# Introducing the Perpetual Note *The ETH Strategy Perpetual Note (ESPN) is a new yield primitive that transforms Ethereum’s natural volatility into an onchain yield stream.* By [ETH Strategy](https://blog.ethstrat.xyz) · 2025-09-02 --- Ethereum’s volatility has long been a feature of its market, yet DeFi has approached it defensively, treating it as a risk to hedge rather than an asset to harvest. What’s been missing is a natural, structural seller of volatility. ETH Strategy fills that role, unlocking a new category of yield. Instead of paying interest, ETH Strategy rewards lenders with long-dated call options, a more powerful form of ETH exposure. When combined with selling shorter-dated options, this creates a steady stream of yield. ESPN takes this complex options trade and distills it into a single token. Just as Ethena productized the basis trade, ESPN transforms the volatility trade into a perpetual, compounding yield product. How does ESPN harness volatility? --------------------------------- Users start by depositing stablecoins (USDS) into the vault, receiving ESPN tokens in return. Behind the scenes, these deposits are bonded into ETH Strategy, which issues a convertible note representing a debt claim paired with a long-dated call option on ETH. With this note in hand, ESPN systematically sells shorter-dated call options on [Derive](https://blog.ethstrat.xyz/derive-vault). The symmetry between the long-dated convertibles acquired and short-dated calls sold keeps the strategy balanced in USD terms, while option premiums earned provide two key benefits: * Pay rewards to ESPN liquidity providers (more on that below) * Reinvest back into the vault, compounding the asset base over time If options expire out-of-the-money (OTM), the vault simply rolls them forward and harvests premiums again. If they expire in-the-money (ITM), ESPN exercises its long-dated convertible to cover the position, ensuring the vault remains delta-neutral while restarting the cycle. ![](https://storage.googleapis.com/papyrus_images/9c82c12e7d56e05552aa0a851acf71c9.jpg) The result is a structure with the durability of a perpetual bond and the growth dynamics of equity. Each cycle compounds the base, allowing more options to be sold and more revenue to accrue. And for the finance bros in the back, yes, this follows the familiar `v=cr/g` formula, the infinite sum of a geometric series valid so long as `r>g`. In other words, ESPN is a product that compounds by design, Ethereum’s perpetual preferred share if you will. The Perpetual Note ------------------ An explicit design choice of ESPN is that it has **no redemptions**. Unlike typical DeFi vaults where capital can be withdrawn at any time, ESPN is built as a perpetual product. Exits happen through the ESPN liquidity pool, not by redeeming against the vault itself. Why? Because redemptions would tie ESPN’s value to short-term market conditions. Any unwind would hinge on current ETH price, introducing bottlenecks and exit queues. Worse, allowing redemptions at net asset value (NAV) could suppress ESPN price given expectations of future revenue growth. Instead, ESPN channels yield into rewarding LPs and reinvesting back into the vault. This structure ensures that liquidity is market-driven and supported by real yield. Unlike typical incentive schemes with token inflation and decreasing reward schedules, our LP rewards are funded by _exogenous revenue_ from continually-increasing option premiums. Over time, this makes ESPN more robust as yield grows, liquidity deepens, and holders benefit from perpetual compounding. ESPN Flywheel ============= ESPN turns option premiums into a self-reinforcing feedback loop, channeling yield from options sold into market liquidity and compounding. Concretely, premiums are felt by liquidity providers as incentives and by holders as increasing ESPN price. ![](https://storage.googleapis.com/papyrus_images/d9614735bebdbd0b17a063bcce375f37.jpg) At launch, premiums harvested will be split as follows: 1. Fixed portion targeting 12% growth rate on ESPN’s capital base 2. Protocol reserve fee (10% of premiums generated) 3. Remainder to LP incentives _Note: this split is subject to change as we optimize incentives to balance the overall system._ Vault Compounding ----------------- ESPN has bond-like qualities, but with a twist: _if the rate at which its yield grows is faster than the risk-free rate, it breaks the perpetuity formula as it no longer converges to a finite number_. Put differently, because part of every cycle’s yield is reinvested, the asset base grows over time. That larger base generates more option premiums, which in turn funds greater rewards and further compounding. Instead of converging neatly, ESPN’s revenue flows behave more like a high-growth yield stream, which markets typically value at revenue multiples. As long as ETH continues to be volatile, ESPN revenue is truly perpetual. In practice, this means ESPN isn’t just worth the assets sitting in the vault. Even conservative models suggest strong upside from the $100 starting price, in expectation of future revenue. And as the market grows more comfortable with consistent harvesting of option premiums, that multiple can expand, further accelerating the flywheel. **10x** **20x** **50x** **$12 / year** $120 $240 $600 **$25 / year** $250 $500 $1,250 **$50 / year** $500 $1,000 $2,500 LP Incentives ------------- Liquidity providers are central to how ESPN distributes yield. Rewards are paid out in ESPN-USDS LP tokens, ensuring that payouts strengthen market depth instead of weakening it through emissions. Here’s the key point: to make these payouts, the vault must first buy ESPN on the open market to pair with USDS. That means every yield cycle introduces natural buy pressure, reinforcing ESPN’s price over time. Unlike many tokens where rewards dilute value, ESPN is designed to turn yield distribution into a direct driver of price support. Not every ESPN holder will also stake as an LP. This dynamic amplifies returns for those who do participate, since the same pool of rewards is shared across fewer LPs. We expect the market to find the right equilibrium, while incentives can be adjusted over time if needed. STRAT Holders ------------- ESPN isn’t possible without ETH Strategy underwriting the options trade. By issuing convertibles backed by treasury assets, STRAT holders take on leverage to acquire even more ETH and increase EPS. Every time ESPN rebonds, the equity layer deepens and allows ETH Strategy to expand future bonding capacity. ![](https://storage.googleapis.com/papyrus_images/63d7e381ce663b518323f9ab6878b174.jpg) ESPN is the first concrete example of what can be built atop ETH Strategy’s convertibles. Vault depositors are after consistent USD returns, while STRAT holders seek increased ETH exposure. Hence, there is a great symbiotic relationship between the two. Without convertibles, this would be just another covered-call vault with returns in DeFi of 5% (or less). By contrast, the structural link to ETH Strategy transforms it into a compounding, perpetual note capable of much higher returns. In the future, we plan to expose the underlying convertible primitive in a permissionless way. Once the market recognizes the power built into ESPN, it will unlock more innovative products built upon harvesting volatility. Risks & Edge Cases ================== No DeFi product is risk-free. ESPN depends on smart contracts and integrations with external platforms like Derive. As with all protocols, there is always a baseline of smart contract and counterparty risk, even when the underlying mechanics are sound. Beyond those general considerations, ESPN’s performance fundamentally depends on market conditions. The two main edge case scenarios to consider are: ### ETH Price Falling Significant drops in ETH price over long periods of time can undermine ESPN’s option strategy. The vault MUST sell options on Derive at the same strike price as convertibles acquired from ETH Strategy (otherwise the strategy isn’t delta-neutral). In the event that ESPN strike prices are significantly OTM, premiums received from selling calls will be much lower, thereby lowering ESPN revenue. ### ETH Volatility Collapsing Volatility is a natural feature of digital assets. In a world where ETH becomes so ubiquitous that it behaved like a reserve currency with little volatility (ETH is money), option premiums would shrink and ESPN’s yield would fall. In practice, we view this scenario as highly unlikely. Even as ETH matures into a money-like asset, volatility would likely persist at levels sufficient to sustain option markets and ongoing yield streams for ESPN. Wen Launch ========== The Perpetual Note goes live **September 3rd at 23:00 UTC (7pm ET, 1am CET)** Vault deposits will open with an initial cap of **$1 million**, which will scale up over time. This new product is the first stepping stone for ETH Strategy, proof that volatility can be harnessed as a structural yield source. ESPN completes the flywheel between depositors seeking USD yield and STRAT holders acquiring ETH leverage. The flywheel starts turning tomorrow. **Be there when it begins**. * * * ### **Get Involved** Join the Telegram: [https://t.me/ethstrat ](https://t.me/ethstratFollow)Follow us on Twitter: [https://x.com/eth\_strategy ](https://x.com/eth_strategyTurn)Turn notifications ON. --- *Originally published on [ETH Strategy](https://blog.ethstrat.xyz/perpetual-note)*