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Video lesson

100% APR DeFi Portfolio

100% APR DeFi Portfolio: Crypto Liquidity Pools

In the world of finance, building a portfolio that generates returns can feel like trying to find a needle in a haystack. This lesson is designed to guide you through constructing a DeFi (Decentralized Finance) portfolio that aims for robust annual percentage returns—specifically, a whopping 100% APR. Understanding these concepts is not only crucial in traditional finance, where risk and return balance is paramount, but it also paves the way for you to navigate the exciting realms of cryptocurrencies and blockchain technology.

Core Concepts

Let’s delve into some essential terms that will broaden your understanding of the crypto scene and traditional finance principles:

DeFi (Decentralized Finance): Refers to financial services using smart contracts on blockchains, primarily Ethereum. In traditional finance, this concept parallels decentralized banking systems, where you control your funds without intermediation.
APR (Annual Percentage Rate): This percentage indicates the annual return you can expect from your investments. In the crypto world, APR can vastly differ due to market volatility, unlike the relatively stable APR in traditional banking.
Liquidity Pool: A collection of funds locked in a smart contract that allows users to trade, borrow, or lend assets. In the traditional finance context, think of it as a mutual fund where multiple investors pool their money for profit-making assets.
Divergence Loss: The opportunity cost stemming from not holding the underlying assets while providing liquidity. It is akin to missing out on potential market gains in traditional finance when you invest in less dynamic instruments.
Stablecoins: Cryptocurrencies pegged to stable assets (like the US dollar) and designed to mitigate price volatility. In traditional finance, stablecoins are like certificates of deposits—safe and stable.
Correlation: Measures how assets move in relation to one another. Assets that are highly correlated tend to behave similarly, reducing the potential for higher returns, similar to how bonds and stocks interact in traditional portfolios.

Understanding these concepts is crucial for you as you venture into the crypto landscape, as they form the backbone of both your portfolio-building strategies and risk management techniques.

Building Your 100% APR DeFi Portfolio

1. Define Your Investment Strategy

Allocating Funds: Start with a total investment amount—in this case, $50,000. Determine how to split this across different liquidity pools.
Choosing Pairs: Select liquidity pairs that align with your risk appetite and expected returns.

Explanation: In this lesson, the four liquidity pairs chosen were Ethereum to LINK, Ethereum to Aether, Ethereum to USDC, and SolRender. These picks reflect varying degrees of risk and returns, leveraging both stable and volatile assets.

2. Simulate Performance

Using Simulation Tools: Tools like Metrix.Finance allow you to simulate how different market scenarios affect your portfolio.
Monitoring Price Movements: Understand how fluctuations in prices of assets will impact your expected APR.

Explanation: Simulating movements can reveal when you might get shifted into a stablecoin, potentially affecting your returns negatively or positively based on market trends.

3. Assess Risk vs. Reward

Divergence Loss Calculation: Analyze potential divergence losses when values of assets change.
Reviewing Returns: Each liquidity pool has its APR, with some having steady but lower returns (like Ethereum to USDC) and others promising higher returns at greater risk (like Ethereum to Ether).

Explanation: Recognizing the risk-reward balance is crucial—higher returns come with increased volatility.

4. Adjust Allocations

Dynamic Changes: Willingness to reallocate funds as market conditions and personal risks change.
Reviewing Performance Metrics: Constantly check which pools give you the best returns relative to your risk.

Explanation: If your analysis suggests that a certain liquidity pair like Ethereum to LINK is becoming redundant, adjust your portfolio to optimize returns.

Blockchain Passive Income

DeFi Yield

As you juggle these traditional and crypto concepts, understand that while methods may differ, principles often align. For instance, just like in traditional finance, not all assets are equal; crypto markets can shift unpredictably, making it crucial to stay informed and adaptable. Projects like Aave and Uniswap demonstrate the mechanics of liquidity pools.

Examples

Imagine a scenario where your portfolio experiences a price surge for Ethereum. The implications could mean a lucrative shift from Ethereum to USDC, which might net you a higher yield due to the shift into stablecoins. Conversely, consider an equivalent scenario where a drastic loss in market value necessitates reevaluation of allocations to mitigate divergence losses.

Real-World Applications

Historical context shows how traditional finance aligns with modern DeFi. Take the 2008 financial crisis—banking systems faced volatility and downturns, creating newfound interest in decentralized systems that stabilize through liquidity pools. Similarly, crypto markets have shown tendencies to react in drastic ways; learning from these patterns aids in your understanding and execution.

Cause and Effect Relationships

The relationship between price movement and liquidity impacts returns significantly. If the market fluctuates, it could enhance or diminish profits. You might notice that more stable pools reduce your risk but also limit your potential returns compared to more volatile pools.

Challenges and Solutions

One challenge you may confront is liquidity risk, especially in times of market volatility. Many crypto pools could experience dumps which can lead to heavy divergence losses. Solutions include diversifying your investment across stablecoins and volatile assets. Embracing the educational process in DeFi, you can clarify misconceptions—like believing crypto is purely speculative versus understanding its fundamental value and strategic positioning.

Key Takeaways

Build in Layers: Diversify across multiple pools to mitigate risk.
Know Your APR: Each liquidity pair has its unique return relationship; aim for one that suits your risk comfort.
Continuous Learning: Regular simulations and adjustments are key.
Embrace Volatility: Use tools to monitor price movements and capitalize on them smartly.
Risk Awareness: Understand the impact of divergence loss and how to strategize against it.

Discussion Questions and Scenarios

How would changing market conditions affect your portfolio?
Can you compare the benefits of stable liquidity pools versus crypto-to-crypto pools?
What’s your personal risk tolerance like, and how could it shape your DeFi strategies?
How does understanding traditional market concepts improve your performance in crypto?
If Ethereum’s price stagnates, what adjustments would you make to maintain an optimal APR?

Glossary

DeFi: Decentralized financial services on blockchains, mostly utilizing smart contracts.
APR: Annual percentage return estimate for liquid assets.
Liquidity Pool: A smart contract holding funds for trading and lending.
Divergence Loss: The cost incurred from not holding assets while in liquidity pools.
Stablecoins: Cryptocurrencies that aim to be stable against the US dollar or other assets.

As you embark on your journey through the dynamic world of cryptocurrency, take this information and let it guide your trading decisions, portfolio management, and understanding of risk.

Continue to Next Lesson

Ready to turbocharge your learning? Keep the momentum going, and let’s dive into the next lesson in the Crypto is FIRE (CFIRE) training program!

Read Video Transcript

How to Build a 100% APR DeFi Portfolio (Crypto Liquidity Pools)

https://www.youtube.com/watch?v=h2U_1pl8u6A

Transcript:

I want to walk you through the process of building a 100% APR DeFi portfolio. In our previous videos, we went over how you can find the positions, how you can simulate performance on Metrix Finance. Today, we’re talking about this build section on Metrix Finance. And the goal here is to bring multiple simulations into play and truly select the best simulations that actually make sense for a portfolio.

So I’ve already put together four different positions right here. We have Ethereum to LINK, Ethereum to Aether Sol render and aetherium to usdc this is cumulatively doing roughly a 100 APR now as you can see our allocations are pretty simple we have fifty thousand dollars which is allocated 20 grand to aetherium to link 10 grand to aetherium to aether 10 grand to Sol render and then 10 grand to aetherium usdc we’re going to talk about why these allocations are structured that way aetheriumC is a crypto to stable liquidity pool. So if we pop into the simulation and we

simulate the position performance right over here, as Ethereum goes up in price, so as Ethereum starts to get to that upper range of 3,200, let’s just say, we are going to get sold into the stable coin. And the reason why is because people are buying the Ethereum and they are selling us the stable coin. So we are taking on more stablecoin.

The people buying Ethereum are obviously taking on more Ethereum, basically. That’s why we’re getting shifted out of it. So you’ll notice that we will have $10,641, but we have a lot of opportunity costs and divergence loss. Now, it does only take, you know, 23 days to outweigh this opportunity cost.

But at the same exact time, it’s a lot more risk than just doing a crypto crypto and getting a little bit lower of a return. But at the same time, being able to outweigh this and the time span of one to two days because we’re in correlated assets. But at the same time, we do allocate still towards crypto to stable liquidity pools like Ethereum, USDC, because they are low risk.

And if the market is going down, they allow us to dollar cost average into assets like Ethereum as the market goes down. But at the same time, they produce very, very good income, which allows us to bring the overall income of the portfolio up to right about 100% APR basically, or $137 per day off of 50 grand. Now I would consider Ethereum to link something that is in a similar risk category to Ethereum to USDC, but crypto to crypto as opposed to crypto to stable.

And as you can see, that’s doing a 67% APR, substantially less. And the reason why is because, well, these assets are correlated. And as you can see, people provide liquidity on a tighter range. There’s about $535,000 per tick right here. And if we go over here, there’s about $228,000. And if we go over here, there’s about $118,000.

So the point is, we are going to get a lower return over here simply because they are more correlated. So this is more attractive to liquidity providers. So liquidity providers are providing more liquidity with a tight range on this. Now, we can adjust this range to get a little bit higher of a return, just like that, because it has been consolidated in recent days. And we could put that right back on the portfolio.

That gets us a little bit better of a return at 97%, but it still does not beat the return that we are getting from Ethereum to USDC. Now, there are pools like Ethereum to Ether, which do outweigh the return that something like Ethereum to USDC would get, but at the same time, they are substantially more risky, not in the sense we’re going to have a lot more divergence loss, but in the sense that Ether is a much lower market cap asset. It is a lot more volatile than Ethereum, and it’s a lot more volatile than other

cryptocurrency assets that are more blue chip, again there are solid fundamentals behind aether but at the same time it’s just naturally a more riskier asset which is why we can get a better return over here of roughly 173 apr if we dive into this right over here you’ll notice that is consolidated in recent days so we could go with a tighter range but there is volatility where we see huge jumps just like this in the time span of one day which we want to make sure we can capture within the liquidity

pool. And then we have pools like SolRender, which are also relatively low risk because Render is a multi-billion dollar asset. And Sol is obviously the top competitor to Ethereum and the second largest smart contract network by TBL. We head over to SolRender and we zoom out a little bit. You’ll notice that once again, we are capturing the recent trend.

The recent trend is going down, which means we are allowing Render more room to grow. So we give 57% to Render and about 43% over to Sol. So the goal here is not just to print a good APR, but the goal here is also to make sure that we have long-term growth exposure because we are providing liquidity for cryptocurrency assets. And assuming we’re taking on the exposure to cryptocurrency assets, we want to make sure that we have the upside exposure as well, not just the downside exposure. One of the cool things that you can do once you have these things safe to build is not

only just see, hey, a $50,000 allocation making 9.5% per month nearly or 112% per year, which is about $155 per day. We can also see what happens when the market starts to move and we could say what happens when aether goes to say five cents and link goes to say 22 dollars maybe render goes up to five dollars and sixty cents ustc stays the same perhaps ethereum rises just a little bit and it goes up to something like 2800 or something and then soul rises just a little bit as well and goes to something like let’s just say 214 right so these assets have

some divergence and in this instance we will have about 3.75 percent of divergence loss otherwise known as this opportunity cost right over here ultimately that means if we held our assets in the market we’d have 56 149 but since we are in the liquidity pools we have 2100 less or 54 000 roughly we have a lot of divergence loss right $54,000 roughly.

We have a lot of divergence loss right there. But the thing is when doing a return of 112% per year, we only need 13.65 days of an active position or fees being generated to cover that opportunity cost. So if I just throw in, let’s just say 13.65 right over here into the input, you’ll notice that now we are breaking even with opportunity costs. If we’re in there for 21 days, we are profiting against holding in the market.

If we are in there for 30 days, once again, we are still profiting against holding the market. So this build page of Metrics Finance will allow you to see the potential performance on an overall portfolio level when we start to see movements like this in the market. Now let’s just say you need to adjust a couple things on one of these pools. In this case, let’s use Ethereum to link. We can go over here and start to adjust deposit amounts.

So say we wanted to allocate a little bit more into Ethereum to link like $25,000 and then we wanted to allocate a little bit less to a specific pool on this list. Let’s just say we were to do something like Ethereum to USDC at $7,500 instead of $10,. And then we were to do the Ethereum to Ether at seven and a half thousand dollars as well.

So just reduce the overall portfolio risk and see how that kind of draws down on the entire portfolio. We can simply update those if we need to adjust the calculation range or the actual price range or the current price, we can do that there as well. So by taking a little bit lower risk in the portfolio, we reduce the APR to about 108% down from 112%.

But at the same time, we have lower risk. So we can make that decision straight from the build page and then go right back to simulate any position performance. And you could see the performance there.