Karura Trading Strategies: First Analysis

Hype around the upcoming Karura network is big, but when I asked on Twitter about profitable models and strategies, I got very little actionable advice. Only our friend Yung Beef Big Bags had a good Medium writeup to offer:

While it is a good start, I wanted something along the lines of taking every single feature in Karura apart and analyzing it from a profit-perspective. Since little could be found, I tried to gain knowledge from other places and also read the Acala Whitepaper (which also is valid for Karura) and the Acala Wiki. I played with the Test App and finally wrote down my conclusions.

I present my learnings for your educational pleasure. Please consider that I could be wrong on any of the points presented and do your own research and due diligence. Please also correct me if you find mistakes!

This article will consist of a presentation of the instruments, short analysis and six initial strategies that build a first framework to consider options on Karura. It is also available as video:

Core Instruments

Swap, Liquidity Pools, Liquid Staking

The basic feature is of course the liquidity pools. All of the testnet pools are paired against the stablecoin kUSD. If you add liquidity to a liquidity pool, you will gain LP tokens, which will accrue trading fees.

You can also stake your LP tokens, which will gain you additional KAR as stability fees from the stablecoin protocol are generated.

Stablecoin, Loans, Collateralized Debt Position

The stablecoin is minted in destroyed by opening and closing a collateralized debt position (CDP), aka taking out a loan and paying it back. Loans are overcollateralized and a stability fee (interest rate) is to be payed which goes to staked LP token holders.

Liquid Staking

This allows you to stake your KSM and receive a synthetic token that represents the staked KSM while the appreciate in value due to staking rewards. You can then trade or collateralize those L-KSM. Instant unbonding is also possible against a fee.

decentralized Wealth Fund (dWF)

The dWF is an asset fund managed by the Karura governance that will accumulate KSM and other assets in order to finance the next Karura parachain slot auction.

Analysis

Now that we know the basic instruments, let me raise a few points:

Everything hinges on stablecoins

Every trading pair on the testnet is a crypto against kUSD. This strikes me as odd, as it will mean a lot of risk for impermanent loss. The rewards programs would have to offset the risk enough to make this in any way interesting. It would be much more interesting to have a L-KSM/KSM pair for instance.

Incentivization

The distribution program is intended to incentivize certain activities by users. It could be used to reward providing liquidity or collateralizing certain assets. The governance might also provide liquidity from the treasury to bootstrap certain pools.

Reward Summary

These rewards could be identified:

  • Transaction fees
  • Stabilitiy fees
  • Distribution Program
  • Liquid Staking

6 Strategies to approach Karura

I could identify these 6 strategies as valid approaches to the Karura ecosystem:

HODL

Let KAR appreciate in value, while the dWF does the heavy lifting of accumulating value and KAR represents a virtual stock of the dWF.

Trade

If you feel like you can beat the market and are long volatility, you might just become a regular user of swaps.

Bull Market: Leverage Long

This strategy is based on collateralizing crypto, loaning kUSD and buying more crypto with it, thereby increasing the collateral and the kUSD you take out. This can be repeated a few times. This can also be magnified by doing this with Liquid-KSM, therefore using a token that itself will increase in value.

Sideways: LP Staking

In a sideways market there will be the least impermanent loss and trading fees can be collected here.

Bear Market: LP Staking

If you are bullish about the future but are in a bear market, you might just provide liquidity and stake the LP tokens. You will acrue transaction fees and stability fees while other players get liquidated and you get their fees.

Distrofarming

The governance might be incentivizing a lot of different things. It might make sense to see what they do and then do proper calculations if this can be used in a profitable way.

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