Automated Squeeth Strategies: Crab v2 Is Now Live 🦀 🦀
Important details:
- Where: https://squeeth.opyn.co/strategies
- Chains supported: Ethereum Mainnet
- Deposits: ETH
- When you DO want to be deposited: When the price of ETH is calm (i.e. not volatile)
- When you DON’T want to be deposited: When the price of ETH is crazy (i.e. volatile)
- Returns: Crab aims to be profitable in USD terms
- Important metrics to monitor: Crab profitability threshold
What’s New in Crab v2?
- New Hedging Mechanism
- Higher Caps
- Partial Fills of Hedges
- Improved Auction UI
High Level Overview
Crab v2 is an automated vault strategy that allows users to earn funding (i.e. yield) from being short oSQTH without taking a view on if ETH will move up or down.
The vault does this by creating a mix of oSQTH debt and ETH collateral. The strategy contract periodically adjusts its holdings of oSQTH debt and ETH collateral to become delta neutral. This means that the positive exposure to ETH from the collateral exactly offsets the negative exposure from oSQTH, giving the position a neutral exposure to the price of ETH. The maximum payoff is if the ETH price remains constant.
The vault rebalances Monday, Wednesday, Friday around 9:30am PST (or upon large price movements in ETH).
The Crab Strategy is profitable between rebalances as long as ETH moves less than an amount based on the funding received from the short Squeeth position, subject to transaction fees, slippage, and other costs. In other words, the Crab Strategy takes the view that ETH volatility will be low (i.e. the price of ETH will be calm, not moving a lot in either direction).
You can find the profitability threshold of Crab by going to the Squeeth strategy tab.
For a beginner’s guide to understanding Opyn’s Crab Strategy without financial jargon, check out this thread.
Crab Payoff
- Payoff Profile: Upside down smile 🙃 (i.e. a hill, and you make the most money when you’re on top of the hill)
- Funding earned: Premium paid by Long Squeeth holders between rebalances (i.e. in-kind funding)
- Max Gain: Limited (amount of debt from short oSQTH)
- Max Loss: Limited (amount deposited to short oSQTH)
- Liquidation: While it’s possible for crab strategy positions to be liquidated, it’s unlikely due to automatic rebalances
Ideal Market Condition for Crab
Crab Strategy is ideal for sideways market conditions (crabs move from side to side, get it?!) when the price of ETH fluctuates within a relatively stable range with periods of low volatility (the price of ETH is calm!). More specifically, the Crab Strategy does best during periods when Squeeth realized volatility is less than Squeeth implied volatility. Put differently, the strategy takes the view that current implied volatility is too high, or that realized volatility will be lower than the market believes. This is a classic ‘short volatility’ position.
Profits in USD
Crab Strategy aims to be profitable in USD terms. The USD earned by the strategy is the result of being short an amount of oSQTH. When the price of ETH rises, it tends to sell ETH off, trying to maintain its $ value.
If ETH goes up or down less than the profitability threshold between rebalances, the strategy makes money, subject to transaction fees, slippage, and other costs. The maximum payoff is if the ETH price remains constant.
*note, because the Crab Strategy does best during periods of low volatility, the price of ETH could rise or fall significantly from deposit until withdrawal, but without much volatility on the path, the Crab Strategy would do well because fundamentally it’s receiving funding while staying within the profitability threshold.
Accumulating ETH
Another benefit of crab is that it can stack ETH in a bear market. Since it aims to gain value in USD, when ETH goes down it tends to accumulate more ETH.
*note: this is unrealized ETH accumulation. In a bear market you would need to withdraw from the strategy to realize the increased ETH amount.
Other Benefits of Crab v2
- Crab is a versatile strategy, especially for swing traders
- No spread between funding longs pay shorts
- Deposits are 24/7 liquid
- 0 management fee
Metrics to Watch:
Profitability Threshold:
- The Crab Strategy makes money if ETH moves LESS than x% up or down between rebalances (the profit threshold). The ideal market condition to deposit in crab is when the price of ETH is calm! (i.e. moves a little)
- See the live profitability threshold on the Squeeth strategy tab
Squeeth Implied Volatility (IV)
- The most important consideration before depositing in the Crab Strategy is Squeeth’s current implied volatility. This is because Squeeth’s Implied Volatility sets the crab profitability threshold.
- Implied Volatility is a forward-looking metric designed to gauge how volatile the market may be in the future (high IV signals large price swing is ahead, low IV signals price will remain stable).
- The strategy takes the view that current implied volatility is too high, or that realized volatility will be lower than the market believes (IV).
- If ETH goes up or down less than the amount of implied volatility between rebalances, the strategy makes money, subject to transaction fees, slippage, and other costs.
- If you deposit into the Crab Strategy when IV is low (~85%) & subsequently withdraw when IV is high (~125%+), you are effectively selling Squeeth when it’s inexpensive, and buying it back when it’s expensive. Selling low & buying high is not a good look!
Price Impact (slippage)
- Slippage happens when a trader makes a trade, and the price is higher or lower than expected (for both buying and selling).
- Two primary reasons tend to cause slippage: Volatility & Liquidity.
- Volatility: Transactions take time to make it on-chain. The final price might differ from the expected price.
- Liquidity: liquidity refers to the ease that oSQTH can be traded without affecting its market price. The lower oSQTH’s liquidity, the higher risk a trade will be affected.
Risks
There are 5 main risks for Crab Strategy depositors:
- If you deposit into the Crab Strategy when the profitability threshold is low (IV is low) & subsequently withdraw when the profitability threshold is high (IV is high)
- If you deposit into crab when the current profit threshold is low (~3%) & subsequently withdraw when the threshold is high (~7%), you are effectively selling Squeeth when it’s inexpensive, and buying it back when it’s expensive!
2. If ETH moves more than approximately the profit threshold in either direction between rebalances. i.e. When the price of ETH is CRAZY up OR down (when ETH is volatile)
- The Crab Strategy makes money if ETH moves LESS than x% up or down between rebalances (the profit threshold). The ideal market condition to deposit in crab is when the price of ETH is calm! (i.e. moves a little)
3. If you want to stack ETH in a BULL market
- Since crab aims to gain value in USD, when the price of ETH goes up it tends to reduce the amount of ETH it holds. This is because the strategy seeks to maintain neutral exposure to the price of ETH.
4. If the Crab Strategy falls below the safe collateralization threshold (150%), the strategy is at risk of liquidation
- If the Crab Strategy falls below the safe collateralization threshold of 150%, the strategy is at risk of liquidation. However, automatic hedges reduce the likelihood of liquidation for depositors.
5. Transaction fees, rebalancing costs, and slippage can cut into profits
- The automatic rebalances that maintain neutral exposure to the price of ETH can reduce crab strategy returns. Additionally, negative slippage due to low liquidity can reduce crab profits when depositing / withdrawing.
Building on Top of Squeeth 🏗️
Opyn’s goal is to enable any protocol or developer to utilize Squeeth’s infrastructure. Squeeth has many powerful use cases and we want to make it as easy as possible for teams to integrate with Squeeth’s core contracts. If you’re a developer or a builder, let’s build the Squeethcosystem together! Reach out if you’re a:
- Team building active or passive yield strategies
- Active Uniswap v3 liquidity manager
- Arb bot devs or quant traders
- Lending protocol
- Creative builder with your own idea
For Automated Squeeth Strategies, there will be a few Opyn foundational strategies (e.g. Crab v2!), but integration teams can adjust any parameter of the trading strategy to create their own strategies or build their own novel strategy with different mechanism, triggers, etc.
Example parameters for adjusting Automated Squeeth Strategies could be: how often the strategy trades / hedge frequency, how much of its delta does it trade, auction params, etc.). Could also have some signal based trading strategies too (if RV*1.5<IV, sell squeeth, trade in or out depending on IV vs market, or similar ideas).
Power Perpetuals are still in their infancy, but we have been studying them in depth since their inception (July 9, 2021!) and remain extremely excited about their potential.
If you are as intrigued by this new primitive as we are, we would love to hear from you. You can join the Opyn Discord, email us squeeth@opyn.co or DM Opyn.
Disclaimer: This post is for general information purposes only. It’s also just an elaborate plan to get people to say a funny word. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. This post reflects the current opinions of the authors and is not made on behalf of Opyn or its affiliates and does not necessarily reflect the opinions of Opyn, its affiliates or individuals associated with Opyn. The opinions reflected herein are subject to change without being updated.
