Participating in the squeeth crab auction

The crab strategy holds a daily auction selling or buying oSQTH for eth. Anyone can participate if they have enough of whichever crab is buying. This guide covers the basic ideas to get started with the auction:

• Crab strategy recap
• How crab hedge works
• How the crab auction works
• Why I would want to participate?
• Example of a buy auction and a sell auction

To dive straight in, check out upcoming auctions and participate in live auctions at www.squeethportal.xyz.

Crab strategy recap

The crab strategy vault holds short oSQTH against eth collateral. As the market moves, the crab vault adjusts its holdings so that the net exposure to eth is as close as possible to zero.

The figure below is a typical crab vault’s payoff with the eth price at 3000 where the positive exposure from eth collateral offsets the negative exposure from squeeth. The crab does best when the price stays at 3000, in which case it receives the full funding rate.

Crab delta neutral at $3000

How crab hedge works

As the eth price moves, the oSQTH price moves, and the exposure of crab changes. If the price moves to 2900 the crab will be long eth (positive slope on the curve); if the price moves to 3100 it will be short eth (negative slope on the curve).

If crab is long eth (at 2900), the strategy will want to mint and sell oSQTH in exchange for ETH.

If crab is short eth (at 3100), the strategy will want to buy back oSQTH with ETH.

The size of the trade at any time can be calculated directly since the exposure of oSQTH is 2x the same value in eth. If the strategy is long 10 eth delta, the strategy will sell 10 eth worth of oSQTH to get back to neutral. The eth proceeds from the trade will increase eth exposure by 10 and the new short squeeth will decrease eth exposure by 20.

How the crab auction works

The crab strategy conducts an auction to trade the target hedge. The auction has two triggers:

1. 24 hours pass since last auction
2. Price of oSQTH moves by more than 20% since last auction

After the auction is triggered, the contract starts by offering a price that is 5% worse than the current 7 minute average price and finishes after 20 minutes offering a price that is 5% better than the 7 minute average price. If the auction is buying, it starts with a lower price and if selling a higher price.

To trade profitably with the auction, wait until the auction offers a price that is suitably attractive.

A crab auction where hedge is buying starts bidding 5% below twap and ends 5% above

Read more about the crab auction here:

https://opyn.gitbook.io/squeeth/contracts/strategies/examples/hedge

Buy auction example

In the example below the auction is offering to buy 1.235743 oSQTH for 1.342187 eth. This auction price is 0.84% worse than the current Uniswap price, though this price will improve as the auction progresses. Since the auction price changes each block, we specify a minimum limit price of 0.335 ETH per oSQTH to bid on the current auction.

After 4 minutes the auction price has increased and is now 1.17% above the uniswap price. Looking more tempting now!

The price will continue to improve for 7 minutes, but whoever clicks ‘HEDGE’ first wins.

Why I would want to participate in the crab auction

There are three primary reasons you might participate in the crab auction:

1. To pick up a spread by trading with the auction and offsetting or selling this risk later on for a profit (the market mak00r)
2. To get a favorable price on a large trade you wanted to do anyway and avoid uniswap slippage and fees (the trad00r)
3. To put on a long or short volatility position (the volarbad00r)

Auction trading tips

1. Be prepared for the size

Before the auction begins you can calculate the likely size of the trade. The auction page indicates the size of the trade if the auction occurred immediately at the uniswap price, so it is usually clear if the auction is buying or selling. Keep an eye on the changes as the auction goes live.

If you want to play around with numbers, you can put the current numbers from the crab vault (vault 70 total debt and collateral) into the Squeethlab spreadsheet. You can check out what will happen to crab as parameters change.

2. Pre-mint enough to sell

If the strategy is buying oSQTH you may be minting the oSQTH in your vault in anticipation of the trade. When you mint oSQTH it generates no exposure since you are long the minted oSQTH and short the same amount of oSQTH in the vault. Mint enough oSQTH before the auction so you have a comfortable safety margin. You can always burn excess oSQTH if you don’t use them to trade.

3. Keep an eye on value with implied volatility

The auction price moves relative to a 7 minute average price on uniswap, so there can be some volatility against the ‘true’ price. One easy way to measure value is the implied volatility of the auction quote price. The implied volatility of oSQTH can be approximately compared to a two week at the money option, and the recent levels of implied volatility are shown on the front end.

So that’s it. You can participate in a time auction once per day, or in a price auction if there’s a 20% price move. Wait until the auction gets to a favorable price and click hedge.

4. Check out past auctions

All past auctions for crab are listed on the crab page at https://squeeth.opyn.co/strategies. Check them out to get a sense of the size of trades.

Happy crabbing!