What happens to DeFi YIELDS if bear market?
Which yields are sustainable?
Which will go away?
Hereβs some real analysis & examples to cut through the βbuy the dip!β noise.
6 strategies to protect your profits & avoid a 2022 bust:
π
π§΅/
Which yields are sustainable?
Which will go away?
Hereβs some real analysis & examples to cut through the βbuy the dip!β noise.
6 strategies to protect your profits & avoid a 2022 bust:
π
π§΅/
0/ Before we start, where do DeFi yields come from in the first place?
4 main sources:
a. demand for borrowing
b. options writing
c. protocol revenue
d. token inflation
For more details, see:
4 main sources:
a. demand for borrowing
b. options writing
c. protocol revenue
d. token inflation
For more details, see:
1/ Lending Yields: π
Ok with basics out of the way, let's start.
What happens to lending yields in a down run? Is it safe to continue lending on @compoundfinance, @BlockFi , @solendprotocol, etc.?
TLDR: yes.
Yields on stablecoins: β¬οΈ
Yields on native coins: β¬οΈ
Why?
Ok with basics out of the way, let's start.
What happens to lending yields in a down run? Is it safe to continue lending on @compoundfinance, @BlockFi , @solendprotocol, etc.?
TLDR: yes.
Yields on stablecoins: β¬οΈ
Yields on native coins: β¬οΈ
Why?
- Yields on USD β¬οΈ
(7 hikes priced in for '22)
- When "risk free rate" increases, all risk premium yields sitting on top increase too
- Demand for USDC/USDT will spike as flight to safety spurs a rotation out from BTC/ETH etc.
- More short traders will need to borrow BTC/ETH
(7 hikes priced in for '22)
- When "risk free rate" increases, all risk premium yields sitting on top increase too
- Demand for USDC/USDT will spike as flight to safety spurs a rotation out from BTC/ETH etc.
- More short traders will need to borrow BTC/ETH
2/ Basis Trade Yields: π
Here's the basis trade in a nutshell:
When funding rates are (+), long perps pay shorts.
So u long spot & short the perp to collect funding.
Is this sustainable?
TLDR: no.
Basis only works in a bull run.
Funding rates turn (-) in a bear market. π
Here's the basis trade in a nutshell:
When funding rates are (+), long perps pay shorts.
So u long spot & short the perp to collect funding.
Is this sustainable?
TLDR: no.
Basis only works in a bull run.
Funding rates turn (-) in a bear market. π
Well why not just do the "reverse" basis trade now, u may wonder? (short spot, long perp)
This doesn't work in practice cuz:
a) borrowing rates to short spot will be massive & will erase any gains u get from earning the funding rate on the perp leg
b) (non)-net cap requirements
This doesn't work in practice cuz:
a) borrowing rates to short spot will be massive & will erase any gains u get from earning the funding rate on the perp leg
b) (non)-net cap requirements
3/ DOV (defi options vault) Yields: π
The strategy in a nutshell:
Systematically sell covered calls or naked puts to earn the options premium from vol buyers/funds.
Is this sustainable?
TLDR: yes, but the vaults are massively inefficient & leave tons of $$ on the table.
The strategy in a nutshell:
Systematically sell covered calls or naked puts to earn the options premium from vol buyers/funds.
Is this sustainable?
TLDR: yes, but the vaults are massively inefficient & leave tons of $$ on the table.
Why is selling vol for yield sustainable?
- anticipation of a bear run should *theoretically* cause implied vols to spike as funds scramble to protect. This hasn't priced in yet (see IV chart below)
How are the DOVs leaving $$ on the table?
- they only sell Friday weeklies
- anticipation of a bear run should *theoretically* cause implied vols to spike as funds scramble to protect. This hasn't priced in yet (see IV chart below)
How are the DOVs leaving $$ on the table?
- they only sell Friday weeklies
How to maximize options premium selling:
(P.S. I will write an entire thread on this later)
- Buy month-out (longer dated) options:
DOVs have caused actual kinks in the vol surface (yes it's there now u can check). Week-out Friday expiries depressed (less yield) vs month-out.
(P.S. I will write an entire thread on this later)
- Buy month-out (longer dated) options:
DOVs have caused actual kinks in the vol surface (yes it's there now u can check). Week-out Friday expiries depressed (less yield) vs month-out.
4/ Yield Farming on (most) AMMs: π
AMM yields come from 2 sources:
(1) u hold both sides of a swap & one or both rallies in an up-only market
(2) u get native token rewards & token inflation lifts all boats
Sustainable?
TLDR: no.
Neither is sustainable in a bear market!
AMM yields come from 2 sources:
(1) u hold both sides of a swap & one or both rallies in an up-only market
(2) u get native token rewards & token inflation lifts all boats
Sustainable?
TLDR: no.
Neither is sustainable in a bear market!
But what about protocols where u can choose to stake into only 1 pool?
e.g. U put capital into only the DAI side of ETH/DAI?
That's fine from a loss-protection perspective, but your yield still comes in the form of native tokens (which will continually tumble in a winter).
e.g. U put capital into only the DAI side of ETH/DAI?
That's fine from a loss-protection perspective, but your yield still comes in the form of native tokens (which will continually tumble in a winter).
5/ Luna-UST-Anchor Yield: π
The pitch:
Stake UST into Anchor & earn 19.5% APY! Wow! The easiest way to make money!
This strategy has been super π₯ so far (bull market). Why worry now?
π (more details at: reddit.com)
The pitch:
Stake UST into Anchor & earn 19.5% APY! Wow! The easiest way to make money!
This strategy has been super π₯ so far (bull market). Why worry now?
π (more details at: reddit.com)
6/ Staking Yield: πish
Staking yields are volume-based yields:
i.e. Genuinely earned protocol revenue, but a sudden drop in overall activity on-chain means less revenue collected to go around.
The upside: it's mean-reverting since less activity => cheaper gas => more activity.
Staking yields are volume-based yields:
i.e. Genuinely earned protocol revenue, but a sudden drop in overall activity on-chain means less revenue collected to go around.
The upside: it's mean-reverting since less activity => cheaper gas => more activity.
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