🎲Strategies
How Can Users Engage with Potions
Introduction
Potions by their nature offer several ways for users to engage with the product. Potions are designed to allow users to take advantage of market volatility (how much and how quickly prices change in the market).
Under the hood, potions facilitate a secondary market with liquidity and assets backed by different types of tokens. To create a secondary market and price differences, we introduced new assets called LTKNs, which are backed by the original asset TKN or TKNs (they could be backed by multiple assets). Any market fluctuations create arbitrage opportunities between LTKN and TKN. As new tokens (LTKNs) are created, we need to incentivize users to add liquidity to these assets to minimize high slippage on larger transactions. Therefore, we share the revenue generated from wrap/unwrap fees with the users that provided liquidity and staked it.
Since there are several ways for users to engage with the potions product, they naturally have the opportunity to implement their farming strategy. Therefore, we would like to provide you with the available strategies that users can take advantage of.
Strategy Types
There are 4 types of strategies users can engage with potions: (i) Wrap & Hold; (ii) Wrap, Create LP & Stake; (iii) Arbitrage Hunter; and (iv) Combined Strategies. Below is in-depth review of each strategy.
Wrap & HODL
Brief Description
Simply wrap your TKN into a potion and receive an LTKN to HODL. Limited earnings, low-effort HODL strategy.
Explanation
There is a user who wants to utilize their asset, forget about it for a while, and additionally farm tokens. They engage with a potion by wrapping their TKN and receiving LTKN instead. This user farms Holder’s APR because of the LTKN burn mechanism. This APR is passive by nature, as the user simply needs to hold LTKNs, which will increase in value relative to TKNs. To check the swap ratio, you need to look at the Backing Ratio coefficient. The burn mechanism works as follows: a portion of LTKN is burned with every new user engaging with the potion, and thus, each LTKN represents a larger share of the TKN in the potion over time. In other words, farming in such a way increases their stake in the pool of TKNs as they can swap LTKN to TKN at a better rate and take profit from their Holder’s APR. This strategy has no pending rewards to claim.
Suitable For
HODL users, those who want a simple entrance into potions.
Pros & Cons
Pros: Participating in Holder’s APR; efficient HODL of interested tokens; no impermanent loss.
Cons: Limited earnings.
Example
A user does not know how to utilize his Token B, which he firmly believes will benefit him as it will increase in price over time. He sees that there is a potion with his Token B. He wraps his Token B into LTKN B. He can unwrap it at any time. His wrapped Tokens B earn him a Holder APR, which derives from burning LTKN B automatically when users engage with the Token B potions.
Wrap, Create LP & Stake
Brief Description
Wrap your TKN into a potion, receive an LTKN, use LTKN and a paired token to create LP, and stake it. Medium risk-reward ratio, where users farm Holder’s and LP APRs, while limited only by impermanent loss risk.
Explanation
There is a user who is used to providing liquidity and gaining profit from it. They engage with a potion by wrapping their TKN, receiving LTKN instead, and creating a Liquidity Pair with the received LTKN and a relevant paired token. They already earn Holder’s APR, as they wrapped their TKN. Additionally, they receive LP APR, which derives from fees generated by users' engagement with potions (wrap/unwrap). This strategy has pending rewards to claim.
Suitable For
Experienced yield farming users, LP providers.
Pros & Cons
Pros: Enjoying both Holder’s and LP APRs instead of a single Holder APR; rewards are distributed automatically and eligible for reinvestment or taking profit.
Cons: Might be affected by impermanent loss; less maneuverable.
Example
A user is used to providing liquidity to gain profit. He sees that by providing liquidity in a relevant potion, he can receive a bigger LP APR, as he participates in revenue sharing from the fees generated by the potion. Additionally, he can receive Holder APR.
He sees that there is a Potion of Token B, which he already holds or provides liquidity for. He takes his Tokens B and wraps them. In return, he receives LTKN B. He can unwrap it at any time.
LTKN B is paired with Stable Coin C. He then takes his LTKN B and either (i) trades 50% of LTKN B for Stable Coin C on the wrap market, or (ii) takes additional funds to buy the corresponding amount of Stable Coin C to Token B.
Further, he creates an LP with LTKN B and Stable Coin C, and automatically stakes them, receiving an sLTKN B Stable Coin C token as proof of his deposit.
His wrapped Tokens B earn him a Holder APR, which derives from burning LTKN B automatically when users engage with the Token B potions. And his LP earns him an LP APR, which derives from potions fees.
Arbitrage Hunter
Brief Description
Take advantage of arbitrage opportunities, which arise from price discrepancies of LTKN on the Wrap Market. Active yield gain with situational profit depending on individual performance.
Explanation
There is a user who looks for instant profit and is ready to take action and risk at any time. Moreover, he is an active user, meaning that he constantly researches profit opportunities. He engages with potions through its side product - the wrap market. He does so via the following steps: (i) analyzes whether there is an arbitrage opportunity by browsing possible swap options between TKNs and LTKNs; (ii) whenever he finds a possible arbitrage opportunity, he analyzes price discrepancy and profitability of the trade, taking into account additional factors such as slippage, wrap, unwrap, protocol, and/or blockchain fees, and all other possible risks, including those of being outrun by other arbitrage hunters; (iii) executes the arbitrage opportunity and takes instant profit. This strategy has no APRs or pending rewards to claim.
Suitable For
Experienced, risky users, arbitrageurs.
Pros & Cons
Pros: Effortless and instant profit that can go up to 25% of the arbitrage opportunity sum; no barriers of entry into arbitrage for regular users; secures arbitrage profits manually.
Cons: Active asset management that requires constant time resources and fast decision-making; can be outrun by a more active user in a competitive environment; no guarantee of constant profit.
Example
A user browses the wrap market for arbitrage opportunities and sees that if he sells Token A for LTKN B, he can earn 150 USD. He calculates wrap and unwrap fees, as well as blockchain fees, and realizes that he can secure up to 140 USD profit. He executes a trade and realizes the profit by unwrapping LTKN B to Token B.
Combined Strategies
Brief Description
Split your funds into several strategies or use revenues from one strategy to engage in other strategies.
Suitable For
Users who like to balance their risks.
Pros & Cons
Pros: Balance all risks and enjoy the benefits of several strategies.
Cons: Depending on the amount and types of strategies, it requires additional time and effort.
Example
A user might be engaged in a Wrap & HODL strategy; however, anticipating higher rewards, finds out that the APRs for staking LP have increased significantly. In response, he could use his LTKN to create LP and stake it in a few steps to participate in those APRs.
Alternatively, the user could create an LP and stake it, earning rewards from revenue sharing type APR in YEL tokens. Afterward, the user could use those rewards in different ways:
Wrap them into a potion and use the Wrap & HODL strategy.
Increase their staked LP position.
Use those rewards to find arbitrage opportunities, employing the Arb Hunters strategy.
Implement all three strategies in proportions that suit them the most to be more flexible in their decisions and mitigate the drawbacks of different strategies.
Additional Information
We encourage every user to do their own research before engaging with our products.
Please, make sure you read the docs to familiarize yourself with how potions work.
We would also recommend the following informational resources/tools that will help you to understand potions better and/or engage more wisely:
“What are Yel Finance Potions?” article by our long-time mod DvD
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