Strategy description

This is a portfolio construction and momentum strategy trading tokens on the Base blockchain.

More clear and accessible explanation of this strategy can be found in this blog post.

Benefits

• Get directional exposure to exciting small-cap onchain token markets
• No need to pick tokens yourself; the strategy will buy all of them
• Small cap memecoins are often uncorrelated with the rest of cryptocurrency markets

Trading rules summary

Trading rules are designed so that the strategy captures the upward momentum of the markets while trying to stay away from the markets and minimise drawdowns.

• Rebalance every four hours
• Buy tokens that are above their local all-time highs
• Dynamically weight between opened positions
• Trade on Uniswap v2 and v3 on Base
• Have minimum TVL and volume criteria to be included in the trading universe
• Use TokenSniffer as a token quality source to filter scams
• Adjust position size based on lit Uniswap liquidity (TVL), to prevent taking oversized positions on limited liquidity tokens
• Earn interest for uninvested for cash by depositing it in Aave lending protocol

The strategy is fully open: the source code is available. For further details, see the strategy source code.

Expected performance

The strategy reflects the performance of small-cap onchain DEX markets, with limited downside.

See backtesting page for historical estimated performance. Past performance is no guarantee of future results. Due to the short history of recently set-up traded onchain markets, there is no backtesting data about market downturns. To check for overfitting, the same trading rules were tested across different markets with longer histories, with varying but not significantly degraded performance.

Risks

This strategy is ultra-high-risk. Only allocate small amounts of capital you may lose. Before investing large amounts of capital, speak with the strategy developers.

This strategy, paired with onchain execution, is the first in the world. Because of the novelty, multiple risks are involved. Consider it beta-quality software.

Trading risk: Small-cap tokens traded are highly volatile, may include rug pulls and other questionable activities. Despite the strategy of automated filtering for tokens, some of the tokens may go to zero. Onchain markets may and many traded tokens go to zero, and are likely to do so at some point. There is little liquidity for these tokens, and trading costs are high, so they may change abruptly.

Technical risk: The strategy relies on ERC-7540: Asynchronous ERC-4626 Tokenized Vaults standard. This standard is new and not yet time-proven. The onchain trade execution contains unaudited smart contracts. There are centralised price oracles. The redemption process relies on a centralised valuation committee.

The strategy includes risk mitigations like:

• Use third-party security services to check the reputation of traded tokens
• Strategy limits position sizes based on the available lit liquidity
• Strategy limits position sizes based on the overall maximum % of the portfolio
• DAO and/or security committee holding multisignature keys can take manual actions in the case of unexpected issues: The strategy can be halted and manually wind up

The technical risks will be mitigated in the future by working with other protocols, by increasing the quality of onchain trading venues, data and decentralisation.

Further information

• Any questions are welcome in the Discord community chat