The first open trading strategies are now available. Read to learn what the Trading Strategy team has built, how everyone can be a quant trader, and what this means.
We want to thank our partners at Enzyme Finance, 1delta, Velvet Capital, xWIN, Uniswap, Sushi, Osmosis, Aave, Circle, and ChainLink for making this release possible.
Background
Two years ago, we set on a path to build the first algorithmic trading product for decentralised markets. While plenty of yield farming protocols and trading bot services for centralised exchanges were available, DeFi was still seen as an immature degen yield farming playground unsuitable for professional quant trading. The lack of professional tools, market data, infrastructure, liquidity, technical risk, and such were major factors - an example opinion about decentralised finance from a professional quant.
We believe decentralised finance is the future. DeFi has many unique selling points that traditional finance cannot replicate. These include, for example, less counterparty risk with good transparency, fairer public data access, and fierce competition pushing trading fees lower. "Uberification" of trading and investing is coming, as A16Z writes in their famous Open Source Finance blog post.
Our vision
Machines and AI are better than humans at analytical tasks. AI is already winning in chess, Starcraft, in some creatives, and many other sectors. Trading and investing will be no different. Most humans would be better off giving their money management to machines instead of managing it themselves or having it managed by other humans.
For a long time, most trading has been algorithmic. But until blockchains and DeFi came around, it was difficult to expose this directly to consumers. While consumers get indirect exposure to automated trading products, it usually happens through a fund, bank, or another intermediary.
Trading Strategy is the first purely machine-based protocol for algorithmic trading. After a single trading strategy is launched, the system aims to be fully self-custodial, and the only person in the process is the one who deposits the trading capital.
Consumers win when machines and AI take over in trading, as more revenue is distributed directly to them. There are fewer intermediaries to feed, and smart contracts neither need nor ask for management bonuses.
How are we different?
Trading Strategy is the first algorithmic trading protocol for decentralised finance. We popularise professional quant finance for everyday users: retail traders, CFOs, and small and medium-sized funds and trading firms, by focusing on advanced and speculative trading strategies and risk-adjusted return, although strategies can also utilise many other kinds of yield generation elements.
Most of the readers of this blog post likely have an existing decentralised finance background, so we explain it with this background in mind.
Ethena, a new stablecoin protocol, popularised cash and carry trade. In this trade, the protocol holds a delta-neutral position, having staked ETH and short ETH in a similar ratio. As writing of this, Ethena earns ~40% APR because, in perpetual cryptocurrency markets, more longs than shorts are open. Long position holders pay interest to short position holders.
it appears Ethena is making many ppl who dont trade derivatives have a really hard time wrapping their heads around the fact that derivatives traders are so genuinely retarded that we're willing to pay like 50%+ apr to enter a position
— CL (@CL207) April 6, 2024
yes we've been doing this for many cycles
Why would anyone taking the counter trade pay Ethena 40% interest? Since 2019, ETH and BTC have appreciated an average of 80% (CAGR) per annum. But this return comes with a severe risk: a 70% maximum drawdown. Traders can afford to pay 40% yearly interest because they believe there is even better trade to take.
Would you take this risk: Double your money yearly, but you might lose 70% in one year? The answer depends on your risk tolerance and how effectively you mitigate the downside. This is where Trading Strategy enters the play. By having tools to develop strategies to trade in different market conditions, and quantifying the risk, the strategies can outperform buy-and-hold, lending, yield aggregator and other markets available in DeFi today.
Read our Outperform ETH blog post for more in-depth examples on how the strategies are developed and how to compromise for risk-adjusted returns.
What are we offering
Trading Strategy is a protocol where quant finance experts can develop, backtest, and offer their trading strategies to DeFi users. DeFi users can then choose from different strategies that fit their risk profile. Quant finance experts can alternatively launch their strategies for proprietary trading as well.
For strategy end users we offer
- A set of strategies to choose from
- Extensive data on the performance and risks of these strategies based on real historical data
- DeFi native Connect wallet, Deposit, and Redeem user experience, and
- Automatically executing strategies
Expected strategy end users include DeFi traders, CFOs, wealth managers, treasuries, and small and medium-sized liquid funds.
For developers or quants, we offer
- A place to run your trading strategies with new market opportunities
- Generous fee collection opportunities from open strategies
- High-quality market data covering multiple blockchains and hundreds of thousands of trading pairs
- A Python-based strategy development and backtesting framework. No blockchain or Solidity knowledge is needed!
- Live trade execution across multiple DEXes, lending protocols
- Software license for proprietary trading strategies
How does the protocol work?
There is not yet a powerful enough blockchain to execute sophisticated trading strategies on DeFi. Thus, the protocol runs with off-chain oracles, similar to Chainlink, which will later be expanded to be a large oracle network.
Whereas Chainlink oracles are focused on delivering off-chain price information for perps and liquidations, Trading Strategy oracles focus on making complex trading decisions based on on-chain data possible. A single trading decision may read and process megabytes of data.
Can public alpha exist?
One main argument we heard when pitching our vision was that "public alpha" does not exist. This means that any public trading strategy cannot be effective. This argument was heard especially from traditional finance representatives. The lack of public alpha implies that finding and exploiting market inefficiencies to generate excess returns requires sophisticated techniques, data, and resources typically unavailable to retail investors or closely guarded by institutional investors and hedge funds.
ENA is not a DeFi token. It’s a CeFi token of an unregulated Hedge Fund doing basis arbitrage.
— GrossBit, the Golden Blob (@gross_bit) April 7, 2024
As a basis arbitrager myself I am biased and am not happy about a a new 2 billion and growing competitor but here is my take:
A professional derivatives trader unhappy about Ethena unlocking his trades to masses.
We believe this view is wrong. Decentralised finance itself is public alpha. For example, Ethena popularised the carry trade by making it easily accessible over the DeFi user interface, opening this billion-dollar opportunity for everyone. Naturally, the hedge funds that had exclusivity for this kind of trading opportunity earlier due to complex trades that needed to be wired together are now salty about their new competition. It turns out that the future markets might be less about secret alpha and more about effective execution and creating automated opportunities with easy access to capital.
How is Trading Strategy positioned?
Trading Strategy is the first algorithmic trading protocol for DeFi.
- Trading Strategy focuses on risk-adjusted return, not delta-neutral strategies
- All funds are held in smart contract vaults and can be redeemed at any time
- All trading strategies have comprehensive information on their risks and potential rewards
- We are a DeFi-native protocol, not a trading bot platform
We composed the protocol from several DeFi elements, including self-custodial wallets. This is another unique aspect of DeFi and why traditional finance can never accomplish as slick user experience and risk transparency.
We offer several value-adds to the entire ecosystem
- For blockchains, we offer a real yield-generating application that demonstrates the best aspects of decentralised finance and its benefits - something that attracts traditional finance and institutions as well
- For DEXes and their liquidity providers, we offer marker-taker volume through our automated strategies
- For digital asset management and vault protocols, we offer an effective increase in the number of attractive vaults by having a vault for each different automated strategy
- For wallets and DEXes, we offer embedded strategies and affiliate revenue deals
- For lending protocols and DEXes, we offer extensive embeddable data services similar to TradingView (see Aave example) - our solution can be white-labelled and free from many TradingView limitations
What did we learn building the first version
When we started building Trading Strategy over two years ago, we were optimistic about the amount of time it would take to complete the first public version. Several hurdles took longer than expected, and showing the immaturity of the DeFi ecosystem.
- Lack of open-source data indexing tooling for EVMs (we had to build our own high-performance EVM data extractor)
- The low quality of infrastructure like JSON-RPC nodes (we had to build open source fallback mechanisms)
- Working around Malicious Extractable Value (MEV), and node operators that front-run and sandwich their users
- Limitations in traditional finance Python backtesting frameworks (we had to build our own which understands DeFi's concepts like different blockchains and DEXes)
- Setting up a legal structure to operate a legit DeFi project
We had to write way more software than we hoped for. However, the software is now written and good to go.
What's the feedback we have received
We validated our product with proprietary traders and DeFi traders using private trading strategies. We are very grateful to all these partners who helped us with the early, very rough versions and the early feedback they provided.
Some of the shortcomings we had to address when validating the minimal viable product.
- Lack of shorting: it is necessary to be able to trade market both ways - this was especially true during the grueling crypto winter of 2021-2023. The great news is the current version of Trading Strategy protocol already includes capabilities for shorting through the use of lending pools for proprietary strategies. More information about this in the next chapter.
- Backtesting speed: The backtester needs to be fast. Otherwise, the strategy developers get frustrated. The current version is much faster than the initial prototypes and sufficient for most purposes. However, it is an event-based backtester and, in its current form, can never be as fast as vectorised alternatives.
- The complexity of programming: most traders and quants are not very good programmers. You need to simplify the code for them and design ultimate obvious and easy-to-reason APIs. We have done a lot of work to simplify the Python notebook examples and added many useful functions to our API.
Difficulty of building out trading automation on chain at every level of the stack highlights to me how Ethereum hyperfocuses on individual users at the expense of institutions and sophisticated actors.
— 𝕯𝖆𝖓𝖌𝖊𝖗 (@safetyth1rd) March 1, 2024
Whereas CEXes go out of their way to make institutions lives easier.
An expert trader's opinion on how difficult on-chain trading is currently. Trading Strategy is here to fix this.
The positive feedback we have received
- Everyone is excited to be an end-user for Trading Strategy and ready to put some money in - we'd say there is a clear market demand for what we are building. We are super grateful for the positive feedback and excitement we have received.
- Proprietary traders keep saying that our strategy development framework is better than some commercial closed-source offerings.
- There is a queue of dozens of DEXes that want to integrate us, and in-house software development resources limit us from tackling them all.
What's still missing
Version 1.0 does not include everything we wanted. These are being addressed in the future
- No short positions on open strategies: Currently, there isn't a single on-chain asset management protocol that supports short positions with share-based vaults(*) - thus all open strategies at the launch will be long-only, limiting their performance. We can still run long-short strategies, but these strategies are limited to proprietary trading or single user mode only, however we have made it very easy for you. This will be extended to cover open strategies in the near future as we are collaborating with on-chain vault providers to make necessary enablers available in their protocols too. Shorting on perp futures DEXes will be made available through upcoming integrations in the near future as well.
- Limited trading universe: Current digital asset management protocols use Chainlink feeds for share pricing. This limits the tradeable token universe to tokens with a Chainlink price feed. We are exploring other price oracle alternatives that would give a much richer set of tokens to trade. Again, this is a problem only for open strategies, and the limitation is not present for proprietary strategies.
(*) Technically, Hyperliquid supports perp vaults. Hyperliquid is not decentralised yet.
What's next for you
Trading Strategy is now live. We expect to roll out better-performing strategies quickly after the launch. We have a few strategies lined up.
Please check out the existing strategies, and if they are suitable for your circumstances and risk profile, you may make some small deposits, as we plan to reward early users.
As we are expanding the protocol's capabilities and integrations, we are also reaching out to the ecosystem partners for discussions
- Any perp DEXes that want to integrate automated trading strategies, or have vaults developed for them a la Hyperliquid
- DEXes and lending protocols that want to get market taker volume or new data services
- Wallets and other frontends who could use trading strategies as an additional shared revenue source
What's next for Trading Strategy
Token. The token is next for us.