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Strategy Profitability

Although the Euler UI attempts to provide as clear and transparent visibility into strategy profitability as possible, it is still important to understand and evaluate the different costs and risks that can impact your profits. Here is a partial list of considerations to keep in mind:

Strategy Costs

  • When creating a leveraged position, a swap must be performed to convert the borrowed asset into a collateral asset. Similarly, when unwinding another swap is performed to convert the collateral back into the borrowed asset to repay the loan. This is true no matter if you use the UI's built-in swapping functionality or if you manually loop (borrow, swap, deposit, repeat).
    • Each of these swaps involve costs inherent to swapping. In most cases the largest cost is the price impact. The larger the swap, the worse the average price will be. Depending on the aggregator, the price impact may also include various fees charged by LPs and/or the aggregators themselves. The Euler UI queries many aggregators and selects the one with the best overall quote.
    • Slippage is a user-chosen parameter that specifies a tolerance for a worse execution price than your original quote. The reason to allow a worse price is to prevent swaps from failing due to minor fluctuations in the market in between when you got the quote and when your trade is executed. Selecting the optimal slippage can be challenging. Too large and your transaction might get "sandwiched" by MEV bots that attempt to extract your slippage for their own profit. Too small and your transactions might fail frequently, causing inconvenience and wasted gas.
    • When creating or unwinding a leveraged trade, the swap is performed for the nominal value of your position, which can be a large multiple of your actual capital. This means that price impact, fees, and slippage are roughly multiplied by your leverage, both when setting up and again when unwinding the position. When positions are held for a short period of time, these costs might exceed the actual interest and reward profits.
  • Similar to swapping costs, both setting up and unwinding positions require paying gas, which can impact strategy profitability, depending on network conditions. Again, these costs are more proportionally more significant for shortly-held positions.
  • The quoted interest rates and ROE (Return On Equity) values are snapshots at the current point in time. These values can and will change as market conditions change. Lending/borrowing activity will affect vault utilisation, which changes both the supply and borrow interest rates. Governors can adjust the interest rate models to optimise their market performance. Rewards can expire or be added. If prices move against you or interest accrues too fast, you may be liquidated. Managing the profitability of a strategy involves consistent monitoring and adjustments over time.

Analysis

There are a few complications when analysing strategy profitability:

  • Rewards distributed by Merkl can lag about 8-12 hours. This means that you will not see the full amount of rewards you have earned except immediately after a snapshot is taken. When a position is very new, this can significantly skew your estimates because it may appear as though no rewards have been issued, when in fact they are still pending processing on Merkl's platform.
  • If you're relying on the UI's NAV calculations, be aware that the UI uses market pricing for computing the value of all your assets. Even pegged stable coins are often priced slightly off their pegged value for various reasons. These prices are not necessarily the price you will achieve when you setup or unwind your position, nor are they necessarily the prices used by the contracts for health checks (it depends on the configured oracles).
    • In order to simplify accounting, you may choose to use the actual underlying balance and assume a pegged valuation. To do so, you can hover over the dollar balance of your collateral and/or borrow to see the precise amounts in underlying assets. These will be regularly increasing due to interest, and will not fluctuate according to market pricing as the dollar equivalents will.