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Strategy Profitability

Understanding the true profitability of your Euler strategies requires careful consideration of various factors beyond the surface-level returns. While the Euler interface provides clear visibility into your positions, it's crucial to understand how different costs and market dynamics can impact your actual profits.

Understanding Strategy Costs

When you create a leveraged position on Euler, you'll encounter several types of costs that can significantly impact your strategy's profitability. The most significant of these are swap-related costs, which occur both when setting up and unwinding your position.

Swap Costs​

Every leveraged position requires at least two swaps: one to convert your borrowed asset into collateral when creating the position, and another to convert collateral back to repay your loan when unwinding. These swaps come with several cost components:

  1. Price Impact: The larger your swap size, the worse your average execution price will be. This is because you're moving the market with your trade. The Euler interface helps mitigate this by querying multiple aggregators to find the best overall quote.

  2. Swap Fees: Each swap incurs a fee from the underlying DEX or aggregator. These fees typically range from 0.05% to 0.3% of the swap amount, depending on the protocol and pool used. Like other swap costs, these fees are amplified by your leverage.

  3. Slippage Tolerance: This is your chosen tolerance for price movement between quote and execution. Setting this parameter requires careful consideration:

    • Too high: Your trade might be vulnerable to MEV bots
    • Too low: Your transactions might fail due to normal market fluctuations

  4. Leverage Amplification: Remember that swap costs are applied to your position's nominal value, not just your initial capital. This means that with 5× leverage, your swap costs are effectively multiplied by 5, both when entering and exiting the position.

Gas Costs​

Network conditions can significantly impact your strategy's profitability through gas costs. These costs are particularly important to consider for:

  • Short-term positions where gas costs might exceed profits
  • Positions that require frequent rebalancing
  • Strategies that involve multiple transactions

Dynamic Rate Environment​

The interest rates and ROE values you see in the interface are snapshots of the current market conditions. These values can change due to:

  • Changes in vault utilization
  • Adjustments to interest rate models by governors
  • Modifications to reward programs
  • Market volatility affecting asset prices

Analyzing Your Strategy

When evaluating your strategy's performance, there are several factors to keep in mind:

Reward Timing​

Merkl-distributed rewards typically lag by 8-12 hours. This means that new positions might appear less profitable than they actually are, as pending rewards haven't been processed yet. It's important to wait for a complete reward cycle before making final profitability assessments.

Price Considerations​

The UI's Net Asset Value (NAV) calculations use market prices, which can differ from:

  • The actual prices you'll receive when executing trades
  • The prices used by the protocol for health checks
  • The pegged values of stablecoins

For more accurate accounting, you can:

  1. Hover over your position's dollar balance to see the precise underlying asset amounts
  2. Use these underlying balances for calculations, assuming pegged values for stablecoins
  3. Track interest accrual through the increasing underlying balances

Best Practices

To maximize your strategy's profitability:

  1. Monitor Market Conditions: Keep track of:

    • Changes in interest rates
    • Updates to reward programs
    • Market volatility affecting your assets

  2. Optimize Entry and Exit: Consider:

    • Market depth for your swap sizes
    • Gas costs relative to expected returns
    • The impact of leverage on swap costs

  3. Risk Management: Always maintain:

    • Adequate health factor buffers
    • Awareness of liquidation risks
    • Understanding of your position's sensitivity to rate changes

  4. Long-term Perspective: Remember that:

    • Short-term positions are more sensitive to setup costs
    • Reward programs may change over time
    • Market conditions can significantly impact returns