Skew Farming Tracer DAO’s Perpetual Pools: A Primer

Umami’s upcoming USDC Vault utilizes an innovative derivative product developed by Tracer DAO called “Perpetual Pools.” Tracer’s permissionless pools enable users to take a leveraged long or short position on assets such as BTC & ETH with zero risk of liquidation.

Umami uses Tracer’s 3x leveraged ETH & BTC Pools to hedge out market risk for its USDC Vault. Tracer’s other pools include 10x BTC & ETH Pools as well as WTI (crude oil).

Tracer’s Pools are not only valuable for hedging and directional bets. They can also be used for a unique delta-minimized yield strategy referred to as “Skew Farming.”

The launch of Umami’s USDC Vault is creating a unique & unprecedented opportunity for traders to “farm” the long side of Tracer’s 3x ETH & BTC Pools.

Tracer’s Perpetual Pools: The Basics

Tracer’s Perpetual Pools are synthetic derivatives of underlying real-world assets. A 3x leveraged ETH Pool, for example, is not actually acquiring ETH with leverage. Instead, it is managing deposited collateral in a way that mimics the performance of a 3x bet on ETH.

Each Pool is “two-sided,” presenting users with the option to take either a long or short position against the underlying asset. Users “Mint” either long or short Pool tokens by depositing USDC (or potentially other tokens) as collateral via Tracer’s app.

Tracer Perpetual Pool UI

Whenever the underlying asset price changes, a proportionate amount of USDC collateral is transferred from one side of the pool to the other. For example, if the price of ETH rises, USDC is passed from the short side of the 3x ETH-USDC Pool to the Long Side.

The more leveraged the pool, the more USDC is transferred for any given price movement. In normal conditions, that means that depositors in the long side of Tracer’s 3x leveraged ETH Pool would gain 3% for every 1% gain by ETH. Depositors to the short side, meanwhile, would gain 3% for every 1% drop in ETH.

Tracer’s Pools rebalance USDC collateral every 8 hours.

Maintaining Balanced Liquidity

For Tracer’s Pools to function properly, it is critical that they maintain roughly balanced liquidity on both sides of the pool. An imbalance in TVL (Total Value Locked) between the long and short sides of a pool can harm its performance considerably.

Take for example a scenario where there is 1.5 million USDC on the short side of Tracer’s 3x ETH-USD Pool but only 500,000 USDC on the long side.

If the price of ETH were to suddenly drop by 25%, there would clearly not be enough USDC in the long side of the pool to pay out depositors on the short side an expected return of 75%.

The Mechanics Of Skew

Tracer’s “Skew” mechanism is designed to resolve this problem. It adjusts the risk/reward tradeoff for each side of the pool to incentivize deposits into the side with scarcer liquidity.

Specifically, skew increases the potential payout for price movements favorable to the less liquid side of pool and reduces the potential payout for price movements favorable to the more liquid side of the pool. The potential downside risk for both sides of the pool does not change.

In the previous example, there was significantly more TVL in the short side of the 3x ETH-USDC pool than the long side ($1.5 million vs. $500,000).

As a result, the Pool would have a very significant skew favoring the long side. If the price of ETH rose by 1%, for example, depositors into the long side of the pool may see gains of 4% (versus 3% for a 3x leveraged Pool under normal conditions aka TVL on the Long side equals TVL on the Short side of the Pool).

Likewise, the short side of the pool would have an unfavorable skew. Therefore, a 1% rise may only increase the Pool’s value by 2%. In both cases, downside risk would be unchanged.

See Historical skew below:

Historical Tracer skew

Skew Farming Strategies

There are multiple ways that an informed market participant can take advantage of Tracer’s Skew mechanism to log highly favorable risk adjusted returns.

This post will review several strategies. In each case, we will use the same example as before, where Tracer’s 3x leveraged ETH Pool has $1.5m in the short side & only $500,000 in the long side (and therefore the skew favors the long side).

Delta Minimized Skew Farming

Skew Farmers deposit USDC into the long side of the pool (3L-ETH/USDC) and offset their market exposure using a different trading platform, such as GMX.io.

  1. Deposit 100k USDC to mint 3L-ETH/USDC; resulting in ~$300k of long ETH exposure
  2. Deposit 100k USDC as collateral on GMX.io to take out a 3x leveraged ETH short position
  3. When ETH’s price rises, the 3L-ETH/USDC gains 4%; when ETH’s price falls, 3L-ETH/USDC loses 3%, which is offset by the 3x leveraged ETH short on GMX

Over time, this strategy should gain significantly on each ETH price rise while remaining delta neutral overall.

Long Maxi Skew Farming

Skew Farmers deposit USDC into the long side of the pool (3L-ETH/USDC) and do not offset their market exposure.

  1. Deposit 100k USDC to mint 3L-ETH/USDC; resulting in ~$300k of long ETH exposure
  2. When ETH’s price rises 1%, 3L-ETH/USDC gains 4%; when ETH’s price falls 1%, 3L-ETH/USDC loses 3%

Over time, this strategy should significantly outperform comparable long ETH positions, such as holding $300k ETH outright or taking a 3x leveraged ETH long position on a traditional leveraged trading platform.

As with any Tracer Pool, 3L-ETH/USDC can never be liquidated.

ETH/BTC Outperformer

Umami’s upcoming USDC Vault will create another interesting opportunity for Skew Farmers. It will be relatively straightforward to engineer a position that replicates the market-exposure of holding ETH or BTC but with significantly greater upside.

  1. Deposit 75k USDC into Umami’s USDC Vault; the Vault maintains a roughly delta-neutral position and generates double digit APR in USDC
  2. Deposit 25k USDC to Mint 3L-ETH/USDC; resulting in ~$75k in long ETH exposure
  3. If ETH price rises 1%, the 3L-ETH/USDC will rise by 4% and the USDC Vault will remain roughly stable; if ETH price falls by 1%, the 3L-ETH/USDC will fall by 3% and the USDC Vault will remain roughly stable.

This strategy will approximately track a traditional long ETH position but should significantly outperform it over time. The long-biased skew will result in a favorable risk/reward for 3L-ETH/USDC. Meanwhile, the USDC Vault will generate double digit APR from USDC.

Skew Farming & Umami’s USDC Vault

The launch of Umami’s USDC Vault in July will create a compelling opportunity for Skew Farmers.

Normally, the Skew on Tracer’s Pools is quite unpredictable, varying considerably day to day. Skew Farmers currently must frequently adjust their positions as the Skew swings between favoring the long and short sides of a given Pool.

For several weeks after the launch of Umami’s USDC Vault, however, the skew for the 3x BTC/USD & 3xETH/USD Pools will be far more predictable.

Umami’s USDC Vault uses Tracer’s 3s-ETH/USD & 3sBTC/USD Tokens to hedge out market risk. As the Vault increases its TVL, it will be adding considerable liquidity into the short side of the 3x ETH & 3x BTC Pools. As a result, the Skew on those pools will tend to be long-biased for at least several weeks.

Want to learn more about Skew Farming & Umami’s USDC Vault? Join our Discord and check out our FAQ!

https://discord.gg/gSeQvxx5

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Sustainable, Risk-Hedged Arbitrum Yields