Playing a Less Bullish Tune: Buying & LP the oSQTH-ETH pair

Asking Better Questions

To understand DeFi, we must ask better questions.

The statement above will guide the remainder of this article. It will ground our understanding of Squeeth as a tool (or “instrument”), and how it functions in the context of LPing.

In the spirit of better questions, let me begin by humbling myself. When writing this blog post, I kept asking: how can I make LPing easy to understand?

That is a bad question. Indeed, the Uniswap Docs answer standard LP questions better than I ever could. Instead, I should’ve been asking myself: What is Squeeth?

By asking this question, I learned that when people think about Squeeth (ETH²), they automatically think about long Squeeth, which is uber bullish ETH exposure. And sure, in its rawest form, buying the oSQTH token and HODLing is an ETH-maxi degen play: this buyer is betting on explosive ETH growth.

However, the beauty of Squeeth is that it is an instrument, and long Squeeth is only one of its tunes.

Today’s tune is “squeeth-lite.” It turns out that buying and LPing the oSQTH-ETH pair has a similar payoff profile of ETH ^ 1.5 (ignoring trading fees & funding).

To explain Squeeth LPing, I had to ask a series of better questions. This includes a question for you, reader. With that, I ask: What do you think the price of ETH will be in one month? How about two? What about in a year?

Armed with these answers, we are ready to begin.

How Can We Abstract The Math?

When the giga-brain Opyn researchers told me the payoff of LPing oSQTH-ETH is similar to ETH¹.5, I realized they must have done some math to figure that out. I am not very big on math. Thankfully, the heavy lifting has already been done, and we can speak about it on a higher level. So, where do we get ETH¹.5x?

It comes from Uniswap. The value of any Uniswap pool is the square root of the product of the two tokens:

sqrt(ETH² * ETH) = ETH ^ 1.5

If you’re curious about a more mathematically sound explanation of this, go read this banger article by Opyn Researcher Andrew Leone.

What Else Affects My Payoffs?

Good question. When someone makes markets via Uniswap, they are at risk of impermanent loss (IL). The TLDR of IL is that market makers will be left with more of the worst performing tokens in the pair. The risk of IL with oSQTH-ETH is the same as other token pairs. However, there is another layer to oSQTH-ETH that should be considered: funding, which could impact you positively or negatively.

If you are unfamiliar with funding, it’s what longs pay to shorts for the right to convex (non-linear) returns. As I mentioned before, an LP is left with more of the worst performing token. Therefore, if oSQTH price is going down, the LP gets longer oSQTH which exposes them to larger amounts of funding (meaning, they have to pay more in funding because they are holding more oSQTH tokens). However, the inverse is true: the LP gets less long oSQTH as oSQTH rises, reducing funding exposure.

Again, because of in-kind funding, oSQTHs token price adjusts downwards. Therefore, strong ETH appreciation is ideal (as that will lead to stronger performance of oSQTH and “make up” for loses due to funding).

The graph below illustrates the relationship between buyers of long squeeth and LP’s:

What Is The Best-Case Scenario?

This is a nuanced question, and it varies depending on your goals. If you want to make money in USD terms, the best-case scenario is that ETH increases in price, and strong trading volumes to capture trading fees that ideally make up for IL.

Concluding Thoughts

In the introduction of this article, I asked you what your ETH predictions are for a series of time intervals. The best person to buy & LP Squeeth is bullish on ETH in the short/medium-term future, but not as bullish as those paying for long Squeeth exposure.

To note, this is not investment advice. And it never will be. Instead, it is an educational piece designed to get us to ask better questions about DeFi, starting with Opyn’s Squeeth.

As always, feel free to come vibe with us in our discord tiny.cc/opyndiscord and ask questions.