CRV - 15 March 2022
The Dopex Community Analyst series is a collection of strategies, ideas, opinion pieces and educational resource written by independent contributors from the Dopex community. Every month many knowledgeable community analysts share a short analyses of a coin of their choice and share these with Dopex. The goal of these articles is to empower the community and help Dopex increase SSOV volume & deposits. With these articles we hope to provide users with additional information that will help them in making an informed choice of strategy using our products.
Without further ado let’s jump into the next article.
CRV TOKEN ANALYSIS
Curve Finance
Before diving into tokenomics, let's have a quick look at Curve Finance itself.
Curve Finance is an automatic market maker (AMM), designed for low-slippage swaps between stablecoins. Just like any other AMM, it has liquidity pools. Here, users can provide some combination of stablecoins that serve as liquidity for others to trade with. On every swap using these pools, traders pay a fee ranging between 0,04% and 0.4%.
Token supply and inflation
Although trading fee revenue can motivate liquidity providers to some degree, CRV emissions they receive are the main incentive. Token’s supply is hard capped at 3,303,030,299. At the time of writing only 552,096,518.5 CRV (Source: https://dao.curve.fi/inflation) is in circulation and it will be another 4 years before every token is emitted. Current inflation is 2 million CRV per day and it all goes to liquidity providers across Curve pools. This number goes down as time passes and the value of CRV increases.
Utility
CRV is a governance and utility token at the same time. It is well-known for its vote locking mechanism. Users can choose to lock their CRV for a minimum of one week and maximum of four years to receive a vote-escrowed version of the token (veCRV). The longer they choose to lock it for, the more veCRV they get in return.
veCRV has three uses:
- voting power (a chance to participate in the Curve DAO, directing emissions)
- fee accrual (50% of all trading fees go to veCRV holders)
- boosting (liquidity providers can increase their yield by up to 2.5x, depending on the amount of CRV they have locked)
(Source: Curve Finance GitBook)
At the first glance fee accrual and reward boosting strike you as utilities that make CRV valuable, but in fact voting power is the primary driver of demand for CRV and now you’ll see why.
Gauges
**We already know that CRV inflation goes to liquidity providers, however because any number of pools can be created, distributing inflation equally between each of them doesn’t make sense. That’s why Curve pools have gauges. Each gauge has a weight and a type. Weight represents a share of the daily CRV inflation that will be received by each liquidity gauge. Members of Curve DAO (CRV holders) adjust these weights through voting - more veCRV secures more votes, leading to more control over CRV emissions.
Liquidity
You might ask what is the benefit of controlling inflation and the answer is liquidity. Every project wants deep liquidity for its native token. It allows investors to enter and exit positions at will, without causing large price moves or losing money on slippage.
The optimal way to obtain deep liquidity seems to be creating a pool on Curve and attracting liquidity providers by directing CRV emissions at that same pool. To carry this out, one needs voting power. Either they start to accumulate veCRV and vote on the pool themselves or they start bribing veCRV holders to vote in their place. Both options result in demand for the token.
Supply and demand
We already know why CRV has value and where the demand comes from, but to achieve positive price action in the short term, it also needs to be in short supply. Here, a potential problem arises since constant emissions are increasing the supply on a daily basis. This is where vote locking steps in.
Locked tokens are removed from the market, resulting in (temporarily) reduced supply. Due to liquidity being needed in perpetuity, most users keep extending the locking period to maximize their veCRV holdings.
An alternative to this is locking your CRV in Convex Finance. Their cvxCRV version of the token is a way of getting exposure to locked CRV while keeping it liquid. The protocol locks the tokens you provided forever and lets holders of their governance token CVX control their voting power. Due to the cvxCRV-CRV liquidity pool, the token is pegged to CRV and can be exchanged for it via normal swap at any time.
Either you do it directly on Curve or through Convex Finance, locking your CRV may result in a large percentage of supply never hitting the market again. Taking into account basic supply and demand dynamics, the effect of vote locking is evident in the token’s price action.
Conclusion
Even if fundamentals of a token are sound, there will always be some volatility in the shorter term. Unless you are a passive investor, you probably want to protect yourself from any possible downside in the near future, especially in times like this with a war raging in Ukraine. Options can be used as a tool in achieving this and below is a strategy I would use.
TRADE IDEA
Options
If you’re unfamiliar with options, head over to Dopex Academy to learn the basics. There are countless different option trading strategies. Having at least some of them in your arsenal allows you to make money in any market conditions.
For this one, you’ll be using Dopex SSOV-p (Single Staking Put Option Vault) to hedge your spot CRV position against a potential drop in price.
The strategy is called protective put. It assumes you already have a CRV position and are prepared to give up some upside in order to protect yourself from a downward price move that you think is likely to happen in the near future.
The graph above is showing us net profit and loss in relation to CRV price using two different strategies. In this example, the spot price is $2.72 and the premium for an ATM put is $0.28. Blue line represents P&L for simply holding CRV (ignore the dots), while the red line includes buying an ATM put as a part of a protective put strategy.
Execution
Let’s assume you already bought some CRV. Now the task is buying enough puts to cover your entire position (on Dopex, you buy them with stablecoins). Puts normally give you the right to sell all of your CRV at a predetermined price (strike price), meaning you can sell it higher than spot in case the price drops.
Dopex’ SSOVs function differently, since they calculate P&L and net settle the results in stablecoins by themselves. SSOV uses European options, meaning these can't be exercised until the expiration date, so you’re only able to withdraw your funds at the end of the epoch. Using Dopex, you can get exposure to options without having to worry about anything beside buying the option and withdrawing funds.
Currently the price of CRV is sitting at $2.72. When it comes to protective put strategy, there is no point in buying expensive in the money (ITM) puts. You would most likely overpay the put for the same amount you’d gain in case of a price drop, so buying them for this strategy is the same as buying at the money (ATM) puts. The difference is that with the ITM put, you would profit less in case the CRV price moved above the strike price on the expiration date (which is what you want the price to do), because you paid a higher premium. In this scenario, if the spot price moved above both strike prices, the higher one wouldn’t help in any way since they’d both expire worthless.
We just saw why you’d rather choose an ATM put over ITM one, but you’ll most likely still go with the out of the money (OTM) put since it is the cheapest. This leaves you with some potential downside, but still protects you from larger price drops which is what you want to hedge against.
Strike prices for current epoch are $2.25, $2, $1.75 and $1.5. All of them are OTM, so you’ll most likely pick the one that is closest to the spot price. It is the most expensive since it has the highest probability of expiring in the money, but this strategy only protects you if the spot price is below the strike price on expiration (that’s when the put starts to gain value and negate the losses on your CRV long position), so when you choose a put with a strike price of $2.25, it is more expensive than a put with a strike price of for example $2, however it cuts your losses sooner when the price drops which is probably what you’re aiming for.
Scenarios
Even though you just bought puts that accrue value as the price of the underlying asset goes down, you bought them as a hedge so the best scenario for you is still the price going higher on expiration date. Keep in mind that not every move to the upside is enough for you to book profits since you have to cover the initial cost (premium).
Here is an example where the spot price was above the strike price on expiration so you wanted it to be high enough for you to make a profit, despite paying the premium for the puts that expired worthless. You held CRV at the price of $2.72 and bought enough puts with a premium of $0.28 to cover the entire position. The spot price would need to stay above 3 dollars ($2.72 + $0.28 = $3) on expiration for you to make a profit, no matter where the strike price was in relation to the spot price at the time of buying. And when I say making a profit, what I’m looking at is your position in dollar terms, not in CRV or any other metric. So the ultimate goal of this strategy (as with most of them) is ending up with more dollars in your pocket than you had before. In this example you succeeded if the spot price on expiration was above $3.
One of the two worst case scenarios is puts expiring at the money. You just paid a premium and in addition lost 17.28% in dollar terms when the price fell from $2.72 to $2.25.
The result is the same if the epoch ends with the CRV price anywhere below the strike price. Puts prevent any losses beyond that. While the value of your spot position declines, the intrinsic value of your puts is rising, protecting you from the drop in price.
If the price falls far enough, you might prefer the second scenario. You held your CRV much higher so you presumably believe that CRV is now undervalued. Thanks to your puts, you only lost 17.28% of your position in dollar terms, while the spot price decreased by much more, so you can now buy some cheap CRV. Keep in mind that something out of the ordinary just happened. You bought puts as an insurance, because you thought there was a slight chance of this scenario playing out but is unlikely. If you were sure this drop would happen, you would have sold your CRV before the price dropped and bought back lower. But options play an important role, as they help you with the risk whenever there is a lot of uncertainty.
Conclusion
Timing the market is hard and this strategy is only suitable for market conditions described above. You could buy protective puts on every epoch, but implied volatility in crypto is high and that results in high premiums.
In an “uponly” market, constantly buying protective puts may not be a strategy to go by, unless you do it systematically after every pump. Nonetheless, you can never be completely sure something is going to happen in this market, so timing the pumps perfectly is practically impossible.
This being said, before you make any significant investments through any kind of strategy, try it out with a small amount of money you can afford to lose.
Disclosure
The author doesn’t currently hold a position in CRV, but does in tokens that profit from its price appreciating. None of this is financial advice. Always do your own research.
Author: @wossi_eth
TL;DR
https://twitter.com/wossi_eth/status/1501184688517533700
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Views expressed in this article are the author’s own and not reflective of the position or professional views from Dopex.io.
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