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The Wolf Den #605 - The Hidden Risk Of Yield Farming

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October 24 · Issue #605 · View online
The Wolf Den Crypto Newsletter
Welcome to The Wolf Den! This is where I share my ideas about the market, technical analysis, education and advice regarding trader psychology and emotional control. The newsletter is released every weekday and is completely FREE.
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In This Issue:
  1. The Hidden Risk Of Yield Farming
  2. Bitcoin Thoughts And Analysis
  3. Legacy Markets
  4. Tools To Improve Your Analysis
  5. Another FTX Bailout
  6. Maker Pushing Towards Full Decentralization By Buying ETH
  7. Another One Bites The Dust
  8. Voyager Update
  9. Is Blockchain Eating Wall Street Or Is Wall Street Eating Blockchain? | Alex Tapscott
  10. My Recommended Platforms And Tools
The Hidden Risk Of Yield Farming
I have previously written about the dangers of impermanent loss. The concept is a tricky one to grasp, which is why I wanted to revisit it with a clear example and look more closely at the math. If you are interested in yield farming, the case study below will outline why your principal is likely losing value. Remember, to be successful in farming, the only thing you need to ensure is that your rewards > losses. Below is a hypothetical pool with made-up tokens, and is a reflection of how farming works.
Let’s imagine the farm uses two coins, $WOLF and $PACK. 
Wolf is trading at $100, and Pack is trading at $1. 
This means that for our liquidity pool to function, the pool needs to maintain an even value of 50:50 between these two coins.
Let’s say our pool has 9 Wolf coins and 900 Pack coins. You see a great opportunity to farm for yield, so you decide to contribute 1 Wolf coin and 100 Pack coins. This ensures that the pool remains even. It now totals 10 Wolf coins and 1,000 Pack coins. The pool is currently valued at $2,000. With your contribution, you now own 10% of the funds in the pool, $200.
If a day passes and the coins remain the same price, you collect trading fees and you have an impermanent loss of $0. Furthermore, if a day passes and each coin rises 10%, you also have an impermanent loss of $0 and have made some gains on fees and price appreciation. This is a good thing!
What happens when unbalanced volatility strikes? Let’s pretend that Wolf coin shoots up to $400 a coin and Pack coin retains its value at $1. This sounds like a great scenario - neither coin has lost value and one has pulled a 4X.
The 10 Wolf coins in the pool are now worth $4,000 and the 1,000 Pack coins are still worth $1,000. The pool has a new total value of $5,000. For the pool to function as designed, the pool needs to rebalance the total values, or its liquidity could be jeopardized. This is the role that market makers looking for arbitrage opportunities play.
So, what happens to the pool?
The pool is going to remove 50% of the Wolf coins and double the Pack coins. This would total out to 5 Wolf coins worth $2,000 and 2,000 Pack coins worth $2,000. The values of the tokens are rebalanced, but at what cost?
Remember, you own 10% of this pool, so when you withdraw your liquidity tokens and cash them in, you are entitled to .5 Wolf coins and 200 Pack coins. Together this is worth $400, not bad considering your initial investment was $200, right?
Wrong.
Your original Wolf coin would be worth $400 and Pack coin $100, a total of $500. You just experienced an impermanent loss of $100. You “lost” $100 by farming. HODLing would have been more profitable. This hypothetical situation is just one of many ways farmers can incur a loss and is an example of where the value actually rises. When one drops, your principle is on a fast track toward $0.
Many of the early iterations of DeFi projects and investors failed because of this mechanism! My goal is to clarify the unadvertised risks. AMMs are made possible through incredible technology, but are still finding their role, and perfecting their mechanics.
Stay safe and farm at your own risk!
Bitcoin Thoughts And Analysis
DAILY CHART
I briefly signed onto twitter yesterday. Based on the bullish posts and exuberance, I checked my portfolio and the charts.
I guess we are at the time in the cycle when a 1% move sparks excitement and hope.
The reality? Price made a small move up in a tight sideways range, and was predictably rejected at the 50 MA.
There is nothing happening here people.
Legacy Markets
Stock Market Today: Dow, S&P Live Updates for Oct. 23, 2022 - Bloomberg
Key events this week:
  • Earnings due this week include: Apple, Microsoft, Exxon Mobil, Ford Motor, Credit Suisse, Airbus, Alphabet, Amazon, Bank of China, Boeing, Caterpillar, Cnooc, Coca-Cola, HSBC, Intel, McDonald’s, Mercedes-Benz, Merck, Samsung Electronics, Shell, UBS, UPS, Vale, Visa, Volkswagen
  • PMIs for US, Monday
  • US Conference Board consumer confidence, Tuesday
  • Bank of Canada rate decision, Wednesday
  • ECB rate decision, Thursday
  • US GDP, durable goods orders, initial jobless claims, Thursday
  • Bank of Japan policy decision, Friday
  • US personal income, personal spending, pending home sales, University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
  • The Stoxx Europe 600 rose 0.4% as of 9:37 a.m. London time
  • Futures on the S&P 500 fell 0.6%
  • Futures on the Nasdaq 100 fell 0.7%
  • Futures on the Dow Jones Industrial Average fell 0.5%
  • The MSCI Asia Pacific Index fell 1.1%
  • The MSCI Emerging Markets Index fell 2%
Currencies
  • The Bloomberg Dollar Spot Index rose 0.6%
  • The euro fell 0.4% to $0.9824
  • The Japanese yen fell 1.2% to 149.35 per dollar
  • The offshore yuan fell 0.9% to 7.2965 per dollar
  • The British pound was little changed at $1.1311
Cryptocurrencies
  • Bitcoin fell 0.9% to $19,322.09
  • Ether rose 0.4% to $1,335.89
Bonds
  • The yield on 10-year Treasuries declined two basis points to 4.20%
  • Germany’s 10-year yield was little changed at 2.41%
  • Britain’s 10-year yield declined 12 basis points to 3.93%
Commodities
  • Brent crude fell 2% to $91.66 a barrel
  • Spot gold fell 0.7% to $1,646.55 an ounce
USD/JPY
Yes, is this police? I would like to report a crime.
The USD has put a brutal beating on foreign currencies, none more than the Yen - even in the face of intervention by the Bank Of Japan.
Dollar defies another suspected intervention from Japan | Reuters
Japan has been applying YCC (Yield Curve Controls) for ages, and is still printing money to buy every long term bond that becomes available on the market.
Play stupid games, win stupid prices.
The above chart is not for any specific trade - just an illustration of the insanity of the market.
Tools To Improve Your Analysis
Lady of Crypto
These #crypto research tools are so good you shouldn't be able to afford them in a bear market

But they are free 👀 👇

1/13
Last Friday’s newsletter intro was about tools and platforms that you can use to make your life easier.
Here is a list of a few more, in a thread from Lady Of Crypto on twitter. I have not used all of them, so I cannot vouch for them directly. But she is well respected and this is a seemingly great list.
Enjoy.
Another FTX Bailout
Crypto Exchange FTX To Provide $6 Million After Users Lose Millions To Phishing Attack
Traders on FTX lost millions in a cryptic exploit, allegedly from the trading platform 3Commas. 3Commas works with exchanges via APIs to allow traders to interact on multiple platforms and exchanges from a single user face. This hack had nothing to do with FTX, but they are stepping in with yet another bailout anyway.
SBF
13) But in this particular case, we will compensate the affected users.

THIS IS A ONE-TIME THING AND WE WILL NOT DO THIS GOING FORWARD.

THIS IS NOT A PRECEDENT.

We will not making a habit of compensating for uses getting phished by fake versions of other companies!
There is never a dull moment in crypto, and it feels like there has been a major uptick in exploits and hacks. FTX is doing the people a favor, but nobody should expect a bailout when their funds are lost. It’s still the Wild West for many crypto platforms.
Maker Pushing Towards Full Decentralization By Buying ETH
Pigeon, Eagle, Phoenix: How Maker Will Use US Treasuries to Buy Ethereum and Boost DAI - Decrypt
Maker is making a long term push towards censorship resistance and decentralization. How? By converting centralized assets like USDC and Treasuries into ETH, over time, and in small amounts. They obviously cannot back a stablecoin entirely by a volatile asset.
This is the first part of their “Endgame” proposal, dubbed “pigeon stance.”
“The name, as Christensen puts it, “is inspired by the evolutionary advantage of pigeons: Low fear of humans makes it a lot easier for them to scavenge leftover food in cities, allowing them to reproduce in massive numbers.””
Can’t wait for Eagle and Phoenix.
Another One Bites The Dust
Crypto Staking Platform Freeway Halts Withdrawals, Citing Market Volatility
Have you ever heard of a crypto staking platform called Freeway? Because the first time that I have ever heard mention of it is today… because they are shutting down due to “market volatility.”
Here are the details, quoted from the article.
“Freeway, a crypto staking platform, announced late Sunday that it had paused withdrawal services, citing volatility in the crypto and forex markets and sending its token into a free-fall.
  • The Freeway (FWT) token is down roughly 80% in the hours since the announcement.
  • Freeway was not a significant or well-known project, with a market cap of less than $70 million before the crash and now $10 million at current trading prices.
  • Freeway claimed it had $160 million in total value locked via a figure published on its website.
  • On-chain data suggests that the majority of the largest of the 4,342 token holders received it during an airdrop and were otherwise idle.
  • The largest whales on the platform lost just over $16,500, using pricing data from just before Sunday’s market crash.
  • As noted by Twitter personality FatManTerra, the administrator of the Freeway website is in the process of deleting team names from the page.”
Voyager Update
Court Approves Voyager’s Entry into Asset Purchase Agreement with FTX US
There is a lot to unpack here, so I suggest you read the blog post and dig in further if you are affected. The basic gist is that the court has approved the FTX.US buyout of Voyager, and Voyager customers now need to vote on whether they accept the proposal or not.
How will the amount be determined?
“Under the plan, the purchase price of Voyager’s cryptocurrency by FTX US, other than for VGX, will be determined based on a 20-day historical average at a future point in time. Because of this, the pro rata value each customer receives will be impacted by the price of Voyager’s cryptocurrency portfolio during the 20-day reference period, which has not yet been set. 
Value may be returned to customers through a mix of in-kind crypto, USDC, and U.S. dollars, depending on the nature of a customer’s claims, whether and when customers transition to FTX US, and the specific coins supported on the FTX US platform. Only customers who transition to FTX US will be eligible to receive cryptocurrency as part of their plan distribution—customers who do not transition to FTX US will receive their distributions in cash from the Voyager bankruptcy estates. FTX US currently supports tokens that represent about 77 percent of cryptocurrency denominated claims and is seeking to add additional tokens to raise this percentage. ”
Calculations that I have seen have shown a recovery of 60% - 72% of assets on the platform.
Is Blockchain Eating Wall Street Or Is Wall Street Eating Blockchain? | Alex Tapscott
Podcast - The Wolf of All Streets
Is Blockchain Eating Wall Street Or Is Wall Street Eating Blockchain? | Alex Tapscott
Alex Tapscott is a prolific writer, speaker and investor. Together with his father, Don Tapscott, who has also been on the podcast, he co-authored the best-selling book “Blockchain Revolution: How the Technology Behind Bitcoin and Other Cryptocurrencies is Changing the World.“ They also co-founded the Blockchain Research Institute, a multi-million-dollar think-tank focused on cryptocurrencies and underlying technologies. I sat down with Alex during Mainnet in New York to discuss what has changed in crypto, why he thinks that this bear market is different from the one in 2018, and why he believes that nothing can stop crypto.
My Recommended Platforms And Tools
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The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this e-mail constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to “Buy,” “Sell,” or “Hold” an investment.
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