A yield compression hedge is a financial strategy designed to mitigate the risk of declining returns in yield-generating investments, particularly in decentralized finance. It involves taking positions that profit when the interest rates or yields on certain assets decrease. Traders might use derivatives, short positions, or specific protocol mechanisms to offset potential losses from a compressed yield environment. This strategy aims to preserve capital in periods of reduced profitability.
Context
News frequently discusses yield compression hedges as a sophisticated risk management tool for participants in DeFi yield farming and lending protocols. As markets mature and competition increases, yields can decline, necessitating such hedging strategies. The availability and effectiveness of these hedges depend on the liquidity and sophistication of the underlying derivative markets.
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