Today, we will be exploring another interesting DeFi use case for MetalSwap's Hedging Swaps.
This one is designed for those who have liquidity available to utilize with ETH or WBTC assets on Uniswap V3. So, please get comfortable, and let's begin!
Uniswap is currently the most widely used DEX in the world. It works thanks to all the liquidity providers who offer their liquidity in exchange for rewards generated by the protocol's fees. Since the launch of Uniswap V3, it has become possible to provide liquidity in a concentrated way and earn rewards based on a percentage of the fees generated in the select range. With today's use case, we aim to protect all those who implement this strategy.
What we will see in this article:
- Presentation of the use case
- Practical example
- Risk of this Use Case
Presentation of the Use Case
You have liquidity available to stake on Uniswap V3, and after conducting research, you have decided to provide liquidity in the USDT/ETH pair with a 0.05% fee. By choosing this pool, you will be exposed to the price of ETH. Your goal is to earn the fees generated by Uniswap while minimizing the risks of asset volatility. To achieve this, it would be beneficial for you to open a hedging position on MetalSwap by using a portion of the rewards you earn from Uniswap to pay the premium.
You have $10,000 available to place in the ETH/USDT pool . You have decided to position your liquidity within a fairly wide range that, according to your analysis, may reflect ETH's movement over the next 30 days. Let's take a closer look at the numbers of your position:
Budget: $10,000 divided in 7474 USDT and 1,435 ETH
ETH Price: $1760
Range chosen: $1515/ $1845
Apr estimated 30 days: 12,22%.
To calculate the APR on this position, we used three different tools (Tool 1, Tool 2, Tool 3) and we made an average of the results. However, it is important to note that these projections are based on historical data, and all of these tools estimate Apr based on the last 7 days. Due to the recent high volatility of the market, we have observed high volumes on the DEX and consequently, high rewards for liquidity providers.
Please note that the balance between the two assets in your liquidity position is constantly changing based on price movements. If the price approaches the lower end of the range, you will have more ETH within your position, specifically 6.02 ETH if the price reaches $1515. On the other hand, if the price starts to rise, you will have more and more USDT, ending up with 10067 USDT, making a small profit from the $10,000 initial. You can verify these metrics thanks to Tool 2.
From which scenario should I protect myself?
The worst-case scenario is when ETH starts to fall, and you need to protect yourself against this because your initial budget will start to decline. If the price goes down to $1515, your 6.02 ETH will have a countervalue of $9,120. In this case, you would have a temporary loss of $880. You can decide for yourself the amount you want to protect. In this example, let's say you decide to open a Hedging Swap to protect yourself from half of the worst-case scenario.
In this case, you should open a Hedging Swap on MetalSwap with Target size 1.80 ETH
Now it's time to go to the MetalSwap DApp and open this swap. The premium required to open it for 30 days is 0.163 ETH, which at the price of $1760 is $286, the 2,86% of the initial capital. In this case, you use a cover of 10% to protect yourself from all the range that you have chosen, so you will be asked for an additional 0.18 ETH, which is equivalent to $316.
Now that you have opened the position on Uniswap V3 and the Hedging Swap on MetalSwap, there are 3 possible scenarios:
- If at the end of 30 days the price is the same as when you opened the position, you will have this situation:
FORMULA: (Rewards Uniswap $1220) - (MetalSwap premium $286) = $934
- If the price drops to $1515, your Hedging Swap will protect you against half of the countervalue loss on ETH. However, if you still want to earn a profit, it is important that the price stays within the range long enough to cover MetalSwap's premium and the remaining half of the lost control value. In this case in this pool, you will earn a daily return of 0.407%, and it will take approximately 17.8 days to recoup the premium and the unprotected half of the control value.
FORMULA: (Rewards earned until price exits the range (x) + MetalSwap short $440) - (MetalSwap premium $286 + Loss countervalue $880) = net rewards
- If the price rises to $1845, in addition to the premium, you will also have to pay back the cover. The sum of these two, minus the gain from the rise in ETH ($67) is $535, and in this case, it will take 13,1 days of Uniswap Rewards to pay back this amount of money.
FORMULA: (Rewards earned until price exits the range (x) + Gain from the rise in ETH $67) - ( MetalSwap Premium $286 + MetalSwap Cover $316) = net rewards
- The most probable risk of this strategy is when ETH's price goes out of the range before your forecasts. In this particular case, you have chosen a fairly wide range that will be good for the next 30 days, but it is, of course, possible that the price will go out of this range.
- Another risk is that the volumes on Uniswap V3 will drop, and the rewards will no longer be competitive enough for this strategy. Unfortunately, there is no way to predict what the pool rewards on Uniswap V3 will be.
- A third risk is related to the smart contracts of Uniswap V3. The smart contract, which handles the pools, could be vulnerable to hacks or exploits, resulting in the loss of user funds.
- The Shanghai update could provide higher volatility during certain periods. In some way, this is good because it will probably bring more volume on Uniswap. However, it is more possible that the price will go out of the selected range.
- It is essential to consider the potential vulnerabilities in a Smart Contract. While the Certik audit and the ongoing Bug Bounty Program have certainly helped to alleviate these concerns, it is still important to remember that some technical issues can potentially compromise a Smart Contract.
- It can be said that, in theory, there exists a possibility of encountering technical risks even within Ethereum's blockchain.
We understand that navigating through complex use cases can be challenging, and we're here to help you every step of the way! Don't hesitate to reach out with any questions or concerns in our Telegram community, where our friendly and supportive members eagerly await to assist you. Let's do this journey together!
❗ METALSWAP ‘s admins or moderators will NEVER contact you directly on any social under any kind of circumstances.
❗ Everything concerning $XMT ‘s smart contracts and addresses is shared by our official channels (list below), do not trust any different info from any different source.
To the MetalSwap!
… and beyond!
-The DeFi Foundation
✎ What is MetalSwap?
With MetalSwap we enable hedge swap transactions through the use of Smart Contracts, AMM style.