Leech Protocol, the web3 market, and investment strategies
"The least risky strategy in DeFi is staking the network's native token"
Author: Sonya Sun
May 31
"The least risky strategy in DeFi is staking the network's native token"
About the background
I have an interdisciplinary education. I specialize in social work, but I finished my Master's in History. I've always leaned towards economic and social theories. I wrote my coursework and theses on these topics. During my studies, I worked as a financial advisor at a firm. It was a good experience in terms of getting familiar with the market, but not so great in terms of getting to know the employer. Later, I started working at another company, a marketing one. I was an investment advisor. I helped investors find projects, and people to invest. I gained good experience and skills from it: I learned how to calculate profits and build a financial model.
Crypto entered my life when I was in marketing. Employers began paying in USDT. But I always thought it was a scam. Therefore, I quickly converted the stablecoins and cashed out into fiat.
When the local dump from the Covid-crisis started, I first bought Bitcoin. Then I learned about DeFi and since then I have been delving deeper and deeper into the sphere.
For the last 3 years, I've been full-time in crypto, specifically in DeFi. I invest my money there and earn on it. Now I also work at Leech Protocol. I formulate strategies and work as a DeFi researcher.
About Leech Protocol
It's a yield aggregator currently in the closed beta stage. We will be developing strategies, automating them, packaging them into vaults, and earning fees on this. For example, someone who wants to invest their funds simply and without unnecessary hassle can put them into our omnibus pool, and their funds will be automatically distributed depending on the risk across different strategies.
I am directly involved in finding such strategies, presenting their concepts, and describing the logic. Then we try to implement them with developers and conduct simulations to assess the risks.
Simulations are conducted in Python. Our developer codes them. We discuss the parameters for the simulation in advance, such as gas, rebalancing model, and so forth. Then we check if there is a point to these strategies. If yes, we launch the strategy in mainnet and do live testing. We limit the capacity for the vault, determining that no more than $100 can be entered into it. Then we increase the capacity and test again.
Right now we are working on Avalanche, Ethereum, and BNB Chain. Arbitrum and Optimism will be implemented later. But in general, adding networks will be simple: if we see that there is liquidity somewhere or a strategy we want to implement, it will take a maximum of one week.
Their money is distributed across different chains where these strategies will be operational. For example, Arbitrum or Optimism. In Optimism, part of the deposit goes to the Velodrome Finance project, and in Arbitrum, it goes to Trader Joe. Part of it goes to the lending protocol Aave with a short position on OPT and ARB tokens. On Velodrome and Trader Joe, we take the position of a liquidity provider, providing liquidity to the ARB/USDC and OPT/USDC pools. We end up with four positions: two neutral ones where the value of the deposit remains unchanged with a rise or fall in OPT and ARB tokens, but we continue to earn fees and rewards from the pools.
Under the hood, there are bridges, swaps, and a contract for reinvestment, including for rebalancing, - in case an asset falls or rises significantly, you will need to provide collateral to avoid being liquidated.
Personally, I don't see any risks in DeFi. Only in bridges, because they get hacked. Also, their very concept as a whole - an additional risk. If there's a possibility to have a native asset in a network, I'd prefer that. I'd be the last to provide liquidity to a bridge. There are many attack vectors, especially from the economic perspective.
It seems to me that with time, you gain a knack and experience for quickly checking for scams. Then you just intuitively understand whether it's a good or bad project. All the other risks are economic, such as the risk of liquidation. But if you know about it, it's practically not a risk for you, because you can control your position and think through a plan of action. The same goes for impermanent loss - if you know what it is, it means you know how to work with it. If there was no experience, you need to hedge.
About investment strategies in DeFi
The least risky strategy in DeFi is staking the native token of the network. In Cosmos, there are some great examples of staking: you delegate tokens ATOM to a validator, and let them work. It's extremely safe, the yield is clear, and it doesn't fluctuate. This is if the token is to the token, not USDT to the dollar.
Providing liquidity in lending protocols - only proven ones. The safety here is provided by the fact that your actions are simple, as is the principle of the protocol's operation. Such protocols are not very prone to economic exploits, simply because those who perform the exploit do it using the same lending protocols. It's not sensible to break the tool you're using. That's why Aave is protected from hackers. The only thing is that lending protocols don't offer high yields.
Providing liquidity in one asset. This is less risky because there is no impermanent loss.
Liquidity pools where equivalent assets are used - i.e., liquidity pools with stable pools and pools where on one side there is a base asset, and on the other - its liquid staking variation. There's already a small impermanent loss, a more interesting yield appears, and the risks remain minor.
Liquidity pools with assets of different volatility. For example, ETH/USDC - ether is always volatile, and stable is not, so impermanent loss is ensured.
Composite strategies where you borrow assets on a lending protocol and put them into farming. Derivative protocols. For example, Beefy Finance. This is a protocol that you really need to understand. The risks there are specific - not just impermanent loss and everything else that is well-known. This is already a deeper immersion in DeFi.
There are easy DeFi vaults and strategies, as well as yield optimizers. In principle, the risks can also vary greatly. In Beefy, you can choose a pool where the risks are small, and there are those where they will be large. This layer of protocols has a problem - a simple user doesn't understand how it works inside. Plus, if you have 10 protocols involved in your strategy, consider that the risk of smart contract hacking multiplies by 10. These are partly more risky, but very simple ways of investing.
About investment experience
I am confident that the foundation that must be in place before investing is personal finance. Until you figure out how to build your cash pool, devote time to investments, save money and count expenses/income - there's nothing to do in investments. Once you've learned this, you can build and do anything, because along with the foundation will come an understanding of your risk profile and those risks you are willing to take.
For personal finances, I build Google and Excel spreadsheets. I have a certain fetish for this, I use them everywhere - where they are needed or not needed.
My main reference point is a balance sheet where assets and liabilities are written down. For example, an apartment or a stake in a business, how much money is locked in DeFi, what are the loans or debts. All this needs to be written down and counted. This will give an understanding of whether your finances have grown over a certain period of time or not. And if so, by how much.
I have different approaches to testing. The first one - if I like the protocol, I can throw $10 at it from a test wallet, and then come back to see what happened to them. The second one - if I plan to put a substantial amount, then research will help there more than a test. I study the project, I can even build a table and calculate the real APR that I will count on.
For beginners who want to do this, I advise to gain experience in DeFi and just find an employer. For example, I was found by myself - influencers who know me as a DeFi researcher recommended my candidacy. It's not hard to gain experience - you just need to put money in pools. With practice comes understanding of how it works.
To understand if the protocol is good or not, you need to read the documentation. In 90% of cases, everything is written there. If not, go to the community and ask the admins. But in practice, of course, only by putting your money into the protocol, you will be able to understand how it works. In general, theory and practice, and then everything will become clear.
I usually have 4-5 major strategies that I constantly use. The main one is a lending protocol + stable farming. I take base assets that I grow and accumulate. Let's say, ETH. The goal of the strategy is to accumulate as much ETH as possible for the next cycle. I put ether in Aave as collateral, borrow stables and use them for farming. In this strategy, I exclude impermanent loss and get an average yield on stables of 13%.
When it's time to collect rewards, I gather them, convert them to ETH, add them to Aave, and borrow slightly more stablecoins, which I then farm again. In this manner, my collateral in ETH grows, and I increase the number of stablecoins that I'm farming. If Ether begins to decline, I withdraw my stablecoins, return them to the protocol, and retrieve my safe position where I won't be liquidated. If everything begins to plummet significantly, I'll return all the stablecoins, keep the Ether for myself, and calmly sit on it. Almost every strategy in DeFi utilizes a lending protocol, so if you want to enhance the efficiency of your capital, you won't be able to avoid them.
I use many protocols. The main ones are: Aave for Ethereum, Arbitrum, Optimism networks and Venus for BNB Chain. I also use the Sentiment protocol. This is a project that uses a credit account. That is, you don't take a loan under collateral, but you leverage within your account and farm within its pools, which are on this account's whitelist.
I am currently actively using ve(3,3) projects ā stable farming is going quite well there now. I use the Tarot Protocol. There are sometimes quite interesting percentages there, but you need to be careful with them, because they don't always correspond to reality. And in this particular project, they no longer accept deposits. If you deposit ten thousand into the vault, the return will drop several times immediately. But there are many vaults and networks there.
I don't use any yield aggregators because I implement these strategies myself manually. Of course, I use Uniswap ā there I have the main pools with ETH and BTC, into which I contribute once a month.
About Web3 market and options
I am a supporter of the Stock-to-Flow model and, frankly, I think that after the next halving, Bitcoin will cost $100k. And then - even more.
The options market is an interesting thing. There you can build many strategies. The yield is small, but it is stable and truly neutral. Therefore, I am currently interested in options: I read about them, try to understand what strategies can be used there.
The interest rate market is also a good thing in terms of yield. You can take, for example, your stETH from Lido, which gives you income, and sell it in advance. Let's say you know that in a year it will bring you 4%, and someone wants to buy these percentages from you. Then you sell them, get cash and calmly walk around with regular ETH and pre-received income.
Now in DeFi there are many protocols specializing in this market. It seems to me that when the yields on the bull will significantly increase, we will see many interesting strategies using these protocols and a lot of interest in such tokens.
Using options specifically in crypto is much more interesting. Crypto allows for more efficient and faster implementation of strategies with lower costs for intermediaries or clearing, which is only needed in traditional finance.
In DeFi, there are many vaults built on options. That is, where you act as a liquidity provider, which creates an options market. In theory, they work on trends. If you see that the trend is bullish - you enter the vault and get a yield for being on the bull. The same goes for the bear and flat. Plus, you're a liquidity provider, which means you can sit as long as you want and wait for a change in trend or trend confirmation. Even if there is a drawdown, you can wait it out and take yours when the trend returns to the right course.
Bootcamp: DeFi Analyst
From a Reddit Degen to a Dune guru.
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