Ok so after experimenting with DEFI pools, and experienced the nonsense of impermanent loss, i decided to come up with a ruleset strategy to minimize risk and maximize profit in this type of endeavor. Please feel free to add your own suggestions for amending this guide, lets make it profitable!
Rules:
1. Diversify diversify diversify. Make sure you spread your pools in the best ranked network chains, and the best exchanges using these chains (i will leave this part to the personal diligence of the individual investor)
2. Depending on your tolerance for risk, put no less than 70% and no more than 90% of your assets in Stable LPs. That is LPs where both coins are Stablecoins. (make sure you research well the Stabecoins you are investing, by using Coin Sniffer and similar tools to make sure you are not going to lose your money)
3. Place the rest of your assets into medium risk to high risk LPs. Stake 50% of your risky investment into medium yielding (10-25%APY) but high growth LPs such as Bitcoin and Ether (medium risk). Then place 50% into high risk high yield shitecoin LPS (100-140% APY). Make sure at least one of the coins in these LPs is a stable coin. Diversify Diversify Diversify your Shitecoin LPs and place no more than 300-350 Dollars in 1 high risk LP (taking into account that one of the coins will be a stable you thus minimize the risk even more). Research thoroughly the shitecoin you are staking, through Coin Sniffer, and check their charts, make sure they’re not in a death spiral, and make sure they are not constantly declining, make sure they are backed by solid projects with a good future.
4. Single coin LPs. Also you can stake into single coin LPs but keep in mind that staking can decrease your APY at any time during the lock up period, and you are left staking in a potentially very low profit for a good amount of time without being able to withdraw. However consider that you can stake lock up LPS IF it is a Bitcoin/Stablecoin or Ether/StablecoinLP. In fact it is encouraged to lock them up for extended periods to remove you the temptation of selling them, because it is highly probable that Bitcoin and Ether will become huge in the future.
5. Once you stake all your assets make sure you collect and harvest the profit only once per week, to avoid paying too many fees (conversely you can keep your coins in the pool and not harvest at all, see details in point 7). Collect all your LP profits at the same time once per week. Regardless of if you harvest or not, still do a general audit once per week of all your coins positions. (During this time if you notice that a pool has dropped APY and another one has come up that is better you can switch LPs as long as you do it no more than once per week, otherwise you risk your profit margin by moving LPs too often and paying way too many fees. So try not to change pools too often, if at all.) Only stake in pools with at least 90k volume and up. Never stake in low volume pools.
6. Make sure you use tools to monitor all your assets across your wallet. However monitor your Risky Unlocked LPs every day, and make sure their price is not going down. If you notice a high price decline remove your LPS and keep the cash until the coin stabilizes in which time you can replace your LP, or if the shitecoin is a complete failure, look for another LP with a better coin. Keep in mind that if you stake shitecoins that are losing in value, even if they pay you high yield, you will lose money. That is why it is always recommended to check your High Risk LPS every single day. Again try not to move the LPs too often because then you lose all your profit from fees.
7. Now when you harvest your profits in all your farms, consider that you will be paid in the exchange based coin, there are many to chose from, so make sure you monitor the prices of the coins paid to you, and only sell to dollars, if the price is good. If the price of the coins is bad, wait until it increases then you can swap to Dollar. In periods of Bull markets you can consider swaping part of your profit, or all of your profit coins to Bitcoin and Ether, in order to take full advantage of the bull run. If no bull run, convert fully into dollar stables. To make things easier though most decent coins will follow Bitcoin price, so generally this will save you a lot of headaches.
8. (The devil is in the details, not all is what it seems). Since every single position will be paid to you in unstable coins, this increases the down or up changes in total value of your investment as BTC price fluctuates, since most exchange coins (let us not call them shitecoins) will usually follow BTC, (but not always, as was recently the case with Cake), so keep an eye out. This was my main reason for producing a seemingly conservative position, but it really is not, because of the fact i just mentioned, every single payment from LPs whether they be stable or unstable will be paid by unstable exchange coins, who most likely, but not always will follow the fluctuations of the BTC price. So in essence you must monitor the BTC price at all times, watching out for candle patterns, and macro news, if there is a rapid high price change in BTC price then consider dumping the earned coins into dollars right away. The opposite happens if BTC goes down, the price of the paid coins will decrease thus not convenient for you to dump them into dollar so just hold until the coast is clear. Moreover you can just keep your profits in the pool and never harvest until you see that BTC has gone up. This strategy saves you the headache of harvesting too many times and saves a lot of money from fees. In other words, if the BTC is going down do not harvest, if the BTC is stable, you can take profit, if BTC is going up take profit or convert your coins to BTC
9. Occasionally you may notice that a shitecoin you are monitoring and which you are staking will suddenly spike up in price for no apparent reason. At this time consider taking out this profit from the pool. (lets say you are staking a 400 dollar shitecoin pool and suddenly you notice 90 dollars up in pool price, so take out 90 dollars from this pool and cash it out. After all you would not have been able to make 90 dollars from this pool for 45 days if we calculate that you could probably make 2 dollars a day.) So this is another thing to watch for. Now i do not recommend putting this profit back in the pool if the price of the pool goes down unless, you pass the 40 days or so of time when the pool would have been able to generate this profit.
10. (Amended after discussion) Keep around 1000 Dollars cash, to play with BTC spot trading so that you don’t miss out on bull runs (the staked percentages should be recalibrated, also you would have to learn about trading strategies such as candlestick patterns and pattern trading, so a lot more work) OR alternatively consider placing this extra cash into a locked BTC/ETH LP, which will pay you from 10/25% APY. This way you are using a HODL strategy and not missing out on Bull runs, while at the same time getting paid with yield, and no headaches.
11. (V3 pools, a disaster shoved down our throats) The biggest open secret in DEFI is that DEX coins are CENTRALIZED. As we have seen again and again especially with the Arbitrum vote. So it is in your best interest to keep your profits in cash or in BTC. Do not Hold Exchange coins (i made my mistake by staking Cake for 2 years, and in the middle of my lock i get to see their IDIOTIC move to upgrade their pools to V3 which is a complete and utter fiasco. They actually force you to micromanage your pool every second or you get terminated out of profits. They did not ask us about this change they TOLD us. As a consequence the people have voted with their feet (as damn well they should) and have ditched the exchange. As a consequence their Cake coin has crashed from 3.8 to 2.7, and i have my lock for another 6 months.) So let this serve as a general warning in this endeavor. DEX exchanges surely offer you the freedom of holding your own keys, but they pay you in CENTRALIZED coins. This is a big problem which can affect your investment. So dump them coins as soon as you can.
(P.S. Stay away from Eth Main Net network pools, the fees are genocidal. It is embarrassing for Ether developers to continue this highway robbery. one of the MAIN PRIORITIES of the developers should be to stop this robbery, apparently it is not high up their bucket list)
That’s all i can think for now, i will ad more rules later after i think of more. Please make your suggestions, and if they are good i will add them to this guide.
Stay safe, and may the Crypto Gods bless you.
Very logical and defensive strategy for DeFi. I can see a lot of similarities between my methods and yours.
One item I was curious on was your tracking method. I am sure you know how straining it can be to track multiple LP and staking positions. I been working on an excel sheet for tracking positions and utilizing multiple accounts on my MM wallet to separate the positions. What tools do you use?
One strategy I really like that you might consider:
1. Deposit collateral you want exposure to in a lending protocol
2. Borrow the tokens you wish to LP/farm with
This would theoretically allow you to maintain 100% exposure to something like eth or wbtc while farming whatever tokens you can borrow. When doing this your downside is only impermanent loss, and your upside is the farm APR.
There’s a decent bit of math to do to see if a strategy like this makes sense, but it would let you chase higher yields with minimal shitcoin exposure
Can’t disagree with this one lol
So when the bull run happens and you’re 80% invested in stablecoins…..?
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