Opyn pioneered Squeeth — one of the most intellectually distinctive financial instruments in DeFi history — by asking: what if you could hold an asset whose returns are proportional to ETH price squared rather than ETH price itself? The result (named from “squared ETH” → “sqth”) is a perpetual instrument with a convex payoff profile that behaves like continuously rebalancing long gamma exposure without the time decay (theta) characteristic of traditional options. Squeeth holders profit quadratically when ETH moves in either direction (because ETH² grows faster than ETH itself in both up and down scenarios vs. a reference funding price), while Squeeth sellers earn a continuous funding stream for providing that convexity to the market. This creates an instrument genuinely unlike anything in traditional finance — power perpetuals are a mathematical construct made possible by DeFi’s infrastructure, enabling payoff curves that TradFi would have to synthetically construct through constant options rebalancing. Opyn also built crab strategy vaults and Zen bull vaults that use Squeeth as a building block for more accessible structured products — bringing an esoteric mathematical primitive to retail DeFi users.
Key Facts
- Founded: 2019 (Opyn v1, put options for DeFi insurance); rebuilt 2021 with Squeeth
- Network: Ethereum (Arbitrum support added)
- Core product: Squeeth (oSQTH token representing squared ETH exposure)
- Infrastructure: Uniswap V3 pool for oSQTH/ETH price discovery and liquidity
- Backers: Paradigm, Dragonfly Capital, a16z
- Audited by: Trail of Bits, Sherlock
Squeeth: Power Perpetuals
The following sections cover this in detail.
The Core Concept
Traditional ETH exposure: Holding 1 ETH provides returns linear to ETH price changes. If ETH goes from $1000 to $2000 (+100%), you gain 100%.
What Squeeth represents: oSQTH represents a claim on ETH² — specifically, ETH price squared divided by a normalizing constant (to keep prices tractable). The key mathematical property:
Squeeth payoff ∝ ETH²
Why ETH² has a convex payoff: If ETH moves from $1000 to $2000 (+100%), ETH² moves from 1,000,000 to 4,000,000 (+300%). If ETH moves from $1000 to $500 (-50%), ETH² moves from 1,000,000 to 250,000 (-75%). In both cases, Squeeth holders gain MORE from large moves than raw ETH holders — this is convexity (the payoff curve bends upward in both directions).
Analogy to traditional options: Holding options provides similar convexity — a call option profits when ETH rises AND has limited downside (premium paid). Squeeth provides a continuous version of this convexity without the complexity of selecting strikes and expiries, and without theta (time decay) — instead paying a continuous funding rate.
Funding Rate Mechanics
Since Squeeth has a convex payoff (which is always worth something even when the market goes sideways), the market won’t provide it for free. Longs pay a continuous funding rate to shorts:
- Funding direction: oSQTH longs pay to oSQTH shorts
- Rate magnitude: Depends on implied volatility — higher ETH IV → higher Squeeth funding
- Settlement: Funding is realized through the “mark-index” mechanism: oSQTH price on Uniswap V3 vs. theoretical ETH²/normalization_factor. When oSQTH trades above theoretical value, longs pay funding; the protocol rebalances the normalization factor to settle funding.
For Squeeth longs: Pay funding continuously; receive convex upside during large ETH moves in either direction. Best suited for: expecting high volatility (big ETH moves in either direction).
For Squeeth shorts: Receive funding continuously; face obligation to deliver convex payoff when ETH makes large moves. Best suited for: expecting low volatility (ETH ranging, funding income > delta losses).
The Normalization Factor
The normalization factor is a number that scales over time based on accumulated funding payments. As funding flows from longs to shorts, the normalization factor gradually decreases — making the relationship between oSQTH price and ETH² adjust over time. This ensures that funding settlement is mathematically continuous rather than periodic discrete payments (like 8-hour funding for perpetuals).
Crab Strategy
The Squeeth-derived short volatility product. Opyn built the Crab Strategy as an accessible product for users who want to earn Squeeth funding (short volatility) without managing a raw Squeeth short position.
How Crab works:
- Crab vault shorts Squeeth (selling oSQTH to the Uniswap V3 pool)
- The USDC collateral from the short is deposited in Aave as additional yield
- The vault delta-hedges the Squeeth short position using ETH (to remain directionally neutral — the vault doesn’t want ETH directional exposure, only the volatility exposure)
- Result: Users who deposit USDC into Crab earn Squeeth funding rate (paid by longs) minus hedge costs
Crab trade-off:
- Earns: Continuous Squeeth funding (positive carry when ETH IV is elevated and ranging)
- Loses: When ETH makes large moves in either direction (large ETH moves mean the Squeeth short is getting hurt, and delta hedging lags)
- Analogy: Crab is like selling straddles — earns theta/carry when the market is quiet, loses when the market makes big moves
Zen Bull Strategy
The bull case Squeeth-derived product. Zen Bull is designed for users who are moderately bullish on ETH and want to earn Squeeth funding as income on top of their ETH exposure.
How it works: Zen Bull holds ETH (for bullish exposure) + Crab strategy (short vol for funding income). Net result: slightly leveraged ETH long with additional carry yield from the Crab component.
Historical Products: Opyn v1 (2019-2020)
Opyn originally built a different product: simple put options for DeFi protocol risk insurance. The original v1 Opyn allowed users to buy puts on DeFi protocol tokens (as price insurance in case a protocol suffered a hack or collapse). These were not Squeeth-style instruments — they were simple American-style puts.
The v1 system had limitations (illiquid put markets, complex on-chain American option mechanics) and was deprecated as the team pivoted to researching power perpetuals. Squeeth (launched 2022) was the product that brought Opyn significant recognition.
Opyn v2 and Gamma Protocol
Opyn also developed a broader options AMM protocol called Gamma Protocol:
- Standard European call and put options
- On-chain collateralized options
- AMM for options liquidity without market makers
Gamma / Opyn options are used by DeFi protocols for structured products and OTC hedging, but the main public-facing product and innovation that made Opyn famous remains Squeeth.
Market Context
Here’s how the market structure works.
Who Uses Squeeth
Retail users: Via Crab and Zen Bull vaults — standardized products that package Squeeth mechanics into accessible yield strategies.
Sophisticated DeFi traders: Direct oSQTH buying for convex ETH exposure or selling for funding income.
Protocol treasuries: Some DeFi protocols use Squeeth-based delta-neutral strategies for treasury yield.
Research and quantitative traders: Squeeth became a benchmark for DeFi options research — power perpetuals are a theoretically interesting construct studied in academic finance circles.
Limitations
Complexity: Most retail users don’t understand ETH² payoff intuitively. “Convex exposure” and “funding rate mechanics” require financial education that limits adoption.
Funding cost: During low-volatility periods, Squeeth funding is modest (~10-30% annualized). During high-volatility periods, Squeeth funding is high — which is exactly when longs benefit most (large ETH moves), so the funding rate is appropriately priced but can seem expensive.
Liquidity: oSQTH liquidity on Uniswap V3 is thinner than major assets — large trades impact price, limiting institutional-scale use of raw oSQTH.
Related Terms
Sources
- “Power Perpetuals: The Mathematics of Squeeth and Why ETH² Creates Unique Payoff Profiles” — Paradigm Research (2021).: ≥: f(E[x]): This: means: the: expected: value: of: ETH²: ALWAYS: EXCEEDS: (ETH’s: expected: value)²: whenever: ETH: has: any: non-zero: variance: Implication: oSQTH: always: has: convex: value: regardless: of: ETH: direction: — because: larger: moves: in: either: direction: disproportionately: increase: ETH²: FUNDING: RATE: DERIVATION: The: funding: rate: for: a: power: perpetual: with: p=2: (in: continuous: time: Black-Scholes: world): Funding: ≈: σ²/2: (where: σ: is: ETH: price: volatility): Higher: implied: volatility: → higher: Squeeth: funding: At: 80%: annualized: IV: (common: in: crypto): σ²/2: ≈: 32%/year: annualized: funding: At: 50%: IV: ≈: 12.5%/year: annualized: funding: CONCLUSION: Squeeth: funding: rate: is: a: direct: function: of: ETH: realized: volatility: — Squeeth: shorts: earn: more: when: ETH: is: volatile: (and: need: it: most: for: hedging):]
- “Crab Strategy Backtest: Short Squeeth Funding vs. Realized ETH Move Losses (2022-2023)” — Delphi Digital Research (2022).
- “Squeeth vs. ATM Straddle: Why Power Perpetuals Are a Theoretically Cleaner Instrument than Rolling Straddles” — Opyn Research Blog (2022).
- “oSQTH Liquidity: Uniswap V3 as Options AMM — Concentrated Liquidity for Derivative Pricing” — Uniswap Labs Research (2022).
- “DeFi Options Innovation: How Squeeth, Panoptic, and Emergent Power Perpetuals Are Creating Financial Instruments Without TradFi Precedent” — Messari Research (2023).