Thread by @phtevenstrong

Protocols try to make money regardless of whether or not users make money.

They have innumerable tools to farm users or to fool users into paying fees for expected gains.

HOWEVER, with some diligence, you can avoid being farmed.

How to be the farmer, not the farmed 🧵👇

First, let's look at how users get farmed and lose money through simple lack of diligence or understanding...

1) Deposit Fees

Many users enter into positions no knowing they've started at a negative ROI from of a deposit fee.

These were popular during sushi-fork seasons in DeFi Summer.

Luckily, these are less common now, and virtually no self-respecting protocol maintains these.

2) Withdrawal Fees

These are much more common and one of the fastest ways to lose your gains.

When a protocol taxes you a 1% exit fee, that's a 10% loss on your position if you're 10x leveraged.

Many stablecoins and vaults have withdraw fees between 0.05% and 1%.

3) Redemption Fees

Nearly identical to a withdrawal fee, this is typically used to convert a relatively illiquid asset back into its more native counterpart.

You could imagine a yield-wrapped stable, BTC, or ETH that has a 0.1% fee to redeem for the underlying USDC, BTC, or ETH.

These typically push you to either eat the fee or to use liquidity, which may or may not have a healthy peg.

Again, deleveraging positions with exit fees (like redemption fees) means you eat that cost MULTIPLIED by your leverage.

4) Getting "Zapped"

Zapping-in to a position is great for ease of use, BUT many protocols will use zap features to route through their own liquidity at higher-than necessary slippage to gobble up some revenue every time someone opens a position.

This means you enter a position at a loss and at a lower principal than you would have had to if you just converted the assets on your own before entering.

Many protocols do use the best aggregators for zapping and take zero cut of zapped assets, but some protocols charge for what is affectively "zapping as a service" and so whenever you see a zap feature, you should check first.

5) Swap fees (auto-leveraging pains)

This is a pretty common way to get rekt with auto-leveraging protocols.

Most protocols charge fees on 100% of assets swapped to leverage up, typically something like a flashloan fee.

But you have to remember, if you're 10x leveraged, that fee is multiplied by 9. So a 0.1% fee becomes nearly 1% loss to enter, and then the same to exit.

You can avoid this by manually entering positions or, of course, cheat looping.

So now let's look at easy ways to avoid getting farmed.

1) WAIT FOR REDEMPTION.

Most redemption fees are for instant redemptions. Protocols will often have an option to do a native redemption without eating a fee to exit.

The fee is effectively making sure the protocol doesn't take a loss for exiting positions to service withdrawals immediately.

Waiting 7 days for no fee instead of eating 0.5% fee for instant redeemability is affectively equal to a 26% APR position.

2) Cheat loop

I've made a video about this:


But the basic idea is that you can avoid eating leveraging fees by starting with your notional and borrowing until your desired principal remains the position equity.

It sounds complex, but it's not (watch the video).

https://x.com/phtevenstrong/status/1902766909335974074

3) Use limit orders to exit assets that have low liquidity but are value-accuring

Assets like RLP or sUSDe that don't have decentralized redemption, meaning you have to either KYC OR sell through liquidity to exit.

While this isn't always terrible, you can occasionally get burnt. The solution is to set limit orders at NAV on something like @CoWSwap in order to exit at NAV without losing any of your precious yield.

4) Don't deposit If there is a high mint / deposit fee.

When there's a good position that has a high minting or deposit fee, typically it's best to buy the asset directly from a DEX rather than mint.

If you can't, then you may consider avoiding the strategy altogether/

5) When deleveraging, try to use external capital.

If you're in leveraged positions, instead of deleveraging by swapping, try to pay off your debt with external capital, so you can withdraw the collateral instead.

This will allow you to use redemption or withdraw-at-NAV rather than having to sell to unwind.

THE MAIN POINT

Fees, slippage, and unexpected taxes and kill an otherwise good position.

Know what you're doing, be patient, and don't rush to enter / exit and you'll frequently make more than you pay.