Fishing for Liquidations.
“Is the bottom in? “Wen bottom?” are probably the most critical questions troubling crypto investors right now. In my short tenure in the market, I have learned that trying to catch the bottom is a futile exercise. More often than not, the market gets the better of you.
Out of numerous technical and on-chain indicators, liquidations are one of the most robust metrics for local or generational bottoms. They mark levels where the last buyers lose hope and forced selling occurs.
Once enough buyers get liquidated, shorting becomes less efficient. Yet, late comers see prices falling and pile up in shorts. Shortly after, the shorts start to go underwater as buyers push prices slightly higher, and a significant bounce happens on shorters’ liquidations. That’s why bottoms are hard to catch: the sentiment is low, and bounces are fast.
Over time, in a negative trending market, buying at liquidation levels can be an effective way to dollar cost average (DCA) into $ETH or other assets rather than buying at specific time intervals. It involves some risk, but it’s the price you pay for being able to snag up cheap coins.
Usually, centralized exchanges or bots in DeFi protocols perform liquidations. What if you could be a part of a liquidation mechanism and liquidate leveraged longs buying assets at a discount? Enter Liquity. It’s a DeFi platform on Ethereum that enables you to participate in the liquidation process passively.
Liquity is a stablecoin lending platform that accepts collateral in $ETH. The minimum collateral ratio on the platform is 110%. Borrowers must deposit at least $110 in $ETH to borrow $100 worth of $LUSD (Liquity’s native stablecoin pegged to USD). If the value of the deposited $ETH falls below $110, the loan is liquidated.
The platform automatically liquidates bad debt via a stability pool. The stability pool buys $ETH from borrowers at a ~9% discount.
During the recent bout of liquidations when $ETH slipped below $1,000, the annual percentage returns (APR) of stability providers surged to over 700%, which is significantly higher for a stablecoin deposit, where rewards are not entirely paid in the platform’s native tokens, but in $ETH from the liquidated accounts.
Source: Dune Analytics
When a loan position (called trove in Liquity) gets closed forcibly, the $ETH collateral is distributed to $LUSD Stability Providers based on what percentage of the stability pool they own.
Liquity’s stability pool currently holds 45.1M $LUSD. If you deposit $1,000 into the pool, it will account for 0.002% of the total pool. If a $100,000 loan gets liquidated, you’ll get (0.00002*100,000 =) $2 worth of $ETH at a discount of equal to or less than 9.09%, depending on how fast the liquidation occured. $2 doesn’t seem like much, but the platform may liquidate dozens or even hundreds of millions of dollars worth of $ETH.
Large amounts of $ETH liquidations on Liquity are lined up below $800. If the downturn continues, stability pool participants will buy $ETH at the bottoms. It is one of the best ways to DCA into $ETH in the present negative trend.
On the other hand, let’s assume that the price has already bottomed out. In that case, you will still earn stability pool fees in $ETH and $LQTY rewards. The stability pool’s lowest APR levels are around 5%, which is decent for a stablecoin.
You can buy $LUSD on Curve.
To stake $LUSD in a stability pool, you can use DeFi Saver. Follow this link and click on the ‘Staking’ option, then choose $LUSD.
Keep in mind that while $LUSD is backed by $ETH, there’s a risk that if something goes wrong with the platform, the stablecoin may lose some or all of its value. This risk is low, but it’s something to keep in mind.
There you have it, an effective and passive way to DCA in $ETH in a negative trending market. Good luck!