Optimising Stablecoin LP position management
At 512M, we specialise in managing a High-Yield Stablecoin strategy, which involves continuously researching and refining methods to optimise stablecoin liquidity provider (LP) positions on decentralised exchanges (DEXs). This article presents an overview of our findings, supported by real-life data from the past year, specifically focusing on the 3pool stablecoin pool on Curve Finance.
The 3pool on Curve offers two types of yields: a base yield, which is automatically compounded, and a reward yield paid in Curve’s native token, CRV. For the purpose of this analysis, we have assumed the maximum boost available for yield accrual. Additionally, we have considered the gas fees incurred each time a claim for rewards is made or a compounding action is performed. Our focus is on two key factors that influence optimisation: the size of the portfolio and the ideal timing to claim and compound the reward tokens (CRV in this case).
Our research involved analysing over 200 portfolios of varying sizes and plotting their returns to evaluate the impact of these factors. The data revealed a compelling insight: smaller portfolio sizes that compounded their earnings at frequent intervals actually suffered losses. This loss occurred because the yield generated by these smaller portfolios was insufficient to cover the gas fees incurred from frequent compounding actions.
This scenario underscores the popularity of protocols like Beefy Finance, which pool assets into larger vaults. With greater liquidity, the impact of gas fees is diluted across a larger pool of capital, making the strategy more cost-effective. Consequently, when managing smaller allocations on the Ethereum mainnet, we often consider integrating protocols like Beefy Finance into our strategy to mitigate the adverse effects of gas fees.
However, it is not just small portfolios that need to be mindful of their compounding strategy. Even larger positions can suffer from overly aggressive compounding. For instance, our data illustrates the performance of a portfolio valued at $250,000. In this example, the worst-performing strategy involved daily compounding. While the overall returns remained positive, there were periods during which the position lost money due to a combination of low base yields, minimal incentive fees, and the high cost of frequent transactions.
When examining the same portfolio with a compounding interval of 15 days, a different picture emerges. At this interval, the impact of gas fees is less pronounced, and the portfolio performs more consistently, especially in a lower-yield environment like the one observed in the 3pool. In such scenarios, the price action of the CRV token has less significance; the reward yield tends to overshadow any negative price movements, allowing for modest profits when the token price rises.
To provide a more comprehensive view, we calculated the Sharpe ratio for each of the 200 portfolios and presented the results. The findings suggest a clear correlation between portfolio size and a better Sharpe ratio, primarily because larger portfolios are less affected by gas fees. Longer compounding intervals also tend to contribute to a better Sharpe ratio, but this trend only holds up to a certain point. In the largest portfolios, intervals longer than 10 days do not consistently result in a higher Sharpe ratio. This outcome may be attributed to the increased exposure to the short-term price volatility of accrued CRV, which represents a more significant portion of the portfolio.
It is important to note that our analysis remains relatively basic, focusing solely on these two factors—portfolio size and compounding frequency. Several additional elements could influence these outcomes, such as the strategy of claiming and staking CRV to generate additional yield. Therefore, while this research provides valuable insights, it is clear that our methodology requires further refinement. A deeper, more comprehensive exploration of other factors is necessary to fully assess the risks and potential returns associated with different positions.
In conclusion, the optimisation of stablecoin LP positions on DEXs is a nuanced and complex endeavour that demands careful consideration of multiple variables. As we continue our research at 512M, we remain committed to refining our strategies to enhance yield while managing risk effectively.
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