Looped Liquid Staking: the Danger, and Opportunity! of the Depeg

Liquid staking:

(Leveraged) Looping, and

the Danger (and opportunity!) of the Depeg.

Preparing for, then HOPING for, the worst.

Or: how I'm not getting any sleep tonight (again).

Real Talk with the el geophf. 

Caveat Lector

Before we start, this, like my other HOWTO/pensées, hits heavy. No reason to be scared, however. If you don't understand something, learn the concepts.

I did.

If you still don't understand, ask. I bite: hard and ferociously, cuz I'm a mean ol' cuss, but you can still ask.

Concepts

So, I'll ask for you, because some people don't know.

• "What is liquid staking, el geophf, the munificent?"

Liquid staking. @stride_zone has a good description and a sine qua non in their whitepaper.

Next concept

• "What is leveraged looping of liquid staking tokens, el geophf, the wizened?"

You callin' me old? 😤

Fair. 🤔

Funny how 'wizened,' or 'one who has obtained wisdom,' used to mean 'agèd person.'

Okay:  back to the question. I've written an article as my answer.

The Risk of Liquidation

You see in my article about liquid leveraged looping (λλλ, eheh 😅) that I point out that the s-token depeg is a possibility, in which case you're eff'd.

Are you?

Yes. Absolutely. The s-token depegs, and your entire supply collateral is liquidated to cover the borrow.

Eff'd.

And there's no way to stop this.

Remember Terra? I tried to bring in collateral, along with all the other wallets, to no avail.

BILLIONS of dollars, liquidated, and the network, my friends, was shut down to save ...

... absolutely nothing.

I hear tell people who looped $NearX when it depegged had a similar experience, ... orders of magnitude smaller, but still, when you lose money, the 'orders of magnitude' pale to your personal loss.

In all this (devastating) loss, I hear tell of people, and companies, who profited tremendously from depegs. One individual walked away with a 7-figure gain on the $UST-depeg.

Companies have set up multibillion-dollar hedges to destabilize then to profit from a depeg.

"VULTURES!" you scream.

"BLOOD-SUCKING OPPORTUNISTS!" you cry.

Here's the thing.

They are still here. And they are planning for the next depeg, right now.

Meaning: given the opportunity, a depeg WILL happen, and looped leveraged positions WILL be liquidated.

Strategies/Hedges

Okay, GIVEN that the depeg 'may' occur, there are several approach to take to this impending doom.

Let's go over each.

1. "Leveraged looping is too risqué, but not in the good way. I'm makin' like a tree and getting outta heahe!"

Cowardice is one approach. And, if you opt-out on one of the most stable and high-yielding money-making strategies, then, ... well, we have nothing more to talk about.

2. Insurance from a 'certified' ('certified' to be what??) third party

Here's why I detest this.

You give me your money.

That's stupid: what happens when the sh-t hits the fan?

I say: "Oh, insurance covers $327 of your loss. Here you go."

How do I know this?

Don't ask.

If you think getting paid a pittance for a crater-hole of financial loss is what pisses me off, you've missed my point.

You give YOUR MONEY to a THIRD PARTY?

How anti-DeFi can you get? 😤

Instead of paying somebody else, who doesn't care about you, why not be your OWN insurer?

3. Hedge.

Be your own insurer.

Look: people bet FOR the depeg, in some cases PROFITING millions of dollars.

Be one of those wise guyz. Bet FOR the depeg.

AND.

All the while, maintain your leveraged looped position.

That's making money on BOTH SIDES of the house, fam.

"Okay, Mr. Smarty-pants, ..." you say.

Thank you. Yes, I am: because I LISTEN TO and LEARN FROM my betters, then ACT ON this knowledge TO CREATE my own path.

That's a free #protip that I'm throwin' atcha, if'n you're catchin'.

Catch my drift?

HOWTO Hedge

"Yeah, so, anyway," you say: "Of COURSE I want to hedge. But how, man? HOW?"

I'd like to introduce you to a concept you've never heard of before:

The Liquidity Pool. 

Now, before you snort at me derisively, claiming to know about liquidity pools, let's look at the use-case beyond providing liquidity for trade and thereby earning fees, yes?

Advanced liquidity pool investing involves this: when your token value DECREASES, the NUMBER of that token in your LP-pair INCREASES, thanks to the balancing-magic of the AMM/Automatic market maker.

Let's walk through a depeg-scenario to see how the s-token-token LP is a hedge.

Depeg Scenario

Let's say you have 5k $sAVAX supply on @BenqiFinance and borrow $AVAX against it.

Now, you're smart, see? So you have a 5k sAVAX-AVAX LP as hedge.

BOOM! $sAVAX depegs to $1.00 vs. $AVAX $20-per. You get liquidated and lose all your collateral: so only have $sAVAX collateral!

So, your @BenqiFinance-position is nullified.

What happens on the LP-side?

Your 5k sAVAX-AVAX LP IS STILL a 5k sAVAX-AVAX LP!

But, before it looked like this:

• 2,400 $sAVAX - 2,500 $AVAX

But after the depeg, it looks like this-...ish:

• 48,000 $sAVAX - 2,500 $AVAX: same value.

"48,000 $sAVAX?" you scoff, ... scoffingly. "What's the worth of that when $sAVAX is worth only $1.00?"

Here's its worth, and here's where you act, and act quickly:

• Draw down 50% of the LP. Now. Hurry.

That puts 24,000 $sAVAX and 1,200 $AVAX into your wallet.

Now that you have those assets-in-hand, you do the following.

1. Supply a FRIKK'n 12,000 $sAVAX to @BenqiFinance 

(sry: I misspoke.) That puts, not 12,000 $sAVAX, but a FRIKK'n 24,000 $sAVAX to @BenqiFinance.

So you're not up by a net-200%

You're up by a FRIKK'n net-400%

A FRIKK'N NET-400%, folks.

2. Swap half the 1,200 $AVAX to $sAVAX and re-provide that liquidity to your sAVAX-AVAX LP.
3. Wait. Wait for $sAVAX to regain peg. Wait patiently.

There are two outcome of your waiting:

1. The peg never restores, and you have Harmony and Terra all over again. Welcome to the club. Hug a kitten. Smell some flowers. Don't kill yourself. Please.

It's a loss. Yes. It's just money. And money, at base, is nothing but Maya. माया

Or, like $NearX on @NEARProtocol:

2. the s-token restore to peg.

But look at this:

You have your LP at 75%, once it rebalances.

But your @BenqiFinance supply is UP 120% 240%

And you have no borrow, so you're really up by more than 200%. 400%

You're up by more than 200% 400% from a depeg.

So. When somebody criticizes your liquid leveraged looped position (λλλ) (alles teh lurlz), saying: "What if the s-token depegs?"

Scream.

Scream in their faces: "O! G-D! PLEASE! PLEASE LET THE S-TOKEN DEPEG! PLEASE!"

Scream some sense into them.

For my sake at the very least.

Conclusion

What is the takeaway from all this, other than 'hedge your stake'?

It's this: it's the coward that listens the the crowd and cowers.

But you're not a coward: you're a trader. You're an investor. You don't let the crowd think for you: you think for yourself. 

So when someone says: "but what about the depeg?" Don't respond: "Oh, yeah! The depeg. Gotta stay away from that. Too risky!"

No. Remember: you're an investor. Think, instead: "If the depeg happens, how do I set it up so that I profit from it?"

Then set that up.

Always remember, the markets don't control your portfolio. They can't: they aren't the investor.

You are.

YOU control YOUR portfolio.

P.L. ('postlude')

I said 'Why I won't get any sleep tonight. Again.'

Here's why.

I have the s-token loops on @avalancheavax and @FantomFDN, but I don't have the s-token LP hedges in place.

Guess what I'm going to be doing all tonight, huh?

Welp. I hope YOU have a good night!

Mirror: lock'd (...kinda) farms

Okay, I talked about @anchor_protocol: http://logicalgraphs.blogspot.com/2022/10/anchor-less-on-terra-classic.html

Now let's talk about @mirror_protocol.

"Is that 223% farm APY really 223% APY?"

"Is @mirror_protocol even viable, geophf?"

Let's take a look.

Recall I wrote an article yesterday about Mirror's current lock'd farm-situation, and how to get around that ... sometimes.

Full disclosure.

I love @mirror_protocol. I love Mirror more than I love ... UR MOM!

And since I'm older than your mom, that makes me ... yes, say it: YOUR DADDY!

WHOZ UR DADDY!? ME! IM UR DADDY!

So deal.

... I'm glad that didn't get weird. 🙄

And that is a geophf-way of saying this:

If you were to ask: "geophf, is @mirror_protocol better than sliced bread?"

My answer will be: "You slice bread?"

I'm French, after all. Slicing bread is anathema.

Also, I'm going to Oktoberfest in D.C.

TIL I'm German. Well, okay, then.

So, I'm going to cut this thread off, mid-stream, and come back to it, hours and hours and much more endrunkified, later.

kthxbaifam

Okay, but @mirror_protocol: is it the real-deal, still, or what? I need to prove this out to myself, because you believe in me, because I use maths, and stuff.

geophf-wizardry with the spreadsheets, and all that.

(Yes, I'm back)

(Yes, I tweet better when I've had a few drinks).

Okay: is @mirror_protocol fo' realz?

Yes, ... and no.

First, let's calculate REAL APYs and see if they match APYs as advertised.

I took out an mDOT-UST LP yesterday advertising 223% APY.

What's the real APY?

My spreadsheet shows: 218.14%

Yuep, the APY is real! YUS! 🎉

But, on that self-same spreadsheet that verifies the APY, you see the APR of negative gazillion.

What's going on there?

$mDOT, along with $mETH and $mBTC, is, to used the technical term: effed.

What do I mean "eff'd"?

During the LUNA v2.0 launch, some ... person used the new LUNA price to 'borrow' millions of dollars of these assets with the devalued LUNA as collateral, walking away with these mirrored assets for basically nothing, draining these tokens of all value.

What does that mean for me, for you, and for the APR? 

It means if you buy these assets, you're buying nothing, just emptied tokens.

When you try to sell these assets, that's exactly what you'll get in the swap: nothing.

So, ... why buy assets with this horrendous slippage?

Why did I buy $mDOT?

Because I CAN'T buy mirrored assets on Mirror. Mirror has locked trading at the contract level.

If you haven't heard, the Band Oracle shut down, so any trade is now wrong.

It was wrong before... Band sucks, but it's wrongER now, so Mirror cut the chord.

Invest in Mirror?

So: APY vs APR. The trade-off on @mirror_protocol is this:

You CAN buy worthless assets to farm $MIR for a good (one of the best in the world, actually) REAL APY 

(where else can you say that?)

But, in so doing, your investment? it just got rekt; therefore the negative APR.

So: do I recommend investing in @mirror_protocol?

Yes and no.

I DON'T recommend it if you want ANY of your investment money back, at all, ever.

Get me?

I DO recommend it ... cautiously, ... if you want yields that HAVE retained their value and MAY do so going forward.

The Plan

How, then, am I, the el geophf, going to invest into @mirror_protocol?

1. cautiously, with my eyes open.
2. with no money.
3. in small, experimental increments.

What do I mean by this?

1. I mean, that's how you should invest anything any time, eh?

... unless you're the Joker and can use piles of money like slide and then burn it to [checks notes] "send a message."

Or like Harley and Ivy and throw money around before using it as a mattress.

I'm not there yet.

2. "invest nothing"??? What do I mean by that.

Well, lookie here: I bought 1.9M $LUNC for $100 at $LUNC atl. It's now worth ~$500.

But I've done this before, see? I swapped some $LUNC for $UST to fund @mirror_protocol before Band cut the chord, ... do you know what happened?

This is what happened: that initial funding, that was either 10k $UST or 25k $UST from swapped $LUNC (I don't remember which, it was too many traumas ago, smh) grew to 56k $UST when I closed my @mirror_protocol positions.

That's growing my money faster than HODL'n dormant $LUNC.

Is that going to happen again this time?

No idea. $LUNC may sky; @mirror_protocol may die.

I don't know why

She swallowed the fly.

That's why 1. and 2. apply: I'm going in cautiously, and I'm going in with converted $LUNC, that is: nothing.

So, 3. small, experimental chunks.

1. Let's go in with 1000 $UST, buy and asset, pair it then farm it on @mirror_protocol. 

1000 $UST is $30. That's small.

Let's repeat this until I can't buy an asset to farm, so I'll be left with 1000 $UST, whaa, boo-hoo.

Okay, our first $LUNC - $UST swap.

Let's see the swaps across the DEXen.

You see that each DEX has a WILDLY different swap for the amount of $LUNC to get 1000 $UST.

Loop was the cheapest, but Loop also doesn't allow the swap.

It be like this on Terra now: nothing works.

F. 

No problem.

Terra, broken, beaten down Terra, has taught me to be both flexible and creative.

Chicks dig that, I'm told. 😎

The swap on @terraswap_io worked; I went with that. 

Okay! Now I have 1000 (fake) $UST (*depegged, actually) from 94k (fake) $LUNA.

Wat do?

We go to the farms, sort by LONG APY, then look for an asset we can buy, somewhere, anywhere.

The first asset, $mSQ, is not available on @terraswap_io, so we keep searching until we find one

No $mVIXY

No ...

Wait, ... am I doing this wrongly?

Narrator: yes.

me: thx, fam, luvu. 🙄

Narrator: luvu2, m8. 😊

The Narrator was correct.

The RIGHT way to go about this is

1. 'zap' the 1000 $UST into the @SpecProtocol vault

2. withdraw it as a Terraswap LP

3. It then shows up on @mirror_protocol as a LP that can be staked

4. stake the LP to start farming.

Now, when you go to "My Page" on @mirror_protocol, you see your LP farming $MIR. 

SWEET!

... lather ...

... rinse ...

... by the way, God bless you, @SpecProtocol, for keeping all these mirrored assets in reserve!

Oops! I didn't withdraw that as an LP!

That's easy to fix: redeposit the assets then re-withdraw as an LP, ... easy-peasies! 

NOW! ... repeat: 

(that is, staking the withdrawn LP vault on @mirror_protocol) 

Looping through the above, I now have positions in all LPs that are yielding above 300%.

I'll monitor @mirror_protocol APYs on a daily basis going forward, adjusting assets as necessary.

The. End.

Good night, fam.

"Anchor-...less" on Terra (classic)

Dear @anchor_protocol,

Any time y'all're ready to party, just let me know. I will bring my $1. I will even bring MORE than $1 for that TEN BILLION APY.

Thankx, frenz

Earn

Y'all wanna see a neat trick?

@anchor_protocol said they closed their lending and earning platforms.

That's not ... completely true.

Wanna see how to start earning 16% on a (very unstable) stable coin?

Note that I have 6 $UST deposited.

Read on to see me deposit ... MOAR. 😎

Okay, what dinna work, first.

What doesn't work is trying to deposit into @anchor_protocol, obvie.

What also doesn't work FOR ME RN is the @loop_finance UST-aUST swap. 

It give an error on swap, even at 100 $UST ($3) even at 40 $UST ($1.5). It used to work. It doesn't now. 😭

Also, look at how $UST's price is just FALLIN'.

OFT.

DA.

CLIFF!

D-mn, bro. 👻

But what DOES work?

What does work, ... 'kinda,' is the @terraswap_io UST-aUST for 100 $UST.

Why 'kinda'? Because there is a spread, even at this very small trade. You're paying a 1.26% fee to enter into earnings, so, by my calculations, you'll need 6,943 years to make it back.

Two things:

1. That '6,943 years'-number is totally made up, YMMV.
2. But it does work. 

When you go back to @anchor_protocol earn-tab, you see your funds are now deposited in Anchor EARN.

Why? $aUST == deposited $UST, no matter where on Terra.

That's why shorts on @mirror_protocol (yes, I meant what I said) pay you twice: once for the yields from the short-farm and once again for the appreciation of the $aUST collateral that auto-magic-ally comes to you due to the a-token price appreciation.

Synthesis

I started with @anchor_protocol and ended up with @mirror_protocol.

That's entirely fitting: the anchor-mirror pairing forms a symbiosis that I've seen replicated nowhere else in crypto.

Terra (classic) started with Anchor and Mirror.

From what I see, Terra (classic) ONLY needs Anchor and Mirror to return to blockchain supremacy.

@anchor_protocol, reopen EARN and BORROW. 

@mirror_protocol, incorporate Chainlink Oracle. 

Come back. 

love, geophf

Terra (Classic) tour: assessing the damage

Let's go on a tour.Let's take a tour of the Terra (classic) blockchain and assess the damage.

Reeeee. 

Straight up: everything on Terra Classic is a straight-up loss. The bridgessssssss are down, so I can't get liquidity onto another blockchain.

I'm not on Ku-whatever. You suggest a CEX to me: you're insta-blocc'd.

Anchor

At the end of the world, I lost a lot of $bLUNA from my liquidated loan. How much?

Haven't a clue now.

So, this loss is a loss-loss, as I don't have a record of it.

Yay. 

Apollo

At the end of the World, I moved my assets off Apollo. Look at the rewards! Not Apollo's fault, but it's a shame, really.

But I suppose I'd say that for every protocol on Terra, now, wouldn't I? 

astroport_fi 

I locked away liquidity for a year, you know, because I was in this thing for the long-haul, you know.

All worthless now.

What is 'all'? I invested $2,751.69. 

Kujira 

My staked $KUJI were migrated to the Cosmos blockchains. Thanks, @TeamKujira 

Mars protocol 

Funny thing about this one. Mars screamed: REMOVE ALL YOUR ASSETS BEFORE THIS DATE! So I did.

That date was their second snapshot.

I got penalized for listening to Mars.

I'm not happy about this, @mars_protocol. You should've mentioned that second snapshot.

Mirror protocol 

My favorite protocol of anywhere.

I liquidated my positions, twice, here, so I have no idea what I've lost or gained.

But. Look. At. These. Real. Non-deflating. Yields... STILL!

G-d, I love @mirror_protocol. I do. 

My heart. 💔💔💔

Nebula protocol 

Dear new protocol.

Welcome to Terra, ... just as we depeg.

Have a nice life, ... but not.

@nebula_protocol, so unfair: stillborn to a ded blockchain. I didn't get to start on this, to try it out even.

Nobody did.

Nexus Protocol 

Wow. That's like: seriously gone.

But it gets worse. I staked a lot of that token with the name that went on for three centuries (bDPSI-24m???) because, you know: it was going to be 1 $UST per token in a year?

Well, 1 $UST ain't 1 $USD no more, ya hear? Ouch

Prism protocol 

This one really gets my goat.

50k $PRISM locked away because of THEIR  DEAD farming bot. I've tried interacting with the contract, and IT tells me I don't have that $PRISM I'VE EARNED....MONTHS AGO!

Prism. Restart the bot, please.

$2,750.59 investment lost

Pylon protocol 

Believe or not $MINE coin could do no wrong for a while, going from $0.02 to $0.26, and it looked like the sky was the limit.

And then. Ικαρθσ took flight and touched the Sun.

We know what happened next.

Same thing with $MINE.

"Unknown token." lulz. 🙄

Then @pylon_protocol had this whole https://gateway.pylon.money/ going, 

where you could lock liquidity to fund new projects like ... 

... does anybody remember these new projects? because they're just gone now.

Oh, that's why I kept a record of them.

Yeah. Sigh. They gone. 

GLOW? Really? What was I thinking!

Loss: $750, after selling off my $MINE for nothing, but I don't have a record of that loss.

Spectrum Protocol 

I invested heavily into these vaults.

I lost heavily from these vaults.

AND THEN! I even loaned out from these vaults to start other things: like @DefiKingdoms and @mirror_protocol. So: loss upon loss.

$4,488.39 loss, in fact. 

They have @SpecProtocol on Terra 2.0, but, honestly, does anybody care about anything on Terra 2.0? That blockchain is the deddest place on then interwebs. 💀

I don't even hear crickets over there. There's more going on with Terra Classic than Terra 2.0.

Sad statement.

I am eligible for a $SPEC-2.0 airdrop when (if?) $SPEC-2.0 launches. So that's nice. $4000+ loss and I get a 500 $SPEC-... '2.0'-airdrop.

That's as nice as my $LUNA-...'2.0'-airdrop, that was worth less than 0.01 PERCENT of my $LUNA (REAL $LUNA) loss.

But that's nice. 🙄

Stader Labs 

Stader Labs is on Terra 2.0 now. Yay. I don't have a record of the $LUNA - $LUNAX I sold off in Terra Classic.

Valkyrie money 

Waow! Look at the price go down-down-down. 

Loss: $348.00

Summary

Total Terra losses, ... that I can account for: $11,513.67

More like $120,000.00 but I can't account for all the losses because I kept rearranging my portfolio, trying to rescue the sinking ship, ...

... then the ship sank.

The. End.