Potential DeFi Strategies, Based On Short-Term / Long-Term Game (CUB Examples)
Before even starting, I want to make it very clear that this isn't financial advice, the AMM (Automated Market Making) and DeFi (Decentralized Finance) are very risky activities, and you should definitely do your own research (DYOR) before engaging in something like that. I'm writing this purely for informational purposes, and also to fixate some of the concepts I had to integrate lately.
Nothing in DeFi is totally new, but the way the concepts are linked together certainly is. Some of the terms may be confusing or misleading, so I felt the need to clarify them, specifically for this context.
So, now that we know what this post is about, let's go.
Definitions And Terms
Liquidity Pool
A pair of tokens, used to create a medium for transacting one token to the other. CUB-BUSD is a pair of tokens used to create a medium for people wanting to exchange in any direction CUB and BUSD.
Pool Token
The "proxy" token created / minted by a specific DeFi protocol, to facilitate the exchange of other tokens. CUB is the "proxy" token of the Cub Finance DeFi protocol.
Tools And Allocations
There are "farms", or liquidity pools, and "dens", or normal staking (blocking tokens for yield). There are also allocations, which means some of the liquidity pools / staking options get more from the whole "pie" (the total amount of minted tokens + fees, sometimes called "treasury"). Tool types (farm / den, or liquidity pool / staking) give different returns, in absolute terms, and they also get different allocations from the entire pie.
Short Term Game
Goal: maximizing short term revenue (weeks / months).
Behavior: aggressive towards the initial inflationary period, potentially rug pulling (getting out of the liquidity pool to take profits).
The short term game strategy will aim for the best ROI in terms of the base token invested. This token may be USD / ETH / BTC, or whatever the DeFi protocols allows in terms of pairs. So a short term game player will want to maximize this, and not the pool token.
This is important, because at the end of the game, the player will calculate the ROI in the base token invested, although he may use the pool token at times to increase revenue.
Liquidity pools have a pair of tokens which can move in both directions, and they are less prone to losses, but also less profitable, in absolute terms. If a token in a pair rises 100x, the stored value in that pool rises 10x, if a token drops 100x, the stored value in that pool also drops 10x. These are gross approximations, btw, just to give an idea about the liquidity pool behavior and reactions to price changes. The farm / liquidity pool goal is to generate transactions, to keep the mixer moving, and generate more pool tokens.
So, a short term game strategy will favor first "farms", or "liquidity pools", because they have a bigger potential to generate pool tokens. And, because of the sheer novelty and increased demand, in the initial stages pool tokens tend to be expensive. A tipping point is reached very fast, though, specifically because, as they acquire pool tokens, short term game players are also selling them, to move profits in the base token.
The portfolio, in this strategy, may be distributed predominantly towards farms. This changes very fast, though, and it's closely linked to allocations (including initial inflation). In the case of CUB, the first 2 weeks are seeing 3x / 2x inflation, compared with the "normal" inflation of just 1 CUB / block.
"Dens", or staked tokens, usually are less profitable, but more stable, in the sense that if the pool token appreciates, then the entire value spikes proportionally.
Long Term Game
Goal: maximizing medium / long term revenue (months / years).
Behavior: balancing towards pool token accumulation and profit taking / reinvesting, potentially bag holding (keeping the tokens more than their peak profit period)
In this case, the portfolio may also be skewed, initially, towards liquidity pools, specifically because they are producing more pool tokens. But, as the allocations dwindle, inflation goes down, transactions go down, etc, a more significant part may be moved into staking instruments.
Storing pool tokens in a tool with a smaller increase speed may also smooth out potential price movements. The same supply is minted every block, but if you keep less of what you own in that supply, paired with other tokens, in a volatile pool, you are less exposed to losses specific to that pair. Also less exposed to gains, but you're willing to accept that, because...
... Because, as the ecosystem equalizes, the overall value of the sum of the tools in the protocol will create demand for the pool token. Hence, the price will go up because of demand higher than supply.
This is a much longer process, though, than the initial stages, in which we're seeing very generous allocations, to lure investors in.
That's my initial understanding about how DeFi works, and about potential strategies.
I see the short term one very risky, but, as with every high risk, very profitable.
The long term seems less risky - mostly because you have less expectations - but with a more stable ROI.
Thoughts?
P.S. If you think I'm wrong somewhere, please point that to me, I'm here to learn as much as I am to share.
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