Defi Farm #30 - Dec 4th Weekly Update

Hi everyone,

Welcome to the 30th edition! I took last week off because of Thanksgiving so a lot to check up on after 2 weeks. Let's dive in 🤿 Over the past 7 days:SPY: +1.95%BTC: +4.0% ETH: +6.2% 

Major L1's:SOL: -3.0%AVAX: +7.8%Near: +6.8%Algo: -0.4%FTM: +29.4%Today I'll go over:- Yield is just the price of risk- News from this past week- Cool projects/protocols I came across

Yield is the pricing of risk

During these market conditions, I think it's important to revisit a few basic concepts and ideas within yield farming. In the last edition we talked about the importance of tracking realized yield, today I want to take another step back and provide a helpful framework.

Over the past two years, the defi ecosystem has become more and more efficient at determining and pricing the risk associated with different protocols, pools, and tokens. Because of this, I think a helpful mindset is to start looking at yield and thinking of the APR% as a reflection of how risky the market believes that position to be.

While the "market" is not always 100% accurate at pricing risk, I think this mindset provides a good benchmark.

Important reminder: yield is a function of the trading fee rewards, boosted rewards, the USD price of the reward tokens, and how much TVL the yield must be split between. 

For example, let's look at these two pools that you could enter into and farm on Spookyswap (Fantom DEX).

A pool with 50% USDC and 50% FTM would pay ~28% APR (most of that comes from trading fees, some are BOO rewards).

A pool with 50% FTM and 50% DEUS would pay ~81%  (some of that comes from trading rewards, and most of it comes from DEUS rewards).

So, if FTM-DEUS is paying so much more yield, why wouldn't people enter it? By entering that pool, you'll be taking on price exposure to both FTM and DEUS. DEUS is an insanely small MC token with very very little liquidity.

One way to look at this LP position is to think "The market is determining that they need to be paid 81% APR to enter this position based on the associated risk."

But risk isn't just associated with the underlying tokens, it could also be associated with the chain that you're on, the perceived security of the protocol you're using, and even the token that the yield is paid in.

You will often see higher yield rates on protocols that are smaller, newer, or have few audits because yield farmers need to be paid more for assuming the risk of using a "perceived" more risky protocol.

Curve and Convex are great examples of this.

On Curve, you can earn a yield of 4.63% APR on their tricrypto pool ( 33% USDT, 33% BTC, 33% ETH). Said another way, the market has decided that a fair price to be paid for the risk associated with being entered into this position is 4.63%.

On Convex, the same exact pool is currently paying 13.32% APR. (It's literally the exact same pool, to enter this you form an LP position on Curve tricrypto, then stake your LP tokens on Convex.)

The direct cause of the difference in rates can be explained pretty easily: Convex is able to earn veCRV boosts because of their model + and they also pay out extra CVX rewards. 

However, this difference can also be explained indirectly, if the market really believed that Curve + Convex had the same risks for the exact same pools, more and more LPs would enter the Convex pool until both Curve + Convex pools were paying the same yields. Right now the market is signaling that they need to be compensated an extra 8.69% in order to enter the Convex pool since it involves an extra layer of potential smart contract exploits.

What does all this mean for you? How can you use it?

If you see an opportunity with an APR that seems too good to be true, ask yourself what risks are associated with entering that position and make sure you understand all of them (token price, smart contract security, any timelocks, what tokens are rewards paid in, etc, etc).

Ask yourself why more people haven't entered a position if it seems so good. There's a chance that (1) more people will, it's just a really new pool and will eventually stabilize to a new yield (2) you're not seeing a risk other people are, or (3) the market is incorrectly pricing the risk. Number 3 is becoming more and more infrequent.

Cool things that happened this past week

• Uniswap is going to test out turning on fees for a few of their pools. This wouldn't increase the fees charged to traders but would redirect a small % of fees earned by LPs to the Uniswap treasury. Some people are speculating that this is the first of many tests before Uniswap eventually allows fees to go to token holders.

• Brazil approved Bitcoin as a use of payment.

• You can now buy NFTs on Uniswap

• Stripe launched an embeddable fiat to crypto onramp that anyone can build right into their website.

• OpenSea to support Binance Smart Chain.

• Coinbase released a tweet thread about how Apple's app store policies are blocking them from offering certain NFT features. This quote from the thread is amazing: "Apple’s claim is that the gas fees required to send NFTs need to be paid through their In-App Purchase system, so that they can collect 30% of the gas fee. For anyone who understands how NFTs and blockchains work, this is clearly not possible. Apple’s proprietary In-App Purchase system does not support crypto so we couldn’t comply even if we tried. This is akin to Apple trying to take a cut of fees for every email that gets sent over open Internet protocols."

• TraderJoe, the biggest DEX on Avalanche announced it was expanding to Arbitrum. I think this was pretty big news that didn't get enough attention. It's not a great look for Avalanche when their largest DEX feels the need to start building in a new ecosystem. I also think it's interesting because right now TraderJoe seems to be the only qualified DEX to compete with Uniswap (both are two of the very very few protocols that have launched successful concentrated liquidity pools).

Cool new protocols/projects that I came across

Calc by Kujira (link) - The Kujira team was one of the teams that was building on Terra and had to find a new home. They just released a pretty neat new product that allows you to DCA into and out of positions in a decentralized manner.

Starlight (link) - This tool is awesome. Built for web3 native teams that still have to operate in the real-world, starlight is a tool that helps crypto companies easily go from crypto to fiat and back. They just released a pretty cool corporate card feature.

That's all I have for this week! Stay safe out there and as always, stay yielding!