Daily market commentary from 11.09.2020

Market commentary

Good Morning!

I apologise for the late market commentary today, but this yield farming thing (especially the calculation of your actual profit or loss) is pretty damn complicated.

This short summary is for everyone who is interested in hearing about my experiences with the Sushi token and its respective trading platform: SushiSwap.

My first calculation will be versus ETH and SUSHI, and then I'll try to make the link to what I actually earned in USD.

To get into the farming cycle, you need to first buy the token(s) that the LP pool requires. In my case, this was the SUSHI token in the ETH/SUSHI pool on Uniswap. By doing that first trade, I was exposed to the ETH/SUSHI (or $/SUSHI) price change. I was only on the lookout for farming tokens where I could hedge that price risk immediately. FTX provided me with the hedging possibility, and therefore, I went for it.

So, on August 31st, I spent my first 1.8 ETH versus 346 Sushis. After I received them in my MetaMask wallet, I added liquidity to the Uniswap ETH/SUSHI pool of 1,619 Sushis versus (at that point) 4.3 ETH.

From that point on, I just farmed Sushi (I did not do anymore outright buys of Sushi). At the same time, I followed my strategy to continuously sell the farmed Sushi tokens on FTX in the SUSHI-Perp future. I took some timing risks here and there, and overhedged in the $6 region. I continued farming and restaking the tokens this way until today (September 11th).

My balance (incl. the first Uniswap purchase of the Sushi token versus ETH) adds up to a total of 19.2 ETH and 3,096 SUSHI. When I "unstaked" my position, I was the proud holder and owner of 3,193 SUSHI tokens and 18.3 ETH. The difference in the SUSHI token was the last batch of farming I collected this morning, and the difference for ETH stems from the pool-curve adjustment (impermanent gain/loss) and the fees I had to pay to interact with all of those smart contracts (do not underestimate the fees!).

So, what is my PnL in the end? When I calculate it in ETH, the formula looks like this:

3,193 SUSHI - 1,619 SUSHI = purely farmed 1,574 SUSHI
1 SUSHI is 0.00621 ETH => 9.77 ETH - 0.9 ETH => 8.87 ETH

Now, calculating the PnL in fiat is slightly more complicated...

You probably remember the two risks involved in farming: the price risk of your farming token, and the price risk of your counter token (in my case ETH), as well as the impermanent loss risk of your staked tokens (mainly the "big" one, which in my case was ETH). I was able to hedge the farmed token price risk via futures on FTX. The impermanent loss risk was something I could not hedge. I got lucky in terms of the risk component I could not hedge. On average, the ETH/SUSHI price did not move too far away from my weighted average.

So, how did I do in terms of the hedging of the two risk components I could hedge?

First, here is the cost of capital I needed to farm (buy ETH) in USD: 19.2 ETH at $435 = $8,352.
The current ETH$ price is $365, which results in a loss of $1,344 on the ETH position (I did not hedge it, which in hindsight was a mistake).

The total unwind resulted in the following in USD:
My SUSHI-Perpetual future hedge resulted in a profit of $5,800.
The physical sale of all of the farmed Sushi tokens resulted in a proceeds of $7,134.

That adds up to: 5,800+7,134-1,344 = +$11,590

In both calculations, I have a pretty decent gain in percentage terms. But when you look at the risk-adjusted yield, it is probably not good enough. Especially in my case, since I got lucky on the SUSHI hedge, plus the impermanent loss risk.

I will now let all of this sink in... I'm not quite sure if and when I'll be back on the "farming fields".