Thread by @Panoptic_xyz

1/13 How do you know if one LP position or portfolio is riskier than another?

Is LPing riskier than HODLing?

This is the first of a series of threads where we discuss different types of risk, how to interpret them, and how to hedge them.

Let's dive in!

2/13 Risk measures (RMs) are crucial in assessing the stability and performance of a portfolio, and they can be used to guide investment decisions.

When providing liquidity on Uni V3, there are several key risks to consider such as volatility, market risk, etc.

3/13 Some commonly used risk measures are:

- Beta (β)
- Value-at-Risk (VaR)
- Conditional Value-at-Risk (CVaR)

All of these measures are related to the volatility of the portfolio. In particular, high volatility typically implies high risk.

Let's discuss them in more detail 👇

4/13 Beta (β) measures the risk of a portfolio against the risk of a reference market index.

While it's tricky to choose a reference market in crypto (as there's no SPY equivalent), we can always compare against BTC, ETH, or a portfolio.

Check out our recent thread on β below!

https://twitter.com/Panoptic_xyz/status/1620829599402971136

5/13 VaR calculates the maximum loss that a portfolio is expected to suffer within a certain confidence level over a given time horizon.

It's calculated by taking the expected value of the losses divided by the probability of those losses occurring.

See formula below 👇

6/13 CVaR (AKA expected shortfall) is an extension of VaR that quantifies the average loss over a specified time period of *unlikely scenarios beyond the confidence level.*

Ex: If CVaR at a 99% conf. level is 1Ξ → We expect the 1% worst losses to be 1Ξ

See formula below 👇

7/13 Example: suppose we have 1 ETH which we deploy on the ETH-USDC 0.3% Uni V3 pool.

We deploy our LP position at the current price, at a width r = 1.3. In addition, we redeploy our position every

- Day
- Week
- Month

Which strategy is the riskiest?

(See 👇 for reference 😉)

https://twitter.com/Panoptic_xyz/status/1621252130815483904

8/13 We obtained the following results:

- VaR ranges from 3.8% - 12.5% losses & CVaR from 6.1% - 15% losses
- 👆 means that the expected maximum loss is around those ranges
- Daily rebalance is slightly less risky than holding ETH

In addition... 👇

9/13
- In general, longer rebalancing period: larger risk
- Larger α: larger risk
- Risk of HODLing ETH over 1 day: VaR = 10%, CVaR = 14%

+ interesting conclusion:

ETH-Stablecoin LP strategies are less risky than HODLing ETH

Why? Intuitively, LP returns offset risk!

10/13 In summary:

Risk measures are used to make informed investment decisions, set risk management policies, and evaluate portfolio performance.

Thus, a comprehensive understanding of RMs is essential for effective risk management.

There's a caveat we haven't discussed 👇

11/13 RMs are based on historical data and can't predict future market movements. This means RMs are - in a way - biased towards the past.

One way of alleviating this is to simulate forward paths using Monte Carlo methods. We'll release a tutorial on this shortly 😉

12/13 Now that we know what risk measures are, in an upcoming topic we will discuss how to use them for hedging and position management 😉

13/13 We hope you've found this thread helpful!

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