In terms of stablecoins that I’d like to be added it would be FRAX! Their peg has been quite stable, and I also think they are gaining traction, and being dubbed as part of the so-called DeFi 2.0 is pretty cool to associate with. In terms of yield generation, I only know the Curve and Convex pools as being the sure go-to. There are a number of staking opportunities for FRAX for various LP pools, though am not sure if the protocol is actually doing that currently
The rest of my post is quite long so if you skip I understand LOL
On building a systematic approach to yield strategizing
Now I’ll get to the more over-arching discussion regarding strategy.
I think it’s clear (at least for me) that there is a need to diversify the various strategies whether it’s stablecoins or protocol exposure. We can always try to yield chase i.e look for the highest yield, but in traditional finance that tends to:
- Poor decision due to an unsystematic approach
- Taking risk beyond capacity. Returns may be higher, but risk may be much higher making the returns adjusted for risk worse
- Tendency to concentrate strategy which exacerbates risk
- “Overpaying”, whether in actual fees, but also in valued resources such as time by not pursuing what are true value adds
While I think the framework of risk in DeFi is still more-or-less non-existent and not as robust as traditional finance, I think the above points are universally true about any investment vehicle, TradFi or DeFi.
I’m really big on systematic approaches and here’s my attempt at one (as an example and possible ideas):
I notice that in DeFi (it happens in TradFi too but not as much for most investors) diversification needs to come in two different dimensions: breadth and depth
Breadth is about the usual number of protocols/cryptocurrencies we want to expose ourselves to. Depth is the degree to which we want to expose ourselves to each of them. Gro already has this notion via the allocations and exposure infograpgics but as a community we would need to further iterate on this. For example, Compound is often sitting at 50 ~ 60% exposure.
This is probably to some degree due to the nature of DeFi in Ethereum as of today, but it is also troubling. Particularly the DeFi space of today runs on composability of assets, and particularly composability of collaterals. I would say without this composability, over-collateralization would have been harder to market in the DeFi space. But we know that wrapping collateral and debt over one another can quickly unravel in very unsavoury ways e.g 2007-2008 financial crisis. I don’t exactly know how Gro currently tracks exposure, and I’m sure the team is doing a great job on it (maybe something that can be further clarified in the docs), but there is always that scare with composable collateral systems.
At the same time, I think there are arguably more straightforward and consequently safer yield generating DeFi protocols such as for example LP pools and farming incentives. The returns can be even more variable than lending/borrowing but for the current DeFi space and there is impermanent loss looming . But I think their use for asset composability is not yet as common as single tokens for leverage. So you can say in some ways LP pools and farming incentive tokens are not as risky or prone to market shocks
The general takeaway idea is to consider different exposure targets for different yield generating strategy classifications. I don’t know yet how fine-grained we can categorize yield generation strategies, but whatever it is the team and community can come together to assess their risk and reward payoff. Possibly with the addition of assigning “Community/Protocol Trust” to strategies/protocols/stablecoins. And even better if it can be derived objectively!
This way of thinking will also better help the community as a whole consider novel and even high-risk integrations that would hopefully be agreeable by the community at large and also not being overexposed to them
We all know (or most hopefully), that wherever you look, risks in DeFi is always going to be there in ways we’ll never quite anticipate. Potential losses are unfortunately part of the equation, but unfortunately risk is also what enables returns to exist. Hopefully going forward we can aim not just for the highest yield, but also the highest yield adjusted for risk (whatever that definition of risk in crypto and Gro’s community will be)