📢 Exciting news! 🎉 Our latest article explores a new DeFi use case: Uniswap V3 LP Discover how MetalSwap it's changing the game!
Today, we will be exploring another interesting DeFi use case for MetalSwap's Hedging Swaps.This one is designed for those who have liquidity available to utilize with ETH or WBTC assets on Uniswap V3. So, please get comfortable, and let's begin!
What we will see in this article:
- Presentation of the use case
- Practical example
- Risk of this Use Case
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Presentation of the Use Case
Practical example
You have $10,000 available to place in the ETH/USDT pool . You have decided to position your liquidity within a fairly wide range that, according to your analysis, may reflect ETH's movement over the next 30 days. Let's take a closer look at the numbers of your position:
Now it's time to go to the MetalSwap DApp and open this swap. The premium required to open it for 30 days is 0.163 ETH, which at the price of $1760 is $286, the 2,86% of the initial capital. In this case, you use a cover of 10% to protect yourself from all the range that you have chosen, so you will be asked for an additional 0.18 ETH, which is equivalent to $316.
Now that you have opened the position on Uniswap V3 and the Hedging Swap on MetalSwap, there are 3 possible scenarios:
- If at the end of 30 days the price is the same as when you opened the position, you will have this situation:FORMULA: (Rewards Uniswap $1220) - (MetalSwap premium $286) = $934
- If the price drops to $1515, your Hedging Swap will protect you against half of the countervalue loss on ETH. However, if you still want to earn a profit, it is important that the price stays within the range long enough to cover MetalSwap's premium and the remaining half of the lost control value. In this case in this pool, you will earn a daily return of 0.407%, and it will take approximately 17.8 days to recoup the premium and the unprotected half of the control value.FORMULA: (Rewards earned until price exits the range (x) + MetalSwap short $440) - (MetalSwap premium $286 + Loss countervalue $880) = net rewards
- If the price rises to $1845, in addition to the premium, you will also have to pay back the cover. The sum of these two, minus the gain from the rise in ETH ($67) is $535, and in this case, it will take 13,1 days of Uniswap Rewards to pay back this amount of money.FORMULA: (Rewards earned until price exits the range (x) + Gain from the rise in ETH $67) - ( MetalSwap Premium $286 + MetalSwap Cover $316) = net rewards
Risks
- The most probable risk of this strategy is when ETH's price goes out of the range before your forecasts. In this particular case, you have chosen a fairly wide range that will be good for the next 30 days, but it is, of course, possible that the price will go out of this range.
- Another risk is that the volumes on Uniswap V3 will drop, and the rewards will no longer be competitive enough for this strategy. Unfortunately, there is no way to predict what the pool rewards on Uniswap V3 will be.
- A third risk is related to the smart contracts of Uniswap V3. The smart contract, which handles the pools, could be vulnerable to hacks or exploits, resulting in the loss of user funds.
- The Shanghai update could provide higher volatility during certain periods. In some way, this is good because it will probably bring more volume on Uniswap. However, it is more possible that the price will go out of the selected range.
- It is essential to consider the potential vulnerabilities in a Smart Contract. While the Certik audit and the ongoing Bug Bounty Program have certainly helped to alleviate these concerns, it is still important to remember that some technical issues can potentially compromise a Smart Contract.
- It can be said that, in theory, there exists a possibility of encountering technical risks even within Ethereum's blockchain.
What a time to be in DeFi!
To the MetalSwap
… and beyond!
-The DeFi Foundation
✎ What is MetalSwap?
MetalSwap is a decentralized platform that allows hedging swaps on financial markets with the aim of providing a coverage to those who work with commodities and an investment opportunity for those who contribute to increase the shared liquidity of the project. Allowing the protection for an increasing number of operators.
With MetalSwap we enable hedge swap transactions through the use of Smart Contracts, AMM style.
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