When it comes to understanding perpetuals, everyone in the know will send you Dave White’s Cartoon Guide to Perps. Something about cartoon Dave (and his pal Perpus cryptoeconomicus) just clicks with people.
The popularity of his cartoon guide inspired me to create my own. So, without further ado, there’s a new (and less visually appealing) cartoon duo in town: Regan and Ms. Crabulous.
This post will cover everything you need to know about the Crab Strategy by Opyn. And, along the way, you’ll get to see some…interesting cartoons.
What is the Crab Strategy?
The Crab Strategy is an automated vault strategy that allows users to collect yield by shorting Squeeth. Users can enter the vault with USDC and their USDC is converted into a mix of ETH collateral and oSQTH debt.
A key benefit of using the vault (instead of shorting Squeeth yourself) is that users can collect funding without taking a directional bet on ETH. Short squeeth is betting on ETH price dropping, whereas Crab takes the position that ETH will trade sideways (not move significantly up or down).
Therefore, the Crab strategy makes money when the price of ETH moves within a relatively stable range. This range is determined by how expensive oSQTH is relative to the Squeeth index (which is just ETH²). The strategy is betting on ETH not being volatile (short volatility). High ETH volatility causes the crab to lose money (in dollar terms) but stack more ETH. So, although down in dollar terms in a bear market, the vault is up in ETH terms. However, to truly “stack” this ETH the user must exit the vault before ETH goes back up (because then the vault will sell off ETH).
So, what bet is the Crab strategy really taking? Well, Crab is betting that buying Squeeth is expensive (implying high volatility) relative to what traders are pricing volatility at on Deribit (primary ETH options trading platform). Therefore, assuming Deribit pricing is roughly correct, Crab is expected to make money.
The Mechanics of the Vault
The vault itself is a mix of oSQTH debt (short oSQTH) and ETH collateral (long ETH). The goal of the vault is to maintain as little exposure to ETH as possible. So, once a day, the vault checks the price of ETH.
To note, the rebalance is only concerned with what the price of ETH is at the time of rebalancing. Therefore, price swings during that 24 hours do not impact profitability–only where ETH is when the rebalance occurs. This graphic may explain it best:
Depending on how much ETH moved, the strategy will rebalance its position. The general position of the vault is short Squeeth, long ETH, locally no exposure to price of ETH. If the price of ETH moves down (since last rebalance), the strategy will mint & sell oSQTH & buy ETH. If the price of ETH goes up (since last rebalance) the Sell ETH buy and burn oSQTH.
To note, the Crab Strategy can be at risk of liquidation if it falls below the safe collateralization threshold. Although unlikely, it’s still an important risk to note.
My very intelligent colleagues also write about the Crab Strategy (but no Ms. Crabulous in their articles–sorry). Still, they are worth a read as they take a more technical outlook on Crab: