Bear Market Gold Mining: Practical Strategies from the Chinese Community's DeFi Degen Hidden Gems

Author: Cobo Global

"Even in a long crypto bear market, it is possible to achieve robust returns if you have a deep understanding of the crypto industry. You can even arbitrage and gain excess returns from various crypto events." This is how Cobo co-founder and CEO Shen Yu summarized the sources of his excess returns over the past year.

Another guest, Super Jun from the Benmo community, a hidden expert in practical operations, bluntly stated, "I never look at the market, nor have I ever been excited about any new trends or projects. I only look for arbitrage opportunities." He can be considered a highly focused event-driven expert.

Unlike Super Jun, Arthur, CEO of DeFiance Capital, talked about a project that excites him—the recently popular social application friend.tech, which he praised as the most exciting application since YFI.

The above content is excerpted from the "Singapore DeFi Day" roundtable discussion hosted by Cobo and co-organized by NEO on September 11, where Cobo co-founder and CEO Shen Yu, DeFiance Capital CEO Arthur, Benmo community founder Super Jun, Tokka Labs CEO Wee Howe Ang, iZUMi Finance co-founder Jimmy, and Solv Protocol CEO Ryan, among other industry leaders and DeFi experts, engaged in high-quality discussions and dialogues around "Opportunities and Challenges in DeFi Returns." Topics included the sources of basic and excess returns over the past year, risks encountered in their respective fields, and new exciting trends.

During this event, Cobo co-founder and CEO Shen Yu summarized the new features launched by Cobo Argus over the past year, all of which were developed around the personal needs of a DeFi major player, which is to "get a good night's sleep."

The content of this dialogue is lengthy, and the above summary cannot cover everything. If you want to know which smart DeFi players are focusing on which tracks? What are the most promising and certain Alphas in this industry? And what are the most interesting points of concern—how high are the expectations for next year's market outlook and profit? Please see the following summary of key insights:

About the Sources of Basic and Excess Returns

Super Jun:

First, basic returns mainly come from DeFi mining. The PoS interest on Ethereum can generate about 4% to 5% in basic returns, and the DAI on MakerDAO generates 5% from U.S. Treasury yields. Combined, these two provide a dual income from taxes and bonds, and when adding DeFi liquidity mining rewards, it results in a decent basic return, which was part of our mining and selling strategy at the time.

Excess returns mainly come from event-driven on-chain arbitrage and buying locked tokens at a discount during bear markets.

Shen Yu:

Basic returns come from Ethereum PoS yields + on-chain U.S. Treasury yields.

Excess returns come from the fact that the entire blockchain is still an event-driven market, where various events create profit opportunities. If you have a deep understanding of the essence of things and how protocols operate, then when various events occur, there will be various arbitrage opportunities. With sufficient knowledge, it can still enhance returns.

On this basis, we can further leverage tools or derivatives to amplify returns, making it relatively easy to achieve annualized returns of over 5%.

Wee Howe Ang

Basic returns mainly come from trading major cryptocurrencies. Although the price volatility of mainstream coins has decreased compared to last year, overall returns are still positive.

Excess returns mainly come from arbitrage on price differences of small coins in decentralized and centralized exchanges.

Jimmy

Excess returns mainly come from airdrops and meme tokens.

Airdrops: By providing liquidity, one can earn various fees, achieving higher (2-3 times) returns than traditional mining.

Meme token returns: In the early days, on-chain bots could rush in; even if the cost was only $10, it could be withdrawn as $10,000.

Whether it's airdrops or meme tokens, they both represent a form of asset creation. Engaging in such trades essentially involves transporting information and asset liquidity. As long as you are close enough to the asset issuance, whether it's a public chain airdrop or meme tokens issued natively on these public chains, you can achieve good returns.

Ryan

The first source of returns is various dividends from public chains, including some quality early projects and airdrop opportunities. The second is the fees generated from on-chain Perp DEX, which can be hedged in decentralized exchanges, representing a localized short-term Alpha opportunity.

Arthur

Overall, the distribution of investment returns in the Web3 primary market is increasingly resembling that of Web2. If you haven't invested in one of the top three projects in a certain track, you might not see any returns at all.

At this stage, compared to primary investments, secondary investments can more flexibly respond to market changes and adjust strategies. Therefore, this year we established a new fund specifically for secondary investments to better align with market feedback.

This year, DeFi returns still exist, but the risks have increased. We will be more cautious in investing in DeFi, only entering when we see very good investment opportunities.

About Risks and Returns

Risks of On-chain Derivatives

Ryan

The first type is the risk of hacker attacks at the smart contract level; the second type is operational risk; the third type is investment strategy risk.

The second type of operational risk can be addressed by Cobo Argus. For our type of derivatives trading, when implementing arbitrage strategies between centralized and decentralized exchanges, there may be synchronization delays, which require a lot of specialized strategies. Cobo Argus's access control solution can achieve risk isolation, delegating operations to professionals while ensuring limited permissions to safeguard asset security. This means that whether the asset owner operates themselves or entrusts it to professionals, the operations can be ensured to be safe.

Risks of DEX

Jimmy

To ensure safety, we will select larger, more mature technical solutions or relatively larger emerging public chains.

As a DEX, another risk to pay attention to is the risk of cross-chain bridges, because users will involve funds in cross-chain transactions, which essentially means leaving assets on its official bridge or a third-party cross-chain bridge, then obtaining a mapped asset issued by the official/third-party bridge of that chain. How to ensure that the assets you deposit can be withdrawn poses a risk of asset redemption on cross-chain bridges.

From this perspective, risk avoidance can be approached from two aspects, mainly looking at the mechanism of the chain itself and the corresponding audits, as well as the TVL of that chain.

Risks and Risk Control in High-Frequency Trading

Wee Howe Ang

The main risk is the risk of smart contracts, because we mainly trade small coins, many risks associated with small coins and related protocols arise from smart contracts, making them difficult to analyze. Currently, there is a lack of a complete framework in the market to assess these risks.

Current Good Risk Control Solutions

Shen Yu

Previously, many funds found it difficult to delegate to subordinates or third parties when mining DeFi due to the large asset scale and complex permission allocation. To address this pain point, after about one to two years of accumulation, Cobo has implemented granular risk control at the contract parameter level through the Argus system this year. Funds are placed in multi-signature wallets, and limited permissions are allocated to different individuals, allowing the actual asset owners to not have to manage every detail. This way, different single-signature users assigned to this permission can customize operations within the permissions, freeing up the energy of executives like CTOs and CIOs from managing investment operation details.

On another level, a long-standing issue that has troubled me is that many on-chain security anomalies occur at night, making it hard to sleep. DeFi has also experienced many ups and downs this year, with numerous security incidents occurring, even programming languages being hacked. As a DeFi user, we must constantly monitor some on-chain metrics, with our phones being alerted 24/7 by various alarms of different priorities. Moreover, since hackers sometimes choose weekends or late nights to attack, many alarms often ring at night, and when you wake up not fully alert, you have to figure out what's happening and resolve it.

In light of this palpable pain point, we have developed some solutions by finely dividing permission granularity, allowing bots to automatically monitor various on-chain anomalies 24/7 while establishing risk execution strategies. By assigning specific operational permissions to online bots for observing on-chain anomalies, any signs of trouble can trigger an immediate retreat, withdrawing assets from the pool back to multi-signature wallets, which can effectively solve sleep quality issues.

In summary, one is to decentralize the DeFi fund— allowing different team members to obtain corresponding permissions to execute more efficient operations, which represents a breakthrough in this area; at the same time, we have developed various bots to ensure asset security and maximize returns. In the past, to sleep well, we were hesitant to leverage too much, but now with these bots, leverage can be adjusted higher because the bots will help manage these operations.

About the Risks of DeFi Investment/Mining

Arthur

DeFi mining should not only look at return rates but also consider Risk Adjustment. Some protocols are quite complex, and you not only bear the risks of the protocol itself but also those outside the protocol. This year, DeFi mining returns are still quite considerable, and the risks are not high. If you are optimistic about a project, just buy the coin; generally, the more time-tested protocols and platforms are safer.

About Market Predictions and New Trends

Arthur

If we take TVL as an indicator, the current TVL is about $4-5 billion, and a year from now, it could be in the range of $10 billion to over $100 billion. The future development depends on how many real-world assets can be brought in. I see three promising tracks: decentralized contract trading, Liquid Staking, and real-world assets. By this time next year, Ethereum should be at least $3,000 USDT.

Shen Yu

At this stage, a major direction is the shift of asset trading from centralized to decentralized, especially after the series of events surrounding FTX, which has almost become a consensus in the industry.

The second point that is crucial for the growth of this industry has two sources: one is user growth, and the other is the inflow of traditional fiat funds. The latter is more influenced by macro policies. Regarding user growth, in the coming years, with performance solutions, the launch of layer two networks, and the development of smart wallets, users can interact with blockchain technology and private key encryption principles without being aware of them, thus owning a blockchain wallet account. Although the standard protocol layer has not yet been unified, it can bring in a large number of incremental users. While it is still unclear where the money will come from, the user entry point as a major direction is relatively clear.

By this time next year, Bitcoin will have halved, and it will be in a range of $40,000+, between $40,000 and $60,000, with ETH likely at a similar multiple.

Wee Howe Ang

I am optimistic about Intent-based trading methods, which can enhance the trading experience in Web3, giving it a chance to compete with Web2, and may even surpass it.

Regarding new opportunities, it largely depends on the development of the entire infrastructure and whether it can bring about some innovative applications.

In the next cycle, mainstream coins will depend on the inflow of funds and leverage. A key point that will determine the future price of mainstream assets is whether new emerging assets are born.

After the period of volatility ends, by this time next year, Ethereum will reach $2,000 to $3,000 USDT.

Audience Questions

Shen Yu, there is a voice saying that new trading models like Unibot will replace CEX. What do you think about Unibot as a new type of trading bot? And how do you view dYdX as a derivatives trading platform creating a separate Layer 1?

Shen Yu

The mechanism of Unibot effectively addresses user experience issues at this stage. It provides users with another entry point through a simple bot interaction interface, allowing ordinary users to perform DeFi operations without dealing with complex cryptographic knowledge or learning how to securely manage assets. However, its security has issues, especially regarding private key protection. I believe that the direction of transforming trading interfaces through bots is correct, but how to enhance security while improving user experience is a problem that needs to be solved. Considering the current developments and constructions of Telegram in the blockchain space, this direction will continue to iterate, and new interaction methods will evolve in the future.

dYdX essentially places trade matching off-chain while settling trades on-chain, which effectively combines the performance of centralized exchanges with the decentralized real-time settlement characteristics of blockchain. However, whether it is necessary to create a separate Layer 1 is something I personally have doubts about.

Arthur, what do you think about the recent popularity of friend.tech?

Arthur

I am personally very optimistic about friend.tech; I think it is the most exciting product since YFI mining.

friend.tech addresses the most challenging problem in social networks—the cold start problem. Additionally, through innovative economic models, it filters out true "friends," allowing only those who genuinely want to interact with you and find your content valuable to spend money to purchase your Key.

Moreover, friend.tech adopts a Web2 frontend, allowing users to register using email or phone numbers, lowering the entry barrier while ensuring users retain control of their wallets. Although friend.tech currently has some issues, these can be resolved in the future.

So far, friend.tech is still a relatively new product, and considering its current TVL of only $20 million, there is still significant growth potential. Achieving a TVL of $50 million should not be a problem.