In this strategy, you will be able to earn a pseudo delta neutral yield of over 100% APR through a synergy between Demex and ATOM.
The essence of this strategy is to obtain rATOM which is currently yielding over 20% APR, and hedging the exposure of the underlying ATOM asset by shorting it on Demex's ATOM perps. This strategy involves Keplr wallet extension.
As StaFi will be incentivizing the rATOM (StaFi's liquid staked ATOM) lending pool with 10,000 $FIS tokens per week for a month (worth about $35,000 in total at today's price), we will be using rATOM for this strategy for maximum APR.
Note that the delta-neutral component of this strategy can be done with any type of liquid staked ATOM.
Let's explore how this is done, but first, if you are not familiar with Demex, here's an introduction to Demex's perps:
1. Getting rATOM
The first step is to get rATOM which will yield staking rewards of over 28% APR in itself currently. We will hedge the price exposure of ATOM to be delta neutral upon purchase as well in the next step.
The annualized amount you earn will be about 28% of how much rATOM you obtain. Note that rATOM takes about 21 days to unbond into ATOM on StaFi.
There are various ways to obtain rATOM, let's go through them:
- Buy ATOM on Demex or Osmosis, bridge to StaFi, and stake on StaFiHub
- Buy rATOM on Demex or rDEX directly (take note of slippage)
- Borrow ATOM on Demex's Money Market (Nitron) and stake on StaFiHub (requires collateral before borrowing)
2. Getting USDC Margin for ATOM Perp Trading
Now that you have some rATOM, deposit it on Nitron to start earning $FIS incentives (currently over 1000% as of this writing). The next step is to obtain some USDC from Ethereum on Demex to use as margin for perp trading and shorting ATOM.
Thanks to leverage, you do not need to obtain the exact dollar value of your exposure as you can choose to multiply your margin power with leverage. I.e. I deposit $1000 of rATOM, borrow $333 of USDC, and short ATOM with 3x leverage to give me a $1000 short exposure to hedge my $1000 of rATOM.
There are various ways to obtain USDC, let's go through them:
- If you already have axlUSDC on Osmosis, you can view this guide on how to send USDC from Osmosis to Carbon, and sell axLUSDC to USDC here.
- If you have USDC on Ethereum, you can click here to deposit.
- Recommended: Collateralize rATOM on Nitron to mint USC and sell to USDC, or immediately borrow USDC. Remember to watch your health factor.
3. Hedging ATOM price exposure on Demex
Now that you have some USDC, the next step is to short ATOM.
Go to Demex's ATOM perp page by clicking here, and you can make a limit or market order to short the amount of ATOM exposure that you have, in order to be delta neutral.
Tip: Ensure the total amount of ATOM you short is the same exposure that you have in rATOM. I.e. if rATOM is 1.25x of ATOM, you will need to take that into account to be properly delta neutral, as one rATOM is not equal to one ATOM, because rATOM auto compounds and accrues value in the token overtime.
If done properly, overtime your rATOM position will accrue in value against ATOM, and your short position will hedge your ATOM exposure, allowing you to earn about 28% APR from rATOM's current staking rewards (this changes overtime), as well as the additional $FIS incentives for depositing rATOM, and minusing away the funding rate on Demex, and interest rate that you may be paying if you minted USC, borrowed USDC, or borrowed ATOM.
This strategy is involves certain risks, let's explore some of them.
- If you are using rATOM to mint USC or borrow USDC to short ATOM, you will need to check your health factor (if rATOM drops too much) and liquidation price (if ATOM pumps too much) and top up accordingly
- If rATOM gets exploited, it can be permanently depegged, ruining this strategy, however StaFi has multiple audits and a long history without any exploits, so it looks reliable and safe but nothing is 100% risk free in crypto
- There may not be enough liquidity to enter or exit your short position at one shot if your size is big, so it might take time and during this period, the price of ATOM might move, leaving you with some market exposure
- Generic smart contract risks
Although crypto is in a bear market now, innovation continues to happen in DeFi and there are still certain opportunities and strategies that you can take to earn yield during this period.
However, it is important to understand the mechanics of how things work and where the yield is coming from. In this case, the yield you are earning comes from ATOM staking rewards, and if you do not wish to have exposure to ATOM price, you are hedging it away via perps.
Carbon will continue to build itself to be an all-in-one DeFi hub where traders and investors can partake in various strategies to hedge and invest in the market. We hope you enjoyed this strategy and stay tuned for more feature update and guides!
Not financial advice
The information and publications are not intended to be and do not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort offered or endorsed by Switcheo. Switcheo does not take into account your personal investment objectives, specific investment goals, specific needs or financial situation and makes no representation and assumes no liability to the accuracy or completeness of the information provided here. Switcheo also does not warrant that such information and publications are accurate, up to date or applicable to the circumstances of any particular case.
About Switcheo Labs
Switcheo Labs is an experimental think tank that combines the brightest minds with a cutting-edge software development lab. We focus on nurturing ecosystems that are forming the foundation of a new, decentralized world — one that thrives even without trust.
With this goal in mind, the team developed a blockchain solution where finance is truly censorship-resistant and decentralized — Carbon, a custom Layer 2 cross-chain protocol that acts as a building block for DeFi. A promising use case for Carbon is seen in Demex, a reference trading UI for Carbon and the world’s first fully decentralized derivatives platform.
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