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What is Cardinal?

Cardinal supports two products:

  • The Carry Perp
  • The Perpetual Negative Rate Hedge

The Carry Perp is a Carry Perpetual. By carry, we mean the difference between an asset's native yield and the market rate to borrow that asset. One can multiply that difference by lending a starting asset, borrowing the yield-bearing one, exchanging the yield-bearing asset for more of the starting asset, and repeating that loop.

The Carry Perp is synthetic. It settles against an LP pool doing the underlying spread at a larger size.

The Perpetual Negative Rate Hedge is a perpetual right to payouts when carry falls below 0, that is, the cost to borrow a yield-bearing asset exceeds that asset's yield. The same LPs that back the Carry Perp trade also serve as the counterparty promising that payout. The payout is funded from a buffer the policy accrues while carry is positive (a share of the yield earned by LPs performing the borrow loop) and is capped by that buffer and available pool NAV, where LP yield is market dependent. It is funded by a streaming premium the buyer preloads into a gas tank.

Cardinal will launch with these borrow loop spread markets:

  • wstETH<>WETH
  • weETH<>WETH
  • rsETH<>WETH
  • sUSDe<>USDT

The three ETH markets share one wstETH LP pool, with premiums priced per market.

LPs deposit capital into a shared pool. Cardinal manages that pool by running the underlying borrow loop spread on Aave V3 on their behalf. LPs are auto-opted-in to being the counterparty to The Carry Perp trades and back The Perpetual Negative Rate Hedge through the same pool.

Cardinal protocol architecture

Products​

The Carry Perp​

Users use The Carry Perp to get more leverage than a natural construction of the borrow loop spread allows for.

Carry scales with leverage. Positive and negative carry rates impact margin at rates proportional to the leveraged yield.

The Perpetual Negative Rate Hedge​

Users specify a notional size and a coverage leverage L, from 1x to 10x.

The buyer preloads a gas tank. Each hour, the gross premium is the actuarially-fair cost of the coverage held, expected negative-carry claims × (1 + lp_profit_factor) / 0.90, which scales with the coverage leverage L and is charged continuously. The LP Profit Factor (lp_profit_factor) is LP-net after the 90/10 LP/treasury split. When the gas tank cannot cover the premium, the position lapses.

Who Pays​

Each LP return stream has a defined counterparty:

  • Loop yield is carry the pool earns on its own capital deployed in the Aave V3 borrow loop.
  • The Carry Perp is funded by its users. Users pay an entry fee and a 35% performance fee on positive carry, and forfeit any remaining equity when the position liquidates. At the launch tiers every position liquidates (a 2–3 day median life), so the stream is the deposit kept on liquidation net of the rare survivor payouts. Users hold the position for leverage beyond what the natural borrow loop allows.
  • The Perpetual Negative Rate Hedge is funded by its buyers. The streaming premium is set above expected claims by the LP profit factor, so buyers are net-cost during positive-carry periods and net-recovery during negative-carry events.

LP-Book Pool​

LP capacity is measured in the notional size of user trades. A user who deposits 1 ETH for a 1000x leveraged position takes up 1000 ETH of pool capacity until their position closes.

If LP-Book Pool health degrades, Cardinal automatically deleverages the LP-managed borrow loop to reduce exposure.

LP-Book Pool health can degrade through:

  • Aave health factor falling too low
  • pool NAV dropping more than 10% peak-to-trough