Strategy Algorithms

A Volatility-Based Approach

Volatility is a fundamental aspect of any market. It not only affects crypto, but all traded assets across various classes. Volatility plays a crucial role in determining prices, and by measuring volatility over time we get closer to defining a market’s behavior.

This data-driven approach can be used in several different applications.

While the use case in traditional markets is to assist in guiding risk management and improving the accuracy of trading, it can also be used to determine a potential price range for any concentrated liquidity trading pair. By examining volatility, it is possible to determine very efficient ranges in which you can provide liquidity.

From our research, we can derive the following:

• Volatility in crypto tends to be clustered and cyclical.

• Volatility in crypto has been trending down over time.

• After volatility settles on a cycle’s local bottom, it tends to spike up ~50%.

The cyclical nature of volatility goes hand-in-hand with the cyclical nature of market trends.

Volatility In Practice

In a practical application, standard deviation will normally be measured on a long time frame, with the additional measurement of a shorter standard deviation based on 1/10th of the long time frame above.

This second standard deviation, based on short term volatility, will always be compared against the annualized volatility calculated on the longer term volatility. In the case of a rebalance, the algorithm chooses the higher standard deviation amount between the two. This will help these strategies encapsulate short term volatility moves that might transform in a sustained trend not predicted with a longer time frame.

Using this method, there is an overall hedge on the blended time windows that doesn’t sacrifice yield: with a small range increase of 10-12% using standard deviations derived from short term volatility, strategies experience around 20% less rebalances.

Strategy Taxonomy

Users will be able to choose from four vault types:

1. Range Assist Wide

2. Range Assist Narrow

3. Bull

4. Bear

All vault types operate on an automatic rebalance method that triggers once a target price is deviated from. The difference between the vaults really comes down to how liquidity is concentrated around the price.