The building blocks of a DeFi trading infrastructure. Stories about surviving liquidity manipulation attacks, hacks, governance changes and the many challenges of the DeFi market. Key takeaways: Key questions about DeFi systematic strategies The components of DeFi systematics strategies Alpha in DeFi Practical tips about DeFi systematic strategies

1. Lessons from the Trenches: Best Practices
and Ideas About Algorithmic Trading in
DeFi
Jesus Rodriguez
IntoTheBlock

2. Agenda
● Key questions about DeFi systematic strategies
● The components of DeFi systematics strategies
● Alpha in DeFi
● Practical tips about DeFi systematic strategies
DeFi Trading Lessons

3. An update about ITB…

4. New releases…
DeFi Trading Lessons

5. DeFi Trading Lessons
NFT Analytics

6. DeFi Trading Lessons
Lots of Cool NFT Indicators

7. A second NFT analytics release coming soon…
DeFi Trading Lessons

8. New customer launches…
DeFi Trading Lessons

9. DeFi Trading Lessons
New ITB Integrations

10. Coming soon….
DeFi Trading Lessons

11. New Capabilities
● NFT analytics
● ITB DeFi quant platform website
● …
DeFi Trading Lessons

12. Three key questions about DeFi systematic
strategies…

13. 1. Where do DeFi yields come
from?
DeFi Trading Lessons

14. Sources of DeFi Yields
Demand for
stablecoin leverage
Native DeFi Tokens Activity Incentives
DeFi Trading Lessons

15. 2. Are DeFi markets a
temporary gold rush?
DeFi Trading Lessons

16. Sources of Inefficiency in DeFi
Information
Asymmetry
CeFi - DeFi
Mismatch
Protocol Diversity
Network / Protocol
Fragmentation
Governance
Changes
Protocol Hacks
DeFi Trading Lessons

17. 3. How Big can DeFi be?
DeFi Trading Lessons

18. Native Engines of Growth for DeFi
Crypto-To-
Crypto
DeFi
DeFi for Other
Asset Classes
DeFi-First
Financial
Services
…
Value
DeFi Trading Lessons

19. The components of DeFi algorithmic
strategies…

20. DeFi Trading Lessons
The Components of a DeFi Systematic Strategy
Financial
Logic
Risk
Management
Logic
Systematic
Strategy

21. DeFi Trading Lessons
Automation of the token interactions
with a DeFi protocol
Financial
Logic
• Liquidity provision
• Borrow lending
• Hedging
• ….

22. DeFi Trading Lessons
Automation of the economic risks
in a DeFi position
Risk
Management
Logic
• Divergence( impermanent loss)
• Liquidations
• Slippage
• Governance changes
• ….

23. DeFi Trading Lessons
A More Technical View of a DeFi Systematic Strategy
Data Infrastructure
DeFi Signaling
Infrastructure Automation
Financial Logic
Risk
Management
Others…

24. The evolution of Alpha in DeFi…

25. DeFi Trading Lessons
The notion of Alpha in DeFi doesn’t follow the definition
of traditional capital markets…

26. DeFi Trading Lessons
Alpha vs. DeFi Alpha
Alpha
• Relies on market indices
based on the price of
assets
DeFi Alpha
• Based on yields produced
by DeFi protocols
• Influenced by peripheral
factors such as
governance, infrastructure
or protocol behavior

27. DeFi Trading Lessons
The intrinsic friction between alpha and risk in DeFi…

28. DeFi Trading Lessons
The Evolution DeFi Alpha
DeFi Alpha
Today
• Simple strategies
• Complex risk management
DeFi Alpha
Tomorrow
• Complex strategies
• Simpler risk management

29. DeFi Trading Lessons
Strategy Complexity
Alpha can be
captured with
simple strategies
in a single
protocol
Competition and
market efficient
trends would
require more
sophisticated
strategies
involving
multiple
protocols

30. DeFi Trading Lessons
Risk Management Complexity
DeFi protocols
are incredibly
vulnerable to
economic and
technical risks
DeFi
protocols
would
incorporate
native risk
management
mechanics

31. 10 practical lessons about systematic
strategies in DeFi…

32. Some general tips…
DeFi Trading Lessons

33. Tip #1
In DeFi, better infrastructure
beats better strategies
DeFi Trading Lessons

34. The DeFi Trading Angle
Alpha decay and
inconsistency is a
major issue in
DeFi today
A robust
infrastructure for
discovering and
adapting
strategies is key to
operate at scale
DeFi Trading Lessons

35. Tip #2
Monitor everything
DeFi Trading Lessons

36. The DeFi Trading Angle
DeFi is a very
interconnected
ecosystem with
many factors that
can influence the
behavior of
strategies
Effectively
monitoring DeFi
protocols can lead
to more effective
strategies
DeFi Trading Lessons

37. Example: Pool Composition
DeFi Trading Lessons

38. Tip #3
Risk management in DeFi is
different
DeFi Trading Lessons

39. The DeFi Trading Angle
DeFi risk has little
to do with volatility
Smart contract,
governance,
infrastructure and
economic risk
influence the
behavior of DeFi
strategies
DeFi Trading Lessons

40. Example: DeFi Risk Indicators
DeFi Trading Lessons

41. Some more technical tips…
DeFi Trading Lessons

42. Tip #4
Automate exit logic
DeFi Trading Lessons

43. The DeFi Trading Angle
In DeFi, exiting a
position often
involves
coordinating
actions between
different protocols
Under specific risk
conditions, manual
exiting is not a
viable option
DeFi Trading Lessons

44. Tip #5
Be aware of the whale factor
DeFi Trading Lessons

45. The DeFi Trading Angle
Large token
holders are the X
factor that can
disrupt the
behavior of DeFi
trades
Quantifying the
exposure to large
token holder is a
key risk
management
factor in DeFi
strategies
DeFi Trading Lessons

46. Example: Whale Exit Simulations
DeFi Trading Lessons

47. Tip #6
Divergence hedging is non-trivial
DeFi Trading Lessons

48. The DeFi Trading Angle
Options
mechanisms for
hedging IL are
expensive and
often not
available
Using pools with
highly correlated
assets is a robust
protection
against IL
DeFi Trading Lessons

49. Example: Minimizing IL with Asset Correlation
DeFi Trading Lessons

50. Tip #7
Monitoring Governance proposals
is key
DeFi Trading Lessons

51. The DeFi Trading Angle
Governance
proposals regularly
alter the behavior
of DeFi protocols
Actively monitoring
active governance
proposals and
simulate their
impact should be
part of the lifecycle
of DeFi strategies
DeFi Trading Lessons

52. Example: The Impact of DeFi Governance Proposals
DeFi Trading Lessons

53. Tip #8
MEV is useful for both capturing
alpha and managing risk
DeFi Trading Lessons

54. The DeFi Trading Angle
MEV protocols is
useful to hide
trades from
competitive
strategies
But MEV
protocols can also
be used to exiting
positions in a risk
emergency
situation
DeFi Trading Lessons

55. Example: Frontrunning Whales
• Whale is going to
exit a liquidity
pool
Mempool
Monitor
• The exit will
cause major
slippage in a
given position
Risk
Evaluator • Use Flashbots to
frontrun the whale
transaction
Risk
Manager
DeFi Trading Lessons

56. Tip #9
Plan for bridging disruptions
DeFi Trading Lessons

57. The DeFi Trading Angle
DeFi bridges
operate very
differently based
on their trust
model
Quantitatively
analyze the
behavior of bridges
in terms of speed,
congestion, risk,
fees etc
DeFi Trading Lessons

58. Tip #10
Derivatives are very limited
DeFi Trading Lessons

59. The DeFi Trading Angle
DeFi derivatives
protocols today
remain
relatively small
and not very
robust
Most derivative
components of
DeFi strategies
are better done
with centralized
exchanges
DeFi Trading Lessons

60. Other Tips
● Information access remains very asymmetric
● Liquidity is constantly chasing the highest yields
● Any DeFi strategy has dependencies on the underlying L1-L2 infrastructure
● Multi protocol strategies yield higher alpha
● Arbitrages are available but small
● Active liquidity mining is very risky
DeFi Trading Lessons

61. Summary
● Every DeFi strategy is a combination of financial and risk management logic
● DeFi alpha is very different from alpha in traditional capital markets
● The lessons outlined in this presentation have been based on practical experience
running large scale DeFi strategies
DeFi Trading Lessons

63. Thank You!
Jesus Rodriguez
jr@intotheblock.io
medium.com/@jrodthoughts
intotheblock.com