Evegny Gokhberg: Market neutral DeFi strategies are essential for volatility, why diversification isn’t enough to manage risks, and the future of capital in DeFi | Raoul Pal

2 hours ago 2

Market neutral DeFi yield strategies aim to earn yield without being affected by price direction. Building a business on a market neutral foundation is crucial due to crypto's inherent volatility. In the early days of DeFi, stablecoins could yield significantly high returns.

Key Takeaways

Market neutral DeFi yield strategies aim to earn yield without being affected by price direction.
Building a business on a market neutral foundation is crucial due to crypto’s inherent volatility.
In the early days of DeFi, stablecoins could yield significantly high returns.
The unique risk-return profile in crypto is based on software platform hacks, uncorrelated with traditional assets.
Diversification in DeFi is insufficient alone to effectively manage risks.
DeFi risk is likened to selling a put option, earning returns until a catastrophic event.
A framework can categorize blockchain attack vectors to assess risk and diversify investments.
DeFi’s annual default rate has decreased from double digits to 2-5%.
Engaging with DeFi platforms requires understanding the primary risk of loss from hacks.
The DeFi market remains structurally starved of capital despite new platforms.
Supply and demand dynamics in DeFi will continue to favor allocators.
On-chain trading strategies’ returns vary significantly with market conditions.
Diversification is key in managing risk in on-chain trading strategies.
Holding assets is preferable if they remain structurally sound and communication with the team is strong.
The philosophy of diversification is crucial in the uncertain DeFi landscape.

Guest intro

Evgeny Gokhberg is the founder and managing partner of Re7 Capital, a DeFi hedge fund specializing in market-neutral yield strategies and on-chain risk management. He previously worked in investment management at UBS and Deutsche Bank, managing equity long/short portfolios, before transitioning to crypto in 2018 at Everledger. Re7 Capital has deployed approximately $1.2 billion in DeFi liquidity provision since its founding in 2021.

Market neutral DeFi strategies

Market neutral strategies focus on earning yield without price direction impact.
Think of it as a hedge fund that collects dollars, converts them into stablecoins, and earns yield

— Evegny Gokhberg
Building a business on market neutral foundations is essential due to crypto volatility.
It was scary to base a business on something extremely volatile

— Evegny Gokhberg
Early DeFi days allowed for high stablecoin yields.
You could earn 40% a year on stablecoins in simple ways

— Evegny Gokhberg
The unique risk-return profile in crypto is based on uncorrelated software platform hacks.
Our risk is a random software platform getting hacked, uncorrelated with stocks or bonds

— Evegny Gokhberg
Diversification in DeFi is not enough to manage risks effectively.
Diversification always sells but it’s not enough

— Evegny Gokhberg

Risk management in DeFi

DeFi risk resembles selling a put option, earning returns until a catastrophic event.
It’s like selling a put option; you get paid until your counterparty goes bust

— Evegny Gokhberg
A framework can categorize blockchain attack vectors for risk assessment.
Can we categorize all blockchain attack vectors and create a checklist?

— Evegny Gokhberg
DeFi’s annual default rate has decreased significantly.
Default rates were double digits, now maybe 2-5%

— Evegny Gokhberg
Understanding the risk of loss from hacks is key to engaging with DeFi platforms.
We accept losing money if a DeFi platform is hacked

— Evegny Gokhberg
The DeFi market is structurally starved of capital.
DeFi TVL hasn’t grown since 2021; people are starved of capital

— Evegny Gokhberg

Supply and demand in DeFi

Supply and demand dynamics in DeFi favor allocators.
Supply demand will favor allocators for the foreseeable future

— Evegny Gokhberg
The cyclicality of yields in DeFi impacts performance more than capital demand.
Cyclicality affects P&L more than demand variance

— Evegny Gokhberg
Multiple layers of risk exist when holding crypto assets.
We take three layers of risk: asset, platform, and chain

— Evegny Gokhberg
Convergence of CeFi, DeFi, and TradFi is expected over time.
We’re seeing a convergence of CeFi, DeFi, and TradFi

— Evegny Gokhberg

On-chain trading strategies

On-chain trading strategies’ returns vary with market conditions.
In bull markets, returns can be 25-30%; in bear markets, 5-10%

— Evegny Gokhberg
Diversification is crucial to managing risk in on-chain trading strategies.
Enough diversification prevents single event impacts

— Evegny Gokhberg
The philosophy of diversification is crucial in the DeFi landscape.
DeFi is six years old; we must diversify

— Evegny Gokhberg
The firm aims to remain flat on the year despite volatility.
We want to be at least flat on the year, no matter what

— Evegny Gokhberg

Bitcoin and altcoins

Bitcoin is viewed as digital gold; other crypto are software businesses.
Bitcoin stands alone as digital gold; others are software businesses

— Evegny Gokhberg
Altcoins are undergoing a cleansing process, with most expected to lose value.
99.9% of altcoins should be worth zero

— Evegny Gokhberg
The crypto market resembles early Silicon Valley startups.
Imagine if every Silicon Valley startup was publicly listed on day one

— Evegny Gokhberg
A dual approach of top-down and bottom-up analysis is needed in crypto.
We start top-down and merge it bottom-up

— Evegny Gokhberg

Investment strategies in crypto

Investing in crypto requires balancing established businesses and speculative bets.
Run a barbell of concentrated risk with measurable, understandable assets

— Evegny Gokhberg
In an unforgiving market, patience is better than frequent trading.
In this market, it’s better to be patient and not trade frequently

— Evegny Gokhberg
Holding assets is preferable if they remain structurally sound.
We’ll keep holding if assets are structurally sound and communication is strong

— Evegny Gokhberg
The last part of the market cycle is crucial for altcoin gains.
You need the last part of the cycle to kick in

— Evegny Gokhberg

Market dynamics and liquidity

Investors should approach trading with a clear understanding of risk.
Be clear about your expected risk and avoid overtrading

— Evegny Gokhberg
Compounding gains in crypto is more effective by holding assets.
The way to compound gains is to do nothing

— Evegny Gokhberg
FOMO is a major destroyer of returns in the market.
FOMO is one of the biggest destroyers of returns

— Evegny Gokhberg
Current market volatility may be related to liquidity issues.
I think it’s liquidity-related, but who knows?

— Evegny Gokhberg

Market forecasts and opportunities

There is hope for positive market movement if critical levels are held.
As long as we hold these levels, there’s hope for positive movement

— Evegny Gokhberg
The market shows stability and altcoin outperformance compared to Bitcoin.
Alts are not breaking down versus BTC; there’s stability

— Evegny Gokhberg
The current market resembles small caps versus major stocks.
It’s like small caps versus majors in traditional markets

— Evegny Gokhberg
Investors should not panic sell during market distress.
Don’t panic sell; it’s probably the opposite

— Evegny Gokhberg

Disconnect between fundamentals and price

There is a significant disconnect between DeFi fundamentals and price performance.
There’s a disconnect between fundamentals and price in DeFi

— Evegny Gokhberg
Liquidity is a dominant factor affecting market narratives.
Liquidity impacts market narratives and price movements

— Evegny Gokhberg
Lack of liquidity causes underperformance in software and crypto assets.
Not enough money in the space to maintain performance

— Evegny Gokhberg
Gold’s rise attracts attention away from marginal assets like SaaS stocks and Bitcoin.
Gold’s rise attracts capital, impacting marginal assets

— Evegny Gokhberg

Banking system and leverage

The banking system can create significant leverage through regulatory changes.
Regulatory changes could lead to significant bank leverage

— Evegny Gokhberg
Re-leveraging in the banking system will increase liquidity and impact the business cycle.
Banking re-leveraging will recycle capital through the system

— Evegny Gokhberg
Current market conditions indicate a lack of sufficient liquidity.
The market shows insufficient liquidity, affecting performance

— Evegny Gokhberg
Gold peaks often precede Bitcoin’s performance, indicating potential market shifts.
Gold peaks, then Bitcoin performs; signals are close

— Evegny Gokhberg

Risk tolerance and investment decisions

Risk tolerance is crucial for investment decisions, especially in volatile markets.
Risk tolerance starts with understanding drawdowns

— Evegny Gokhberg
Investors should consider a benchmark like ETH to manage risk.
Use a benchmark like ETH to manage risk effectively

— Evegny Gokhberg
Higher beta assets experience larger drawdowns compared to major crypto.
Higher beta assets have larger drawdowns than major crypto

— Evegny Gokhberg
Investors need to be realistic about their risk tolerance and potential losses.
Ask yourself if you’re willing to bear potential losses

— Evegny Gokhberg

Market corrections and opportunities

The current market correction does not indicate the entire crypto market is broken.
The market looks like a sharp correction within a bull market

— Evegny Gokhberg
The market could change rapidly, but a prolonged downturn is not imminent.
A prolonged downturn doesn’t feel imminent right now

— Evegny Gokhberg
Current market conditions should be viewed as an opportunity, not a signal to abandon.
This is an opportunity, not a sign to abandon the industry

— Evegny Gokhberg
Market noise will ultimately be just that—noise.
Noise in markets will be just that—noise

— Evegny Gokhberg