundred billion dollars in the market. Nevertheless, considering that crvUSD currently has an issuance of about $100 million, attracting several billion in new liquidity could significantly enhance the scale of crvUSD, create user stickiness, and kickstart the flywheel, which is precisely what crvUSD urgently needs.
Building a Highway from BTC to USDC
Attracting BTC liquidity only addresses the issuance problem of crvUSD. However, if crvUSD cannot be endowed with differentiated use cases and cannot provide users with a compelling reason to use crvUSD, its failure in the currently fiercely competitive stablecoin market is merely a matter of time.
The scenario that Yield Basis is targeting is the exchange scenario from wBTC to USDC (or other leading stablecoins). Undoubtedly, wBTC can be directly exchanged for USDC, but due to the issue of impermanent loss, there is insufficient liquidity in the wBTC to USDC pool. Coupled with the large price fluctuations of wBTC, the direct exchange incurs relatively high slippage losses.
Yield Basis's ambition is to create the most economical and lowest slippage exchange path in the market: wBTC → crvUSD → USDC.
First Segment (WBTC → crvUSD): If Yield Basis's vision succeeds, a large number of wBTC holders will flock to provide liquidity, which will significantly enhance the depth of the WBTC/crvUSD pool on Curve, naturally reducing trading slippage.
Second Segment (crvUSD → USDC): The Curve platform is already known for its efficient exchanges between stablecoins. To ensure liquidity in this segment, Yield Basis plans to use 25% of YB tokens to "bribe" USDC holders, incentivizing them to provide liquidity for the crvUSD/USDC pool.
Once the overall cost of this path (slippage + fees) is the lowest, it will effectively create a "highway from BTC to stablecoins." In the future, all users wishing to exchange WBTC for mainstream stablecoins (like USDC) will choose this route. In this way, crvUSD will be embedded in a critical trading link, creating a rigid demand for crvUSD. Whether traders looking to cash out or LPs wanting to earn fees, they will all rely on crvUSD. Yield Basis's strategy of "using USDC as a stage to showcase crvUSD" creates a unique and indispensable application scenario for crvUSD.
⚠️ Risk Assessment
Despite painting an enticing prospect, Yield Basis is ultimately a complex innovative experiment facing numerous risks and challenges. In summary, there are several aspects worth paying attention to:
Systemic Binding Risk
Yield Basis tightly binds several core components of the Curve ecosystem—Curve CryptoSwap exchange, LlamaLend lending protocol, and crvUSD stablecoin. This creates a structure of "one for all, all for one." Any issue in one link could trigger a chain reaction.
Limitations of Backtesting Results
The backtesting simulation based on six years of historical BTC/USD data in the white paper shows that the average annualized return (APR) of this strategy can reach 20%. Even in bear markets, it can maintain about a 10% return, while in the bull market peak of 2021, the return rate could even reach 60%. Sounds tempting, right? But don't forget, this is just a simulated result.
Moreover, this simulation has its flaws. For instance, one of the costs, the borrowing rate of crvUSD, is fixed at 10% in the simulation, which is clearly a very fragile assumption. The success of the protocol itself is precisely the fundamental reason that undermines this assumption. If the Yield Basis protocol is highly successful, it will create massive, rigid borrowing demand for crvUSD. This will greatly increase the borrowing utilization rate of crvUSD in LlamaLend, leading to its actual borrowing rate far exceeding the assumed 10% in the model. As the borrowing rate is a cost of the Yield Basis strategy, the soaring costs will severely erode the net APR of the entire strategy, potentially turning it negative.
This is a classic "success paradox": the more successful the protocol, the higher its operating costs (borrowing interest), which in turn lowers its attractiveness to users (net APR). This inherent reflexivity is one of the most important risks to consider when evaluating the long-term profitability of the project.
Risk of WBTC Price Decline
As mentioned earlier, when the price of WBTC declines, the system needs arbitrageurs to help with rebalancing. This mechanism has an important prerequisite assumption: that arbitrageurs, after acquiring discounted WBTC, have confidence in WBTC and are willing to hold it, waiting to sell after the price rebounds. Only then can the actions of arbitrageurs stabilize the market.
But what if extreme panic occurs in the market, and arbitrageurs, after acquiring discounted wBTC, fear holding it and choose to sell it immediately in the market? What would happen? This would not only fail to stabilize the price but would also exacerbate market selling pressure as they, having acquired WBTC at a lower cost, would be willing to sell at even lower prices, creating a terrifying death spiral.
This risk is particularly fatal for wrapped assets. If the arbitrageurs received actual BTC, based on "Bitcoin faith," they might indeed choose to hold. However, they received wBTC, an asset dependent on the credit of custodians. This concern about custodians could shake the confidence of arbitrageurs at critical moments. This concern is not alarmist; WBTC once triggered a crisis of trust in the community due to changes in custodial institutions (such as associations with Justin Sun), leading mainstream platforms like Coinbase to reassess its risks.
Risk of YB Price Decline
The original design of the YB token is to allow users to exchange part of their current earnings for expectations of the project's future development. If everyone is optimistic about the future of Curve and Yield Basis, they will lock YB to enjoy future governance rights and dividends. However, if YB's price performance is poor, for example, if the market feels pessimistic about YB's future appreciation potential, it will trigger a series of problems.
First, no one will want to lock YB; everyone will want to immediately receive the earnings dividends from ybBTC. As more people receive dividends, this will lead to a decrease in the actual yield for each LP, thereby weakening the attractiveness of WBTC liquidity.
Second, the previously mentioned plan to use YB to "bribe" USDC holders will also fall apart. If YB is not valuable, it cannot guarantee the liquidity of the crvUSD/USDC pool, and the entire narrative of creating a "BTC to USDC highway" will fall apart.
Risk of crvUSD Losing Its Peg
Finally, and most fundamentally, the entire design of Yield Basis is centered around crvUSD. If crvUSD experiences a severe loss of peg for any reason (such as hacking, collateral depreciation, regulatory shocks, etc.), it would mean the collapse of the entire project's foundation. At that point, the "BTC to USDC highway" would instantly collapse, and the value of tokens like YB and veYB would immediately drop to zero.
???? Conclusion
Yield Basis concentrates many innovative elements from the DeFi field in recent years. We see a new solution to the impermanent loss problem of AMMs, as well as bold attempts at complex leverage mechanisms and token economic design. In an ideal state, Yield Basis provides LPs with a solution close to "risk-free yield enhancement": eliminating the yield gap compared to simply holding assets while enjoying trading fee sharing.
But this is not a free lunch. The actual yield for LPs needs to deduct borrowing interest and the costs of maintaining leverage, while also sharing profits with the protocol. More importantly, the fate of the protocol is closely tied to the success or failure of crvUSD. It is both the hope for large-scale adoption of crvUSD and a potential source of risk that could drag down the entire Curve ecosystem.
Investors must clearly recognize that Yield Basis is not a zero-risk arbitrage paradise. Its smooth operation highly depends on market conditions—requiring sustained ample trading volume and appropriate fee differentials; otherwise, LP yields may not be sufficient to offset borrowing and rebalancing costs. In extreme market conditions, the protocol mechanisms may face shocks beyond the designed assumptions, leading to chain risk transmission.
It is especially important to note the deep binding relationship between crvUSD and the YB token in the system. If either party encounters issues, it will directly impact the other. This relationship evokes memories of the previously collapsed Terra/Luna ecosystem; although the mechanisms differ, the high degree of reflexive systemic risk is 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 impermanent loss dilemma and injecting new development momentum into the Curve ecosystem. However, just as the traditional finance adage states that high returns come with high risks, Yield Basis is not a guaranteed investment holy grail. Its success will ultimately depend on the market's acceptance of its value proposition and the overall resilience of the crvUSD ecosystem.
This article is based on publicly available information and analysis and does not constitute investment advice. Cryptocurrency investments carry significant risks; please make cautious decisions and do your own research (DYOR).
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