Market neutral DeFi yield strategies aim to earn yield without being affected by price direction. Building a business on a market neutral foundation is crucial due to crypto’s inherent volatility. In the early days of DeFi, stablecoins could yield significantly high returns.
Key Takeaways
- Market neutral DeFi yield strategies aim to earn yield without being affected by price direction.
- Building a business on a market neutral foundation is crucial due to crypto’s inherent volatility.
- In the early days of DeFi, stablecoins could yield significantly high returns.
- The unique risk-return profile in crypto is based on software platform hacks, uncorrelated with traditional assets.
- Diversification in DeFi is insufficient alone to effectively manage risks.
- DeFi risk is likened to selling a put option, earning returns until a catastrophic event.
- A framework can categorize blockchain attack vectors to assess risk and diversify investments.
- DeFi’s annual default rate has decreased from double digits to 2-5%.
- Engaging with DeFi platforms requires understanding the primary risk of loss from hacks.
- The DeFi market remains structurally starved of capital despite new platforms.
- Supply and demand dynamics in DeFi will continue to favor allocators.
- On-chain trading strategies’ returns vary significantly with market conditions.
- Diversification is key in managing risk in on-chain trading strategies.
- Holding assets is preferable if they remain structurally sound and communication with the team is strong.
- The philosophy of diversification is crucial in the uncertain DeFi landscape.
Guest intro
Evgeny Gokhberg is the founder and managing partner of Re7 Capital, a DeFi hedge fund specializing in market-neutral yield strategies and on-chain risk management. He previously worked in investment management at UBS and Deutsche Bank, managing equity long/short portfolios, before transitioning to crypto in 2018 at Everledger. Re7 Capital has deployed approximately $1.2 billion in DeFi liquidity provision since its founding in 2021.
Market neutral DeFi strategies
- Market neutral strategies focus on earning yield without price direction impact.
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Think of it as a hedge fund that collects dollars, converts them into stablecoins, and earns yield
— Evegny Gokhberg
- Building a business on market neutral foundations is essential due to crypto volatility.
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It was scary to base a business on something extremely volatile
— Evegny Gokhberg
- Early DeFi days allowed for high stablecoin yields.
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You could earn 40% a year on stablecoins in simple ways
— Evegny Gokhberg
- The unique risk-return profile in crypto is based on uncorrelated software platform hacks.
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Our risk is a random software platform getting hacked, uncorrelated with stocks or bonds
— Evegny Gokhberg
- Diversification in DeFi is not enough to manage risks effectively.
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Diversification always sells but it’s not enough
— Evegny Gokhberg
Risk management in DeFi
- DeFi risk resembles selling a put option, earning returns until a catastrophic event.
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It’s like selling a put option; you get paid until your counterparty goes bust
— Evegny Gokhberg
- A framework can categorize blockchain attack vectors for risk assessment.
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Can we categorize all blockchain attack vectors and create a checklist?
— Evegny Gokhberg
- DeFi’s annual default rate has decreased significantly.
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Default rates were double digits, now maybe 2-5%
— Evegny Gokhberg
- Understanding the risk of loss from hacks is key to engaging with DeFi platforms.
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We accept losing money if a DeFi platform is hacked
— Evegny Gokhberg
- The DeFi market is structurally starved of capital.
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DeFi TVL hasn’t grown since 2021; people are starved of capital
— Evegny Gokhberg
Supply and demand in DeFi
- Supply and demand dynamics in DeFi favor allocators.
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Supply demand will favor allocators for the foreseeable future
— Evegny Gokhberg
- The cyclicality of yields in DeFi impacts performance more than capital demand.
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Cyclicality affects P&L more than demand variance
— Evegny Gokhberg
- Multiple layers of risk exist when holding crypto assets.
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We take three layers of risk: asset, platform, and chain
— Evegny Gokhberg
- Convergence of CeFi, DeFi, and TradFi is expected over time.
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We’re seeing a convergence of CeFi, DeFi, and TradFi
— Evegny Gokhberg
On-chain trading strategies
- On-chain trading strategies’ returns vary with market conditions.
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In bull markets, returns can be 25-30%; in bear markets, 5-10%
— Evegny Gokhberg
- Diversification is crucial to managing risk in on-chain trading strategies.
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Enough diversification prevents single event impacts
— Evegny Gokhberg
- The philosophy of diversification is crucial in the DeFi landscape.
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DeFi is six years old; we must diversify
— Evegny Gokhberg
- The firm aims to remain flat on the year despite volatility.
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We want to be at least flat on the year, no matter what
— Evegny Gokhberg
Bitcoin and altcoins
- Bitcoin is viewed as digital gold; other crypto are software businesses.
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Bitcoin stands alone as digital gold; others are software businesses
— Evegny Gokhberg
- Altcoins are undergoing a cleansing process, with most expected to lose value.
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99.9% of altcoins should be worth zero
— Evegny Gokhberg
- The crypto market resembles early Silicon Valley startups.
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Imagine if every Silicon Valley startup was publicly listed on day one
— Evegny Gokhberg
- A dual approach of top-down and bottom-up analysis is needed in crypto.
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We start top-down and merge it bottom-up
— Evegny Gokhberg
Investment strategies in crypto
- Investing in crypto requires balancing established businesses and speculative bets.
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Run a barbell of concentrated risk with measurable, understandable assets
— Evegny Gokhberg
- In an unforgiving market, patience is better than frequent trading.
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In this market, it’s better to be patient and not trade frequently
— Evegny Gokhberg
- Holding assets is preferable if they remain structurally sound.
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We’ll keep holding if assets are structurally sound and communication is strong
— Evegny Gokhberg
- The last part of the market cycle is crucial for altcoin gains.
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You need the last part of the cycle to kick in
— Evegny Gokhberg
Market dynamics and liquidity
- Investors should approach trading with a clear understanding of risk.
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Be clear about your expected risk and avoid overtrading
— Evegny Gokhberg
- Compounding gains in crypto is more effective by holding assets.
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The way to compound gains is to do nothing
— Evegny Gokhberg
- FOMO is a major destroyer of returns in the market.
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FOMO is one of the biggest destroyers of returns
— Evegny Gokhberg
- Current market volatility may be related to liquidity issues.
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I think it’s liquidity-related, but who knows?
— Evegny Gokhberg
Market forecasts and opportunities
- There is hope for positive market movement if critical levels are held.
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As long as we hold these levels, there’s hope for positive movement
— Evegny Gokhberg
- The market shows stability and altcoin outperformance compared to Bitcoin.
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Alts are not breaking down versus BTC; there’s stability
— Evegny Gokhberg
- The current market resembles small caps versus major stocks.
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It’s like small caps versus majors in traditional markets
— Evegny Gokhberg
- Investors should not panic sell during market distress.
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Don’t panic sell; it’s probably the opposite
— Evegny Gokhberg
Disconnect between fundamentals and price
- There is a significant disconnect between DeFi fundamentals and price performance.
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There’s a disconnect between fundamentals and price in DeFi
— Evegny Gokhberg
- Liquidity is a dominant factor affecting market narratives.
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Liquidity impacts market narratives and price movements
— Evegny Gokhberg
- Lack of liquidity causes underperformance in software and crypto assets.
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Not enough money in the space to maintain performance
— Evegny Gokhberg
- Gold’s rise attracts attention away from marginal assets like SaaS stocks and Bitcoin.
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Gold’s rise attracts capital, impacting marginal assets
— Evegny Gokhberg
Banking system and leverage
- The banking system can create significant leverage through regulatory changes.
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Regulatory changes could lead to significant bank leverage
— Evegny Gokhberg
- Re-leveraging in the banking system will increase liquidity and impact the business cycle.
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Banking re-leveraging will recycle capital through the system
— Evegny Gokhberg
- Current market conditions indicate a lack of sufficient liquidity.
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The market shows insufficient liquidity, affecting performance
— Evegny Gokhberg
- Gold peaks often precede Bitcoin’s performance, indicating potential market shifts.
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Gold peaks, then Bitcoin performs; signals are close
— Evegny Gokhberg
Risk tolerance and investment decisions
- Risk tolerance is crucial for investment decisions, especially in volatile markets.
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Risk tolerance starts with understanding drawdowns
— Evegny Gokhberg
- Investors should consider a benchmark like ETH to manage risk.
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Use a benchmark like ETH to manage risk effectively
— Evegny Gokhberg
- Higher beta assets experience larger drawdowns compared to major crypto.
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Higher beta assets have larger drawdowns than major crypto
— Evegny Gokhberg
- Investors need to be realistic about their risk tolerance and potential losses.
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Ask yourself if you’re willing to bear potential losses
— Evegny Gokhberg
Market corrections and opportunities
- The current market correction does not indicate the entire crypto market is broken.
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The market looks like a sharp correction within a bull market
— Evegny Gokhberg
- The market could change rapidly, but a prolonged downturn is not imminent.
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A prolonged downturn doesn’t feel imminent right now
— Evegny Gokhberg
- Current market conditions should be viewed as an opportunity, not a signal to abandon.
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This is an opportunity, not a sign to abandon the industry
— Evegny Gokhberg
- Market noise will ultimately be just that—noise.
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Noise in markets will be just that—noise
— Evegny Gokhberg
