What is D-Squared Finance? - A Complete Guide.

February 13, 2023

In conclusion

Introduction to D-Squared Finance

There’s no denying that DeFi on Arbitrum is picking up steam. Innovative protocols are emerging left, right and centre. Something is in the air!

Most of these projects are unique. They bring something new to the table, to a crypto space jaded by lazy imitations… These new builders realise that simply forking into a new chain is not good enough anymore. Arbitrum Season is a time of craftsmanship and originality. I believe it is every protocol’s duty to bring new ideas and new mechanisms to DeFi. It’s a time to push the boundaries of innovation.

Arbitrum’s thriving DeFi ecosystem has been brewing for some time. It was waiting for a spark to catch alight. It seems that came when FTX collapsed and the CeFi (centralised finance) narrative crashed. GMX led the way as Arbitrum’s adoption exploded. The chain has caught the attention of many external builders and gigabrains and we are seeing a new federation of interlocked protocols emerge.

D-Squared is one of these exciting new protocols.

The D-Squared team has been building throughout the depth of this bear market, since March 2022. And now the chads over there are revealing the product of their labours.. Trust me, you won’t want to miss out on this one!

D-Squared aims to be the best hedge fund on Arbitrum. It is a DeFi quant vault-based protocol specifically designed to give DeFi natives an easy point of access to complex investment strategies… Now that’s a mouthful, so let’s unpack it into a full explanation and find the alpha. First, the key high-level overview:

  • Quant-trading strategies managed by experts;
  • Deployed on both Arbitrum and Avalanche;
  • A strong emphasis on security, risk management, and ease of integration with other DeFi protocols;
  • A reliable and safe investment experience for crypto-savvy investors.

Quant trading employs algorithms that use mathematical models and statistical methods to make investment decisions. The primary goal of quant trading is to identify profitable trading opportunities and execute trades automatically using computers. Yeah, this is big-brain stuff!

So what is D-Squared’s trading edge? We’ll get to that. Hint: it’s a hybrid model that mixes the best of quant methods with hard-earned human experience.

In the article, I’ll explain what D-Squared is, the strategies they offer (including ‘under the hood details on how they find alpha), and the risk associated with said strategies. Then we’ll explore the tokenomics and real yield accruing to the DSQ token.

What is D-Squared?

D-Squared provides “Options-Based DeFi Vaults”. Their primary goal is to deliver consistent, risk-adjusted returns across market cycles through highly secure vaults. We are already used to leveraged long returns (often with no risk management at all!) that perform in a bull market. D-Squared isn’t so reckless. Their strategies are designed to profit whether the market is a bull, a bear, or just shuffles along like a crab.

Each D-Squared vault is optimised to suit a different risk preference, across different asset classes, and both Arbitrum and Avalanche blockchains… Each strategy is hosted in its own separate vault, which operates using the familiar Epoch system. For those unfamiliar, an Epoch has a start (when users deposit funds), a trading phase (when D-Squared executes the strategy), and then an end (when users withdraw their funds).

This modular setup provides users with the flexibility to choose a strategy that aligns with their risk tolerance, while also allowing them to monitor the performance of their investment throughout the epoch. The epoch system also makes it easy for users to withdraw their funds if they are dissatisfied with its performance…

Composability is at the core of DeFi. By incorporating this principle into its trading strategies, D-Squared seeks to gain a competitive advantage in the market.

The user experience is simple: to participate in these complex strategies, investors simply deposit USDC into a vault that aligns with their investment objectives. D-Squared handles the rest. Simple as that!

Hybrid Model

Now we are getting on to D-Squared’s competitive advantage. They believe inefficient markets create opportunities. D-Squared’s trading engine is optimised to swiftly identify and take advantage of these inefficiencies, positioning investors on the winning side of the trade.

To achieve this, they introduced The Hybrid Model. D-Squared is driven by a unique hybrid approach that combines: (1) an advanced algorithmic trading system and (2) a team of professional traders with a verified track record of achievement. The traders on the team have publicly disclosed their identity, providing an added level of transparency and credibility to the platform.

The D-Squared trading engine collects data from various sources, including sophisticated algorithms and market sentiment analysis. If it detects a market inefficiency, the engine will generate a trade signal. Unlike other models, the D-Squared engine is highly flexible in the implementation it can use, such as the leverage parameter. This allows the engine to maximise opportunities during high-probability market conditions, while also preserving capital during low-probability ones. The result of this approach over time should be positive expectancy, a winning strategy similar to the one employed by professional Blackjack players to “beat the house”.

The hybrid model is important for the adaptability of each strategy. Static strategies (e.g. “set and forget” automated variants) are always at risk of being left behind by market changes. Markets are reflexive and a known strategy can be hunted down and taken advantage of. Thus it’s critically important that a trading engine can adapt dynamically to changing conditions.

“A trade is only profitable until it’s not.”

D-Squared recognises the limitations of relying solely on quant-based strategies and the advantages of incorporating human judgement in certain situations. For example, a machine relying solely on quantitative factors would have missed the qualitative factors that contributed to the crash of LUNA/UST. To address this issue, D-Squared’s hybrid model combines the capabilities of an algorithmic trading engine with the oversight of a global team. This ensures the implementation of robust risk management and capital preservation practices, which have been notably lacking in the crypto space.

It is important to note that trading is inherently uncertain, and D-Squared vaults should be considered as offering risk-adjusted returns, rather than being risk-free.


D-Squared is designed to offer a simple user experience. However, many readers are no doubt curious to know what is going on ‘under the hood’. Let’s take a look.

D-Squared has been running these strategies so far. At launch, ARB++ will be added and GM temporarily paused:

  1. GLP++ (Avalanche): The goal of this vault will be to consistently outperform GLP on a risk-adjusted basis over the long run. It’s already possible for users to go onto GMX’s perps platform and simply buy GLP. The challenge is in outperforming that play. GLP++ core activity includes trading GLP on  Avalanche, which is a basket of tokens composed of AVAX, ETH, BTC and USDC in different ratios. Up to 80% of the funds will be allocated to GLP (the basket token), while 20% will dynamically be allocated to AVAX / WETH / CAI / BTC  individually using a momentum model to take advantage of arbitrage opportunities on the Avalanche blockchain. The GLP++ strategy is created to benefit from the low volatility of USDC (which constitutes approximately 50% of the weight of the GLP token) and earn additional income from trading fees paid by GMX to GLP holders. The GLP++ strategy aims to outperform traditional GLP by allocating 20% of the funds to AVAX, WETH, CAI, and BTC through a momentum-based model, powered by the BWS Trading Engine, with maximum leverage of 5x. This 20% allocation is expected to provide a greater potential for profit compared to simply investing in the standard GLP token.
  2. Gamma Master (Arbitrum): The goal of this vault is to simulate options payoff during extreme volatility in either market direction – up or down. The Gamma Master (GM) vault is designed to take advantage of short-term market reversals that occur frequently in the crypto assets due to the liquidation of overleveraged traders. Utilising an ensemble of short-term signals on ETH through the use of GMX on Arbitrum, the vault offers a higher risk profile and an option-like payout when market conditions are favourable. During periods of low market activity, the strategy may not receive any signals. In these cases, the deposited funds remain unchanged and can be withdrawn at the end of the epoch. The GM vault is designed to be patient and wait until a potential “gamma move” is severely mispriced as a result of market microstructure dynamics and leverage. The strategy aims to provide a payoff that resembles that of a digital call option, with the potential to return up to 250% of the investment while risking up to 100%. However, due to the high-risk nature of this vault, only some epochs may yield positive results.

This is expected to launch later in the year.

    ETH++ (Arbitrum): The goal is to
    outperform an average user’s ETH allocation on a risk-adjusted basis over the long run
    . ETH++ is designed for seasoned crypto investors who are looking to hold long-term exposure to ETH. However, many people tend to hold too much ETH when it’s high, and not enough when it’s low. The ETH++ vault aims to address this by using the ETH/GLP pool on GMX, executing arbitrage strategies through buying and selling various ETH-related derivatives on Arbitrum, and utilizing the full range of products from leading DeFi options protocols like Dopex, Premia, and Rysk. With a focus on medium-term returns, the ETH++ vault aims to provide a smoother return profile with multi-year ETH upside while taking advantage of option mispricing during periods of volatility. The delta exposure of the vault is expected to range between -20% to 200% of ETH, with lower average downside volatility than ETH due to the efficient use of optionality.

We told you it was complex! That’s why the vaults make the process simple and you can let the big brains do the work for you.

How Do the Vaults Work?


The structure of each vault is composed of two essential components – the Vault and the Trader. The Vault is a single staking vault that is compatible with ERC-4626 and manages all deposit, withdrawal, and share-related operations. Meanwhile, the Trader is responsible for implementing the designated trading strategy by deploying the funds in the vault. Upon launch, the Trader will be a secure smart contract that offers a platform for executing strategies efficiently.

User Flow

Each epoch consists of three stages: the funding stage, the trading stage, and the withdrawal stage. During the funding stage, which is when the vault opens, users can either deposit the designated currency of the vault (USDC) or retrieve their assets if they have any remaining from previous epochs. While in the trading stage, no deposits or withdrawals are permitted, and the trader is responsible for managing the vault’s funds. Upon completion of the trading stage, the trader returns the vault’s funds and the epoch ends. This triggers the vault to enter a state where only withdrawals are allowed until the start of the next epoch and its associated funding window.

These are the steps, which are always the same:

  1. Vault opens
  2. The user deposits the vault’s underlying token and receives share tokens representing an equivalent percentage of total vault funds
  3. The vault closes and trader takes custody of the funds
  4. Strategies are executed by the experienced Investment Team through the Trader Smart Contract. Only designated traders from the team can interact with the trader contract
  5. The Trader Smart Contract restricts the traders to a specific set of actions, only for whitelisted DeFi protocols
  6. BWS Trading Engine uses the locked funds to execute trades
  7. The Trader unwinds all positions and returns the vault funds and profits/losses, less fees, to the vault
  8. The vault is in a withdrawal-only stage until the next funding window opens


The smart contracts for the trader at D-Squared are structured in a modular fashion. The modules that make up the strategy are chosen during its creation and cannot be altered once deployed, providing users with peace of mind that their funds will only be used in accordance with the original plan. Initially, the strategies will have a limited set of modules to choose from. As more modules are developed and audited, the possibility for more intricate strategies will arise, and the protocol will be poised to take advantage of new market opportunities by launching a new Vault and Strategy with the appropriate combination of modules.

Key Values

The D-Squared team stand firm on certain values. It’s commendable to see such core principles from a protocol in DeFi. That’s been missing from many of the previous generation’s protocols.


They have implemented a range of controls to enhance the security of the platform.

  • Complete transparency of on-chain actions and trading positions
  • The trading team’s actions are constrained by the strategy smart contract to only whitelisted interactions
  • The fully doxxed trading team
  • Dual sign-offs within the team for all code deployment
  • Segregation of duties between Trading, Front End and Solidity
  • An independent security advisor working with the internal Head of Security
  • Modern DevOps practices to ensure high integrity of the front end and the back end

Nothing’s guaranteed, however, D-Squared has set up processes to mitigate risk.

Risk Management

Risk management is a difficult task for hedge funds and vault protocols, as traditional methods for measuring risk based on return data are not effective for dynamic trading strategies. This is especially true if the strategies are based solely on historical backtesting data. The need to de-risk during market stress makes it challenging to accurately estimate market changes and historical slippage. A comprehensive approach to risk management requires practical experience and cannot be achieved through theory alone.

D-Squared’s Systematic Dynamic Risk Management framework combines years of practical experience and academic research and has been tried and tested at an institutional level in the TradFi industry. The approach focuses on efficiently managing risk through the use of dynamically optimised options and hedges, according to market conditions. By incorporating market hedges into the portfolio, the aim is to capitalise on opportunities created by downside volatility and market crises while still retaining some potential for upside returns.


D-Squared is designed to take advantage of both the composability of DeFi protocols and the composability of vault strategies. It operates on top of established protocols such as GMX, Dopex, Premia, Rysk, and Hubble for trading ETH and ETH-related assets on the Arbitrum and Avalanche networks. D-Squared will also collaborate with joint venture partner BWS Labs to utilise their vaults, such as the USDC++ vault, to enhance its strategies.

The smart contracts deployed by D-Squared are constructed with a modular design, making it easy to create or modify strategies through the use of pre-audited modules with minimal effort and risk. Additionally, users can construct their own portfolios by combining different vaults with unique risk profiles and market exposures to suit their specific needs and preferences while utilising the D-Squared framework.


D-Squared has decided to go with the reliable escrowed model that GMX has popularised.


This is the native utility and governance token of the platform. It provides holders with a claim to platform revenue. 50% of the platform fees generated by the protocol are redistributed to token stakers at the end of every epoch. D-Squared’s business model is to offer a valuable service that users will pay for, and this real yield is then passed on to token stakers – paid in non-native tokens (ETH).

The total supply will be capped at 500,000. 200,000 were minted during the private sale in December 2022, and the remainder will be minted in due time.


This is a non-sellable and non-transferable receipt token received in exchange for locking DSQ. It remains locked for 12 months, after which it can be redeemed for an equal number of DSQ tokens. Users need to stake their DSQ to earn esDSQ platform rewards. Staked DSQ will also earn a 50% share of protocol fee revenue, paid in ETH.

DSQ Bonds

This is a unique implementation. DSQ Bonds are a mechanism to raise money for D-Squared’s ongoing development and marketing costs without impacting the token’s market price. Presale backers are offered an opportunity to unlock some liquidity by selling a portion of their vested tokens back to the protocol.

With DSQ Bonds, investors commit stablecoins upfront and receive esDSQ from the treasury at a discount on market price. Proceeds support D-Squared operations and offer constrained OTC buffer liquidity to the presale participants.

Approximately 80% of the tokens purchased during the presale are locked and cannot be used until one year after the launch. This leaves up to 20% of the presale tokens that are eligible for an allocation of DSQ bonds. The team’s allocation of tokens is subject to the same lock conditions as the presale tokens.

Staking Leaderboard

Users who continuously boost their token ownership and stake them will receive a higher “level” ranking on the staking scoreboard. The scoreboard features 5 levels, and those placed at the uppermost levels will receive discounts on vault fees and early access to liquidity weeks as a reward for their dedication.

Periodic snapshots are taken, and to move up a level, a user’s staked token amount must surpass the previous snapshot, encouraging consistent long-term support of the protocol.

Liquidity Weeks

Periodically, Liquidity Weeks are organized to provide an exit option for the most dedicated Level 5 investors who desire to trim their stake before the one-year lock period ends. During these weeks, esDSQ holders have the opportunity to exchange their esDSQ for ETH or an ETH-based structured product through over-the-counter transactions to avoid any significant market effects from large conversions.

On average, these liquidity weeks occur once every three months and are managed by the team who operates as a market maker at their discretion.

Public Sale

Depending on when you read this, the public sale may have happened or may be near. It is scheduled to take place on 15th February 2023 at 2:22 pm UTC.


You might have read the mention of BWS already in this article. Well, it is because D-Squared is a joint venture between HessainX and BWS Labs. HessianX builds the technology, and BWS Labs trades the strategies. It is not a DAO. D-Squared will engage token holders, vault investors, and community members when making protocol decisions but the creation and approval of all governance proposals will be determined by the joint venture partners alone. In this sense, D-Squared is governed more like a private corporation than a DeFi DAO.

The following key decisions will need to be made on an ongoing basis:

  1. Introduction of new vaults
  2. Fees passed on to investors
  3. Partnerships
  4. Platform rewards


In the end, I’m super excited to see what these gigabrains can achieve as Arbiturm Season takes hold and the DeFi options space expands… There’s no doubt that they’ve carefully and methodically planned D-Squared. I can clearly see a Product-Market Fit. If you aren’t risk-averse and want exposure to some potentially high-risk-adjusted returns, these vaults might be your thing!

Just remember to do your own research and understand the vault mechanism well, before apeing. These folks have devised some rather interesting strategies for sure.

Finally, their attention to detail is commendable. It looks like they have left no stone unturned. Again, in DeFi this is rare but rather appreciable.

Well, that’ll do it for today gents! I hope the article was helpful and informative.


Website: https://dsquared.finance/

Twitter: https://twitter.com/Dsquaredfinance

Discord: https://discord.com/invite/QFPWUBmyAD

Medium: https://medium.com/@Dsquaredfinance

Docs: https://d-squared-finance.gitbook.io/docs/

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