Skew Farming GuideA quick guide for taking advantage of "pool skew" to earn excess risk-adjusted returns
Tracer's Perpetual Pools have been live on Arbitrum One for just a few weeks and since then they've attracted over $35M USDC in total value locked (TVL). If you haven't heard about DeFi's new leveraged token, check out all things Perpetual Pools in the explainer article here.
Since they've launched, we've noticed that traders are missing out on an opportunity to earn excess risk-adjusted returns. We call this arbitrage opportunity 'Skew Farming'. Here's a quick guide for taking advantage of "pool skew".
Before we begin, please note that we will release a more informative article regarding skew farming soon. In the meantime, this article is a simple, no-frills walkthrough of the strategy.
Here's a quick tip for traders. The column highlighted in the below image depicts the effective leverage.
When the leverage for gains is different than for losses, the pools are skewed. This presents an arbitrage opportunity we call 'Skew Farming', because the polarised leverage is caused by collateral skew.
DISCLAIMER: The following steps are for demonstration purposes only. The calculations are done assuming an ETH price of $3000. Do not expect GIFs to reflect the values used in the calculations. It is recommended you obtain your own financial advice before proceeding.
What we'll do is take a position in the side with better leverage on gains. At the same time, we'll also take the opposite position of equal magnitude on another platform.
Look at the 3-ETH pool in the browse tab (shown above). The leverage is different for gains and losses, so skew exists. The leverage on gains is higher for the short side, which means it has asymmetric upside. You only lose at a leverage of 3, but when you win it's at 3.22.
Let's mint some short tokens. You can follow the guide on how to mint and burn pool tokens here.
Now that we have leveraged short tokens, we can take the opposite position by buying ETH. We're buying the long position to counter any losses we might have from the leveraged tokens.
- Use an AMM or exchange to purchase the equivalent value of ETH. Remember that our leveraged position loses at a leverage of 3, so you'll need three times the ETH long.
- You could also take a long position on a perpetual swap platform, using leverage to make this strategy more efficient.
The price has gone down and the S-tokens won! They've increased in value, but we also lost money on the ETH in our wallet. Let's compare the value of the Perpetual Pool position and our spot position.
The ETH price decreased by 1% and our short position went from $1000 → $1031.89. Our long position went from $3000 → $2970. In total, a gain of $31.89 - $30 = $1.89.
What happens if the ETH price increases by 1%? Our short position goes from $1000 → $970.59. The ETH we bought went from $3000 → $3030. Resulting in a net profit of $30 - $29.41 = $0.59.
If you don't want to wait to mint tokens, you can buy leveraged tokens on Balancer right away. That way, you don't change the composition of Tracer's Perpetual Pools and can get exposure immediately.
There's plenty of opportunity to farm the skew - check out the Pools with polarised leverage now and use this arbitrage strategy. Join the community and ask the team questions in the Tracer Discord.
Please note, 'Skew Farming' is conceptual model and does not constitute financial advice. All decentralised trading strategies present forms of risk including smart contract risk. It is recommended that you obtain your own financial advice before using this product.