At this stage, we are working on one goal: pivot Midas.Investments to full-scale B2C and B2B crypto asset management platform with the required audits and licenses, so our investors feel secure with Midas platform. Midas is able to build strategies with different risk profiles that achieve one of the best custodial yields on the market. We do this through smart diversification on various DeFi tools, staking and our own algorithmic trading software and methodologies.
In this article, I want to unveil the curtains on how we’re managing Ethereum that is deposited on the platform, so we can provide flexible APY up to 21%.
Our ways to provide yield
Before adding the asset to the platform, our investment/quant department makes research on the ways it can provide yield. There are three main directions we dig (from less risky to riskier): staking (receiving rewards from the blockchain for locking coins), DeFi (which is a rabbit hole with various types of yields, which I will reflect on later on), algorithmic trading (seeing if the asset fits derivative or spot algorithmic trading).
Ethereum is a great example. It has staking, used in almost every top DeFi protocol, and has an amazing derivative trading potential due to high volatility. Therefore, our ETH strategy is divided into conservative staking with 5.4% APY (30-50% of portfolio), DeFi portfolio with 8%-25% APY based on the market interest (30-45% of portfolio), and a derivative trading algorithm with 1x leverage, which showed incredible results of 200% annual ROI over 6 months (10-25% of portfolio). The portfolio allocation is managed by the investment’s desk and changes based on the macro-market conditions.
Overall, the combination of strategies gives us somewhere between 22% and 30% APY. It covers interest payouts and accumulates Ethereum in the additional safe fund, which covers the potential drawdowns on any type of investment. In the last year, we paid 11% APY on Ethereum, or more than 550 thousand dollars combined in rewards, and accumulated an extra capital equaled to almost 18% of all ETH deposits. Here is a showcase of how we treat your Ethereum investment in our platform.
Decomposing decision-making on building portfolio
- Staking EthereumStaking tends to be the less risky approach to making yields for the asset. Ethereum does not have staking on mainnet just yet, you can lock 32 ETH to receive 6% APY, but you will not be able to withdraw it until the Proof-of-Stake network merges with ETH Mainnet.Although there are solutions, such as Lido and Ankr, which give flexibility in staking Ethereum through synthetic assets. We prefer Lido, since it has much broader exposure, multiple audits with fixed issues, and over 1 billion dollars locked.As simple as buy and hold.
- Using Ethereum in decentralized finances.Many crypto investors treat decentralized finances as the dark forest full of wolves and snakes. It is indeed an innovative industry in the process of getting approved by time itself, but the complexity and increased interest provide great opportunities for managing capital in DeFi.The main point of failure is the safety of smart-contracts, so by (1) making proper research on every protocol and (2) hardly diversifying assets through various DeFi blockchains and protocols, you can strongly cut down the impact of black swan events.Therefore, our DeFi Ethereum exposure is locating between 5-15 protocols that were analyzed and proven by time. I personally have respect to protocols that got hacked, but managed to got back stronger and compensated the funds from the treasury. My favorite example is yearn.finance .Where are the yields coming in DeFi? Basically, there are three sources of income:
- Interest rates. You deposit an asset, someone uses it, paying you the interest rates based on demand. Examples: AAVE, Compound, AlphaHomorra, Alpaca.
- Liquidity provider fees. Your liquidity is being used for AMM, giving you the fees, when traders exchange one of the tokens you deposited. Examples: Uniswap, Curve, Pancakeswap.
- Token farming. My personal favorite. The protocol exchanges its own tokens for some sort of activity within the protocol. All those hundreds of DeFi protocols are fighting for your liquidity, which ends up in a game “Who will offer the highest token emission”, which started with Compound in August and got a new life with the Binance Smart chain launch. The reason for this lies in the simple understanding that the revenue of the protocol is based on its total locked value and financial model, so any team is willing to convert tokens into liquidity.Therefore, by regularly monitoring all the markets and ecosystems (Ethereum, Binance, Matic, Fantom, Solana) you can make a strongly diversified portfolio, which relies on the different types of “work” your capital does in the protocol.These are a few of the protocols we use to generate yield for ETH: yearn.finance, Vesper, bZx, Alphahomorra, Alpaca, Stabilize, Synthetix, Belt, Liquidity pools (BTC, Stables, DPI, FTM, and BNB), Harvest, ETH2x-Fli/ETH LP… The rates after the recent market crash went much lower (from average 25% to 8-15%) because folks got liquidated with over-leveraging. But it will catch up in a couple of months, once the market starts to fill with leverages again.We do not tend to hold tokens of protocols and shamelessly convert them to Ethereum each day to reduce risks of a token crash. We also have exposure to DeFi insurance on some of the protocols that we are working with. It affects our ROI, but hedges us against black/grey swan events.In order to manage all this, you need to monitor the market full-time and have enough capital to earn more than spending on fees. That’s exactly what we do.
- Algorithmic trading of Ethereum derivativesThose who were with Midas long enough, are familiar with Fline bots. It is the investment-trading team that Midas partnered with two years ago in order to diversify the passive income services to algorithmic trading.During those two years, Fline team had launched various trading algorithms, mostly concentrating on identifying BTC trends and following them. There were ups and downs, but after two years of hard work, Fline team managed to achieve consistent performance through building their own software and searching for new ways of analyzing the market data.One of the results of Fline’s work is the Ethereum bot, which is tested within Midas.Investments. The bot is really flexible and swaps his position from long to short and vice versa based on the market conditions. It has take-profits for candle wicks, closes shorts in profit as fast as it can due to bullish market conditions, and so on.We started testing the bot in January this year, and since that Ethereum got one of the highest volatility and growth this year, the bot managed to achieve a total equivalent of 200% yearly ROI. It means that the performance from the bot alone covered all the interest rate payouts for Ethereum, which was a huge surprise for us.It also traded the market crash very well, allowing us to accumulate more Ethereum on the lower prices. (You earn more dollars on longs, more assets on shorts).
- This is the PNL graph of the main ETH Bybit account for the last 90 days. With the overall deposit of 200 Ethereum, it compounded itself in the first two months (which is not on this graph), then went more sideways before profiting from the market chaos in the previous month.The funds earned through this bot were withdrawn and split between Midas investors (offering a higher yield in June), Fline team, reinvested in DeFi and staking, and sent to safe fund (currently holding over 80 Eth).
By using these three types of yield, Midas.Investments reached 27% APY on Ethereum deposits, which really helped us to hire the best talents in the industry, start the legalization and marketing process. I really love Taleb’s barbell strategy, where you hold the main part of your assets in conservative investments (I treat staking and some of the DeFi protocols relatively conservative) while having various non-correlated high reward opportunities (like trading algorithms). And even if one of the more risky positions got liquidated or will turn to a heavy loss, the stability of others would compensate.
If this article sparkles your interest, I will make a breakdown of each of our core investments showing the transparency on how we manage funds. This is the real reason why we can offer the highest yields on the custodial market while taking down the complexity of managing such a portfolio. In the future, we will list various strategies with flexible risk profiles for one asset (e.g. Ethereum staking for 8% APY)
With love and care
CEO of Midas.Investments