Liquid Stables: Dynamic Allocation

Adapting to Market Conditions

The composition of assets backing Seablocks’ synthetic asset evolves over time to mitigate risk, enhance liquidity, and diversify revenue sources. The protocol continuously evaluates market conditions and user preferences to ensure optimal asset allocation, with strategic oversight provided by a dedicated risk management committee.

Initial Framework

When Seablocks was first conceptualized, the core idea was to use staked assets such as ETH, BTC and liquid staking derivatives (LSDs) while hedging delta exposure through perpetual and dated futures contracts. This approach aimed to maximize staking rewards while offsetting potential negative funding costs. However, as staking yields declined over time, this strategy became less attractive from a risk-adjusted perspective.

For example, stETH yields initially ranged between 6-7%, providing a strong buffer against negative funding rates. However, by early 2024, yields had declined to approximately 3%, making the risk-reward tradeoff less favorable. Additionally, stETH, being a derivative asset, introduced potential liquidity concerns, particularly during volatile market conditions when secondary market discounts or withdrawal delays could impact price stability.

Expanding Asset Support

As demand for the synthetic asset grew, it became evident that additional asset types were needed to maintain scalability. Relying solely on ETH perpetual futures markets could lead to excessive exposure within those markets, increasing liquidity risks and potentially reducing funding rate profitability. To address this, Seablocks expanded its backing assets to include BTC and SOL, unlocking additional futures markets for hedging purposes and enhancing overall diversification.

Prioritizing Liquidity and Stability

With the protocol’s rapid growth, users increasingly preferred minting and redeeming synthetic assets with stable assets such as USDT and USDC, rather than using volatile assets like ETH or LSDs. To accommodate this shift and ensure 24/7 redemption availability, Seablocks introduced a liquidity buffer of stable assets, initially set at approximately 5% of total circulating supply.

This liquid reserve provides:

• Sufficient flexibility to handle large-scale redemptions without significant slippage.

• A means to optimize capital efficiency by maintaining a balance between liquidity and yield generation.

• A risk management tool to reduce exposure to volatile assets while still benefiting from diversified revenue streams.

Market Performance and Stress Testing

Following the protocol’s launch, funding rates were elevated, with some periods reaching annualized yields of 60%. This led to significant revenue generation, allowing the protocol to accumulate reserves and reinforce its financial stability. At peak revenue periods, Seablocks was able to allocate 5% of profits to a reserve fund.

Seablocks underwent a significant stress test when market open interest experienced a sharp reduction of approximately 15% in a single day. Despite this, the protocol successfully maintained a stable market price within 10 basis points of $1, demonstrating the effectiveness of its liquidity buffers and risk management strategies.

By continuously refining its asset allocation approach and maintaining a flexible liquidity strategy, SeaBlocks ensures long-term sustainability while optimizing performance across varying market conditions.