MetalSwap has just released its hedging swaps on the Optimism blockchain, bringing this financial instrument to this layer 2 for the first time in the history of DeFi. Today, we present to you this use case that demonstrates the benefits of integrating your liquidity providing strategies on Velodrome DEX with MetalSwap's hedging swaps.
The advantages of this use case are:
- Providing liquidity on Velodrome while mitigating the volatility of a specific asset.
- Achieving a more stable and predictable cash flow.
- Participating in the distribution of the Optimism grant on MetalSwap's dApp.
- Creating a completely customized strategy.
Introduction to Velodrome
For those unfamiliar with the Optimism blockchain, they may not be aware of the DEX Velodrome. By far, this is the dApp with the highest Total Value Locked (TVL) in the Optimism blockchain. Just like any DEX, Velodrome enables the exchange of various cryptocurrencies, all with very low fees and in a completely trustless manner. Velodrome is exclusively available on the Optimism blockchain, and currently, its TVL is around $210 million. As with all DEX platforms, a crucial role is played by liquidity providers, who offer their liquidity in exchange for rewards. In this use case, we will explore a scenario where a liquidity provider offers liquidity in the USDC/ETH pair.
Introduction to the Use Case
We have $1000 available to offer as liquidity within the Velodrome DEX. After conducting our research, we have decided to provide this value in the USDC/ETH pair. The rewards, paid in Velo tokens, are estimated with an APR of 10.32%.
By providing this liquidity, we expose ourselves to the price of the ETH coin, which may fluctuate and either decrease or increase in value during the staking period. However, by opening a hedging position on MetalSwap, we mitigate the volatility of this asset, ensuring a more stable income over time.
You have $1000 available to place in the ETH/USDC pool. Unlike the use case published on Uniswap, where you had to choose the range within which to provide liquidity, in this case on Velodrome, we do not have that option. We can only offer liquidity across the entire range. In this scenario, we want to open a liquidity position for 3 months.
Let's examine the details of your position:
- Budget: $1000 divided into 500 USDC and 0.264 ETH.
- ETH Price: $1,900
- Estimated APR for 1 year: 10.32%
- Time: 3 months
It is important to remember that the rewards are estimated and not guaranteed, as they depend on the trading volumes that particular pair receives.
From which scenario should I protect myself?
Of course, we want to protect ourselves from the scenario in which, when we remove our liquidity in 3 months, ETH has lost value, reducing our profits or potentially resulting in losses. For this reason, we will open a short hedging position on the Metalswap dApp.
Opening the position
Access the dApp, select the Optimism blockchain, and let's proceed with opening this position. As mentioned, we want to protect the volatile portion of our capital, which in this case is the 0.264 ETH. We can also choose to partially protect ourselves by covering only half of these ETH, which would be 0.132 ETH in this case.
We set a coverage percentage that provides us peace of mind for the next 90 days, and in this case, we'll set it at 20%. Furthermore, we then pay the required premium, which amounts to 0.019 ETH or $36,1. However, please note that there are incentives resulting from winning the Optimism grant. We will receive 31.63 OP tokens, which, at a price of $1.28 each, amount to $40.48. This makes the position completely free and already provides us a small profit.
As mentioned earlier, the estimated APR for this pair is 10.32%. This means that in 90 days, the APR will be 2.58%.
If we have chosen the price range correctly, we won't need to do anything, and at the end of the predetermined period, if the APR has not changed, the sum of the rewards and the result of the hedging swap will show an increase of 2.58% in our capital. In the event that the price of ETH rises, we can always increase the coverage so as not to be liquidated.
As said before, now the Optimism incentives make it very advantageous to open a hedging position on the dApp.
The first risk is that the volumes on Velodrome will drop or the Velo token loss value and the rewards will no longer be competitive enough for this strategy. Unfortunately, there is no way to predict what the pool rewards will be.
A second risk is related to the smart contracts of Velodrome. They could be vulnerable to hacks or exploits, resulting in the loss of user funds.
It is essential to consider the potential vulnerabilities in MetalSwap smart contracts. 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 them.
Finally, it can be said that, in theory, there exists a possibility of encountering technical risks even within Optimism’s blockchain.
Incentives derived from the Optimism grant will not always be like this, the further along the distribution goes the more the rewards will steadily drop and therefore it's important not to waste time in these early stages.
With the introduction of hedging swaps on the Optimism blockchain, it is now possible to open hedging positions in a much more cost-effective and advantageous manner. Additionally, with the additional rewards derived from winning the Optimism grant, in some scenarios, the rewards surpass the cost of the premium, making the opening of a new position essentially free.
This use case on Velodrome can easily be applied to all other cryptocurrencies available on the MetalSwap dApp.
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✎ What is MetalSwap?
With MetalSwap we enable Hedging Swap transactions through the use of Smart Contracts, AMM style.