{"id":138117,"date":"2020-12-21T03:06:35","date_gmt":"2020-12-21T00:06:35","guid":{"rendered":"https:\/\/en.buradabiliyorum.com\/how-should-investors-value-defi-projects-a-new-paper-might-have-some-answers\/"},"modified":"2020-12-21T03:06:35","modified_gmt":"2020-12-21T00:06:35","slug":"how-should-investors-value-defi-projects-a-new-paper-might-have-some-answers","status":"publish","type":"post","link":"https:\/\/buradabiliyorum.com\/en\/how-should-investors-value-defi-projects-a-new-paper-might-have-some-answers\/","title":{"rendered":"# How should investors value DeFi projects? A new paper might have some answers"},"content":{"rendered":"<p>&#8220;<strong># How should investors value DeFi projects? A new paper might have some answers <\/strong>&#8221;<br \/>\n<img decoding=\"async\" src=\"https:\/\/images.cointelegraph.com\/images\/840_aHR0cHM6Ly9zMy5jb2ludGVsZWdyYXBoLmNvbS91cGxvYWRzLzIwMjAtMTIvZmE0NTA4MTgtMjk3YS00NjgzLWExMzktNDk1MzNhZGRiNDU1LmpwZw==.jpg\" \/><\/p>\n<div class=\"post-content\" data-v-5a136f3a>A new <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/arxiv.org\/abs\/2012.08040\">paper<\/a> released on Thursday from a team of crypto researchers hopes to add to a body of work that will eventually identify \u201cthe Black-Scholes of decentralized finance (DeFi)\u201d \u2014 an equation that will allow investors and users to properly value DeFi projects and potential profit\/loss metrics in popular DeFi verticals such as liquidity mining.\u00a0<\/p>\n<p>Why is such an equation important? At first blush,\u00a0 liquidity mining is simple enough to explain: in exchange for providing liquidity to automated market makers like Uniswap, users are rewarded with trading fees or governance tokens, often denominated in APY percentages.<\/p>\n<p>However, users suffer &#8220;impermanent losses&#8221; related to fluctuations in demand for the trading pair, and a simple APY calculation on a user interface frontend isn&#8217;t sufficient to paint a full picture for what the gains might look like for liquidity providers.\u00a0<\/p>\n<p>According to research from Tarun Chitra, founder and CEO of DeFi risk analysis firm Gauntlet.Network and one of the three co-authors of <em>When does the tail wag the dog? Curvature and market making,<\/em> liquidity mining is best thought of as a complex derivative.<\/p>\n<blockquote class=\"twitter-tweet\">\n<p lang=\"en\" dir=\"ltr\">\u26a0\ufe0f Paper Alert \u26a0\ufe0f<\/p>\n<p>Q: Have you wondered about math for the following?<\/p>\n<p>a) Optimal token qty to emit for yield farming incentives<br \/>b) Hedging impermanent loss w\/ options<br \/>c) When do LPs not get rekt?<\/p>\n<p>A: New paper from moi, <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/twitter.com\/alexhevans?ref_src=twsrc%5Etfw\">@alexhevans<\/a>, <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/twitter.com\/GuilleAngeris?ref_src=twsrc%5Etfw\">@GuilleAngeris<\/a> <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/t.co\/VeJjtSK038\">https:\/\/t.co\/VeJjtSK038<\/a><\/p>\n<p>\u2014 Tarun Chitra (@tarunchitra) <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/twitter.com\/tarunchitra\/status\/1339640488400400385?ref_src=twsrc%5Etfw\">December 17, 2020<\/a><\/p><\/blockquote>\n<p><script async src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script>\u201cMost passive investment products often times have non-trivial derivatives-like exposure. For instance, the collapse of the ETF XIV in February 2018 (\u201cvolmageddon\u201c) illustrated how some assets that are \u201cpassive\u201d and \u201csafe\u201d have complex exposure,\u201d Chitra explained to Cointelegraph. \u201cLiquidity providing in AMMs is not so different, although it presents a new set of risks to holders. Liquidity providers are always balancing fees earned (positive income) with large price moves losses (negative, impermanent loss).\u201d<\/p>\n<p>These complexities have led to the failure of many liquidity mining projects due to overincentivization (\u201c1e9% APY isn\u2019t sustainable, too many LPs and no traders\u201d), or underincentivization from developers not offering enough rewards to counterbalance impermanent losses. Ultimately, users and developers \u201cshould think of farming as a complex derivatives analogue of maker-taker incentives on centralized exchanges.\u201d<\/p>\n<p>Additionally, this new conceptual model may allow for more sophisticated decision making from liquidity providers, as well as more robust architectural frameworks for AMM developers.\u00a0<\/p>\n<blockquote><p>\u201cThis paper provides a principled way for developers and designers to provide LP returns that make sense,\u201d said Chitra. \u201cAPY only makes sense for fixed income assets (bonds), whereas derivative pricing makes MUCH more sense for something like liquidity provision. We hope this is the first in the line of many works that try to find the \u2018Black-Scholes of DeFi.\u2019\u201d<\/p><\/blockquote>\n<p>According to Chitra, successfully identifying a DeFi-equivalent to the Black-Scholes model might also be the key to mass DeFi adoption. Developed in the 1980s to help investors find ways to properly price stock options, Black-Scholes led to a massive boom in derivatives trading.\u00a0<\/p>\n<p>While it remains to be seen if a new model can cut so cleanly through DeFi&#8217;s complexities, this paper <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/download-scripts-themes-apps\/\" data-internallinksmanager029f6b8e52c=\"9\" title=\"Download Scripts &amp; Themes &amp; Apps\" target=\"_blank\" rel=\"noopener\">app<\/a>ears to be a promising first step.\u00a0<\/p>\n<p><template data-name=\"subscription_form\" data-type=\"defi_newsletter\"><\/template><\/div>\n<blockquote><p><strong><span style=\"color: #ff6600;\">If you liked the article, do not forget to share it with your friends. Follow us on\u00a0<span style=\"color: #ff0000;\"><a style=\"color: #ff0000;\" href=\"https:\/\/news.google.com\/publications\/CAAqBwgKMLG0nwswvr63Aw\" target=\"_blank\" rel=\"nofollow noopener noreferrer\">Google News<\/a><\/span>\u00a0too, click on the star and choose us from your favorites.<\/span><\/strong><\/p><\/blockquote>\n<blockquote>\n<p style=\"text-align: center;\">For forums sites go to <span style=\"color: #ff9900;\"><a style=\"color: #ff9900;\" href=\"https:\/\/forum.buradabiliyorum.com\/\" target=\"_blank\" rel=\"noopener\">Forum.BuradaBiliyorum.Com<\/a><\/span><\/strong>\n<\/p><\/blockquote>\n<blockquote>\n<p style=\"text-align: center;\"><strong>If you want to read more <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/news\/\" data-internallinksmanager029f6b8e52c=\"2\" title=\"News\" target=\"_blank\" rel=\"noopener\">News<\/a> articles, you can visit our <span style=\"color: #ff9900;\"><a style=\"color: #ff9900;\" href=\"https:\/\/en.buradabiliyorum.com\/general\/\" target=\"_blank\" rel=\"noopener\">General category.<\/a><\/span><\/strong><\/p>\n<\/blockquote>\n<p><span style=\"color: black;\"><a style=\"color: #ff9900;\" href=\"https:\/\/cointelegraph.com\/news\/how-should-investors-value-defi-projects-a-new-paper-might-have-some-answers\" target=\"_blank\" rel=\"noopener\">Source<\/a><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>&#8220;# How should investors value DeFi projects? A new paper might have some answers &#8221; A new paper released on Thursday from a team of crypto researchers hopes to add to a body of work that will eventually identify \u201cthe Black-Scholes of decentralized finance (DeFi)\u201d \u2014 an equation that will allow investors and users to&#8230;<\/p>\n","protected":false},"author":1,"featured_media":138118,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"fifu_image_url":"https:\/\/s3.cointelegraph.com\/uploads\/2020-12\/fa450818-297a-4683-a139-49533addb455.jpg","fifu_image_alt":"","footnotes":""},"categories":[1],"tags":[74868,75012,74891,81210,75042],"class_list":["post-138117","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-general","tag-defi","tag-derivatives","tag-ethereum","tag-ethereum-options","tag-mining"],"_links":{"self":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/138117","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/comments?post=138117"}],"version-history":[{"count":0,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/138117\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media\/138118"}],"wp:attachment":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media?parent=138117"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/categories?post=138117"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/tags?post=138117"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}