Introduction to Yield Skimming Strategies

A YSS strategy is an ERC‑4626 vault where appreciation becomes dragon exposure instead of user yield. The dragon address holds value‑shares that are minted on rate increases and burned on rate decreases. Users maintain stable ETH‑value positions (1 share = 1 ETH value) while the underlying exchange rate fluctuates. If a depreciation exceeds the dragon buffer, the vault becomes insolvent and converts to proportional distribution mode.

In multi‑strategy vault setups (see MultiStrategyVault Lifecycle), a manager can shift allocations between Yield Skimming and other strategies to optimize appreciation capture; in a standalone direct‑deposit strategy, all appreciation accrues to the dragon router, maintaining user ETH‑value stability.

Why YSS (developer motivations)

• Capture protocol value: Ship strategies whose appreciation is guaranteed to fund a dragon router address on‑chain.
• Stable value promise: Depositors maintain ETH‑value exposure; they knowingly forgo appreciation. Value capture mechanics are transparent in events and debt tracking.
• Exchange rate native: Built for yield‑bearing assets like wstETH, rETH. Dragon mechanics automatically handle rate fluctuations without complex harvest logic.

Key concepts (compact glossary)

• Strategy (ERC‑4626 vault): One contract per yield‑bearing asset. Users deposit/withdraw using deposit, redeem, etc. The strategy holds the appreciating asset directly.
• Dragon router: The beneficiary account. Receives value‑shares on appreciation; its shares are burned first on depreciation.
• Dragon buffer: The live balance of dragon value‑shares. It shields users from depreciation until exhausted.
• Exchange rate: The appreciation factor of the underlying asset (e.g., wstETH/ETH rate). Tracked in RAY precision (1e27) internally.
• Value debt: ETH‑value tracking for users and dragon. Users get 1 share = 1 ETH value at deposit time.
• Solvency mode: Normal operation where vault value exceeds total debt. Rate‑based conversions apply.
• Insolvency mode: Emergency state when losses exceed dragon buffer. Proportional distribution; dragon operations and new deposit blocked.
• Report (trusted step): A keeper/manager call that updates exchange rates and finalizes accounting. Value‑share mint/burn occurs here.
• Roles:
  • Management — config and trusted operations (including reporting cadence).
  • Keeper — automation for report calls.
  • Emergency admin — halt new deposits/mints and help unwind positions during incidents.

Lifecycles at a glance

Strategy (direct deposits)

1. Deposit → value‑shares. User calls ERC‑4626 deposit; shares minted at current exchange rate (1 share = 1 ETH value).
2. Hold. Strategy holds the yield‑bearing asset directly (no external deployment needed).
3. Appreciate. Exchange rate increases over time; user ETH‑value stays constant from this.
4. Report → settle appreciation/depreciation. Trusted call updates rates and finalizes accounting:
   • Appreciation: mint dragon value‑shares; user ETH‑value stays the same.
   • Depreciation: burn dragon shares first; only excess loss triggers insolvency.
5. Withdraw. Users redeem at current exchange rate for stable ETH‑value; after insolvency they receive proportional distribution.

Responsibilities for strategy authors

• Accurate rate tracking. Implement _getCurrentExchangeRate() to return the true exchange rate from your yield‑bearing asset.
• Minimal operations. YSS strategies are passive holders—no harvest complexity, no external deployments.
• Automation. No report means no appreciation capture and no loss absorption. Configure a keeper or a runbook for cadence.

What users should expect

• Stable ETH‑value. These shares maintain ETH‑value stability by design. Show "Appreciation Captured" instead of a variable exchange rate.
• Depreciation protection. As long as dragon shares exist, user ETH‑value is unchanged through depreciation; once the buffer is gone, vault enters insolvency mode.
• Withdrawals at current rate. Users can exit at any time; redemptions convert value‑shares back to assets at the current exchange rate (or proportionally during insolvency).