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Smilee: A Guide To Embracing Volatility With A Smile

April 18, 2024

In conclusion

The main version of the Smilee protocol is now officially live on the Arbitrum network, and we can definitely smell what they’re cooking! Over 1,000x leverage for you volatility enjoyoors!

If you read our previous article on Smilee, the meal that’s been prepped is surely not strange to your taste buds! However, if this sounds like a bunch of strange kitchen fetish or innuendos, then we suggest taking some bit of time to go over it to grasp what Smilee Finance is all about.

Nonetheless, for you lazy apes, we’ll first start with a quick refresher on what Smilee is.

What is Smilee Finance?

Smilee is a first-of-its-kind protocol in the sense that it is pioneering a new primitive known as decentralized volatility products (DVPs). DVPs allow traders or degenerates like you and me to trade various types of volatility products, with the first derivative being the impermanent gain.

The impermanent gain product is two-faceted: There is the “Trade” side of it and the “Earn” side (liquidity provision) of it.

For traders, impermanent gain offers a distinctive exponential payoff structure. The system rewards traders increasingly as they make more accurate predictions. The payoff structure is based on the direction of asset price with respect to impermanent loss in a liquidity pool. The trader has three options on the direction of the asset’s price and pays a premium to trade them:

  • The IG BULL — In this scenario, the trader is long the underlying asset's price (LP), thereby betting on an upward price movement.
  • The IG Bear - Here, the trader is short the price of the underlying asset (LP), thereby betting on a downward price movement
  • The Smile - Here, the trader bets on a volatile price movement irrespective of the direction. This is achieved by purchasing both IG Bull and IG Bear.

For liquidity providers, there is an opportunity to earn trader premiums, volatility AMM bid-ask spreads, and atomic delta hedge as real yield by depositing an asset and earning the yield in USDC.  

At the moment, there are four asset pairs that traders and LPs can feast on:

  • wBTC/USDC
  • wETH/USDC
  • ARB/USDC
  • GMX/USDC

On the side, we have it in good authority that there are considerations for more asset pairs we might see on Smilee, some of which are: JOE, GRAIL, PENDLE, RADIANT, and LINK.

Nonetheless, understanding what Smilee offers is one thing, but the real excitement lies in immersing yourself in the dining experience and indulging in the incredible opportunities it offers. To truly partake in this feast, you'll need to grasp how to navigate the protocol practically, with a dose of trading strategies to go with.

How to use Smilee

Start using Smilee by navigating to the dApp: app.smilee.finance

  • Proceed to connect your wallet – ensure the network is set to Arbitrum.
  • Make sure to read and accept the conditions before connecting. To accept, we recommend clicking on “Accept all”
  • Having connected, we advise you to hide sold-out items by clicking on the eye icon to the left of your screen in order to view ongoing trades.  

You can also compare pairs and their performance by clicking the compare button in the middle right of the screen, as seen below.

Switch between trading options to compare.

Trade

Trading on Smilee involves going short, long, or delta an asset’s price action in a liquidity pool.

  • To go long, simply select any of the available assets you wish to trade with a “Bull” suffix attached to it (e.g., WETH BULL)
  • To go short, simply select any of the available assets you wish to trade with a “Bear” suffix attached to it (e.g., wBTC BEAR)
  • To go delta neutral or long gamma, simply select any of the available assets you wish to trade with a “Smile” suffix attached to it (e.g., GMX SMILE)

To buy:

  • Select the pair of choice in the Bear, Bull, or Smile section. (For example, ARB BEAR)
  • Click on “Buy” (Ensure you have sufficient USDC on Arbitrum)
  • Proceed to insert the amount of “Lots” you intend to purchase.

It is important to note that the amount of Lots you purchase determines the premium value of your position.

  • As seen below, you will receive an ERC721 token (NFT) as a receipt for your position.
  • Proceed to confirm the transaction on your wallet.

To sell:

  • Click on the sell icon as shown below.
  • Proceed to input the amount of lots you intend to sell. To sell all, simply click on ‘max.’
  • Your token will automatically be deposited into your wallet.

It is important to note that selling a position automatically burns the ERC721 NFT that was minted in the buying phase.

Earn

Earning on Smilee involves providing liquidity using USDC to any of the pools available to earn real yield.

To earn:

  • Click on the toggle icon at the top left of the screen and proceed to the “Earn” section.
  • Select any pair of choice and click on “Deposit.”
  • Proceed to select the amount you intend to deposit.
  • Click on “Deposit.”
  • Approve the deposit on your wallet, and you will successfully create an earn position.

To view positions:

  • Click on the toggle icon at the top left of the screen and proceed to the “position” section.
  • All your active positions will be displayed in the ‘active’ section, and the expired ones will be displayed in the ‘expired’ section.

Some Trading strategies using Smilee

Trading Smilee's impermanent gain offers several strategies that may seem like a no-brainer for savvy individuals eager to seize the opportunity. Let's delve into a few of these strategies.

With Smilee's impermanent gain, you can take long or short positions on volatility in asset prices without the fear of liquidation risk. The only risk is the potential loss of the premium placed in a particular direction if the token doesn’t move enough in the right direction. This setup presents an enticing chance to use Smilee's no-liquidation feature to hedge against trades made on another platform.

For instance, consider pairing GMX with Smilee: By trading GMX perp with leverage set to match the liquidation point with Smilee's breakeven, you can go long on the asset with GMX and purchase a bearish position with Smilee. With just a small investment, you secure coverage for potential liquidation events.

Another effective strategy or application for Smilee's impermanent gain is using it as a hedge against token unlocks. Token unlock events typically carry a bearish sentiment, but there's often uncertainty regarding how the market will react. Instead of immediately selling your assets, you could hedge against this uncertainty by taking a long position on a bearish outcome with Smilee. This way, you can potentially benefit from volatility as the market fluctuates.

We also like this trade idea by Tempesto on how to use implied volatility (IV) and realized volatility (RV) as indicators to trade Smile impermanent gain on Smilee – which is basically a delta-neutral strategy for trading volatility. For this idea, the trader tracks IV and RV to buy Smile IG when IV falls below RV and then sells it in the reverse scenario.

Berachain deployment & Incentives

Beyond Arbitrum, Smilee’s volatility trading hub will also cook on Bera’s artio alongside a points program dedicated to rewarding early users of the platform on Berachain.

We recommend looking into this published article to understand why Smilee and Berachain are like bread and butter as well as find out if you are eligible to claim the Smilee on Berachain Artio Access Pass + points.

Dessert

If you are constantly getting burned by the market’s price action trading shitcoins or slurping liquidations using leverage (no thanks to liquidity hunts), we recommend pivoting to trading volatility instead through Smilee’s impermanent gain product. There is literally almost nothing to lose. You don’t get liquidated.

In addition, you get to possibly farm rewards at the same time.

As this market gets increasingly sophisticated, leaving us 50 IQ apes by the wayside, Smilee has entered to make our lives easier.

Instruments that are often complicated and intimidating are now incredibly easy to use and welcoming. Whether you want to hedge your trades, take short-term bets, or trade volatility, Smilee has you covered.

Never has sophistication looked so simple. Don’t fade Smilee anon.

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