What non-trivial trading strategies can be made? Almost all the infrastructure for these solutions already exists, so the hard part remains - to use these developments to create the most optimal variant of earning in DeFi.
What is a composite strategy? First of all, it is a set of several instruments that act in an interrelated manner. One such strategy is the delta neutral strategy. This is one of the simplest strategies that includes hedging with the same instrument. We propose to add to this the next complex product - options.
Options are a type of financial instrument that allows you to immediately limit losses, while giving you the opportunity to make unlimited profits. This instrument at its root utilizes the most important trading concept - risk/reward. An option is an instrument that in its basic concept plays on the trader's side, offering the best R/R opportunity. All that is usually left to do is to correctly calculate the math of losses and potential gains.
Liquidity Pooling Composite Strategy
One example of a compound strategy can be used to hedge liquidity pools. As we remember from past lessons - the most problematic thing is Impermanent Loss. With a composite strategy using futures/margin trading and options, you can remove the 97.5% impact of Impermanent Loss within concentrated liquidity pools. How to do it?
We place assets in concentrated liquidity in the selected range
Simultaneously open a short x3-x5 on the underlying asset
Simultaneously buy an option on the underlying asset
If the price falls to the lower boundary of the range on the underlying asset - the short deal will compensate Impermanent Loss by 95%.
If the price rises to the upper limit of the range on the underlying asset - the option compensates Impermanent Loss by 100%.
As a result, we get an analog of the delta-neutral strategy, but much more complex.
What is important here - almost full compensation of Impermanent Loss allows earning the maximum possible commissions from a narrow range. The final figures can range from 30% to 100% per annum depending on the chosen trading pair and range.
That being said, there are a few key important things:
all 3 actions should be opened simultaneously to avoid gaps on 3 different instruments
after reaching the range boundaries - the pool should be rebalanced to avoid getting a new loss on Impermanent Loss.
What is used in this strategy:
Concentrated liquidity: UniswapV3 (alternative to QuickSwapV2, but the yield is lower there).
Leveraged shorts on CEX: Binance
Option protocol
As you understand, there are a lot of components in this strategy and therefore it is necessary to calculate all the math and numbers before entering. It is also worth logging into the option protocols and looking at the strike and entry price - you can enter there not at any value - you have to guess.
Example.
We take the pair BTC/USDT and set the liquidity range between $22,000 and $24,000; the current price is $23,000
At the same time we open a short with 25 leverage and get a liquidation price of $24,000.
At the same time we buy a call option (long), for example, for 7 days at a cost of $200.
If we fall to $22,000 - our losses will be $500 (from the option) and profits will be $1000. Total +$500
On the upside - our losses will be $900 (from futures) and gains will be $850. Total -$55
As we can see from this example - Impermanent Loss is almost completely hedged.
The annualized return on this pair in the selected range will be 95% per annum.
Since we use additional liquidity on the short, the real yield from commissions will drop to 90%. All this more than covers Impermanent Loss.
But one more important thing to realize is that choosing the right option term is the key point, so that you don't have to spend extra money to buy an option, so that the commissions from UniswapV3 cover all expenses. After all, 90% is an annual return, a monthly return is about 7%.
All of these numbers and factors should definitely be considered when using this strategy.
Composite strategies on credit protocols
Shorting on credit protocols
We also want to show you how to short an asset on DeFi, if you do not trust CEX.
To do this, we invest an asset on the credit protocol and in return take another asset, necessarily volatile. Then we sell this volatile asset for the original one invested in the credit protocol.
Example.
We want to short ETH.
We put USDT into a deposit on Aave
We take a loan in ETH (be sure to evaluate LTV )
Sell ETH for USDT
Thus, we have shorted through the credit protocol.
If the price of ETH falls, we can spend less USDT to buy the same amount of ETH to close the loan. This difference will be the profit from the short.
But if the price of ETH rises, we will have to spend more USDT to buy the same amount of ETH to close the loan.
Moreover, the same strategy can be used to gain leverage to short ETH. We simply put the USDT received at step 3 back into the deposit and run the whole scheme again. This is analogous to the leveraged deposit, but in reverse.
Closely related assets
The logic would be that the deposit rate should be higher than the loan rate. This would not be done within a single coin, but within different coins with the addition of an exchange.
Example.
So, we see that the ETH deposit rate is higher than the loan rate of synthetic ether - wstETH, which is highly correlated with the ETH rate. And we are going to use this opportunity.
We invest ETH in Aave with a rate of 2.11%
Loan wstETH to Aave at 0.58%.
Exchange wstETH for ETH on DEX (1inch, Uniswap).
Invest ETH in Aave again
Repeat this way for several rounds
The LTV of ETH is 80%. Since we assume that ETH and wstETH are closely related synthetically, we assume that the money should not exceed 10%. Then we take an LTV of 72% and keep it at that level for all rounds. As a result, the final yield on ETH will be 6% instead of the original 2.11%. What if we repeat this not with closely related assets, but with unrelated assets at all?
Unrelated assets through exchange
Example.
So, we see that the BTT deposit rate is higher than the USDC loan rate. And we are going to take advantage of this opportunity.
Invest BTT with a rate of 16.8%
Borrow USDC with a 0.19% interest rate
Exchange USDC to BTT on DEX
Invest BTT again.
Repeat this way for several rounds
BTT's LTV is 60%, which is quite low. Since these assets are not related in any way and moreover can quickly fall in price by 50%. So we take LTV of 30% and keep it at this level during all rounds. As a result, the final yield on BTT will be 25% instead of the initial 16.8%. But these strategies will be more suitable for those who walk such coins. But we can further complicate and modernize these strategies in order to get much higher returns on stablecoins!
Example.
We want to significantly increase the yield on stablecoins. So, we see that the BTT deposit rate is significantly higher than the USDC loan rate (as in the example above). Now we'll go the opposite way to get the yield on USDC.
We invest USDC with a rate of 0.19%
Loan USDC with a rate of 0.89%.
Exchange USDC to BTT on DEX
Invest BTT with a rate of 16.8%
Once again borrow USDC and invest it in a deposit
Repeat several rounds
The final yield in USDC will be 24% with LTV =30%.
It is important to note that in these two strategies we start taking strong market risks, because in the first case we bet on long BTT and in the second case we bet on short BTT. As a result, we get a certain trading situation that we would like to avoid. And this can be done by removing the exchange link between these assets and replacing it with a credit link.
Unrelated assets through lending
This situation makes sense if the return on the borrowed asset will exceed its lending rate. Additionally, we want to generate a stable yield on stablecoins. Here we get a combination between a loan and a leveraged deposit strategy.
Example.
We have a USDC steiblcoin and we want a minimally risky yield on it. At the same time we see that there is another asset - BTT, which shows a 24% yield due to the leveraged deposit strategy.
We invest USDC with a rate of 0.19%
Borrow BTT with a rate of 10.43%.
Invest BTT at 16.8%.
Borrow BTT at 10.43%.
Repeat steps 2-4 several times
The final yield on USDC will be 10%. In doing so, we significantly reduce market risk. We take LTV BTT to USDC in the amount of 30%. Here it is enough to keep an eye on the LTV BTT to USDC - at any moment you can close this strategy without any market risk as in the 2 strategies above.
The most interesting thing in all of this is that all the components do not have to be on the same protocol. For example, deposit and loan rates for the same asset can be different on different projects and this can be successfully utilized. The concept of blockchain and DeFi allows you to play with this without any restrictions to earn real returns.
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