Evegny Gokhberg: Market neutral DeFi strategies are critical to volatility, why diversification is not enough to manage risk, and the future of money in DeFi

Key Takeaways

• Market-neutral DeFi production strategies aim to achieve yield without being affected by price manipulation.
• Building a business on a market neutral basis is important because of the inherent volatility of crypto.
• In the early days of DeFi, stablecoins can bring very high returns.
• The unique profile of risk recovery in crypto is based on software platform hacks, which cannot be associated with common assets.
• Diversification in DeFi is not enough on its own to effectively manage risk.
• DeFi risk is comparable to selling a put option, reaping the benefits until a catastrophic event.
• The framework can classify blockchain attack vectors to assess risk and diversify investments.
• DeFi’s annual default rate has dropped from double digits to 2-5%.
• Dealing with DeFi platforms requires understanding the main risk of losses from hacks.
• The DeFi market remains structurally hungry despite new platforms.
• The supply and demand of power in DeFi will continue to favor providers.
• The benefits of an on-chain trading strategy vary greatly with market conditions.
• Diversification is the key to managing risk in chain trading strategies.
• Holding assets is good if they remain structurally sound and team communication is strong.
• The philosophy of diversity is important in the uncertain environment of DeFi.

Guest introduction

Evgeny Gokhberg is the founder and managing partner of Re7 Capital, a DeFi hedge fund specializing in market neutral yield strategies and leveraged risk management. He previously worked in investment management at UBS and Deutsche Bank, managing long/short portfolios, before switching to crypto in 2018 at Everledger. Re7 Capital has invested nearly $1.2 billion in DeFi financing since its founding in 2021.

DeFi strategies are market neutral

• Market neutral strategies focus on achieving yield without the influence of price direction.

• Think of it as a hedge fund that collects dollars, converts them into stablecoins, and earns a yield.

  – Evgeny Gokhberg

• Building a business on a market neutral basis is important because of the volatility of crypto.

• It was scary to base a business on something so volatile

  – Evgeny Gokhberg

• The early days of DeFi allowed for high stablecoin yields.

• You can earn 40% per year on stablecoins in simple ways

  – Evgeny Gokhberg

• The unique risk recovery profile in crypto is based on unrelated software platform hacks.

• Our risk is a random software platform hack, not related to stocks or bonds

  – Evgeny Gokhberg

• Diversification in DeFi is not enough to manage risk effectively.

• Diversity is always sold but not enough

  – Evgeny Gokhberg

Risk management in DeFi

• DeFi risk is like selling a put option, reaping the benefits until a catastrophic event.

• It’s like selling a put option; you lead until your party explodes

  – Evgeny Gokhberg

• The framework can isolate blockchain attack vectors for vulnerability assessment.

• Can we isolate all blockchain attack vectors and create a checklist?

  – Evgeny Gokhberg

• DeFi’s annual default rate has dropped dramatically.

• Default rates were double digits, now maybe 2-5%

  – Evgeny Gokhberg

• Understanding the risk of loss from hacks is key to engaging with DeFi platforms.

• We accept the loss of money if the DeFi platform is hacked

  – Evgeny Gokhberg

• The DeFi market is structurally hungry.

• DeFi TVL has not grown since 2021; people are starving for money

  – Evgeny Gokhberg

Supply and demand in DeFi

• Supply and demand power for DeFi providers is a favor.

• Supply demand will favor suppliers for the foreseeable future

  – Evgeny Gokhberg

• The cyclicality of yield in DeFi has an impact on performance in addition to demand for money.

• Cyclicality affects P&L more than demand variability

  – Evgeny Gokhberg

• There are many layers of risk when holding crypto assets.

• We consider three layers of risk: asset, platform, and chain

  – Evgeny Gokhberg

• Convergence of CeFi, DeFi, and TradFi is expected in the future.

• We are seeing the convergence of CeFi, DeFi, and TradFi

  – Evgeny Gokhberg

Chain trade strategies

• The benefits of chain trading strategies vary depending on market conditions.

• In bull markets, returns can be 25-30%; in bear markets, 5-10%

  – Evgeny Gokhberg

• Diversification is essential to risk management in chain trading strategies.

• Adequate diversity prevents the impact of a single event

  – Evgeny Gokhberg

• The philosophy of diversification is important in the DeFi environment.

• DeFi is six years old; we must separate

  – Evgeny Gokhberg

• The company aims to remain flat for the year despite the volatility.

• We want to be at least flat for the year, no matter what

  – Evgeny Gokhberg

Bitcoin and altcoins

• Bitcoin is considered digital gold; some crypto software businesses.

• Bitcoin stands alone as digital gold; other software businesses

  – Evgeny Gokhberg

• Altcoins are going through a purge process, and most are expected to lose value.

• 99.9% of altcoins should be zero

  – Evgeny Gokhberg

• The crypto market is like the early Silicon Valley startups.

• Imagine if all Silicon Valley startups were listed publicly on day one

  – Evgeny Gokhberg

• A dual approach to bottom-up and top-down analysis is needed in crypto.

• We start from the top-down and put it together from the bottom-up

  – Evgeny Gokhberg

Crypto investment strategies

• Investing in crypto requires balancing established businesses with speculative bets.

• Start a focused risk barbell with measurable, understandable assets

  – Evgeny Gokhberg

• In an unforgiving market, patience is better than casual trading.

• In this market, it is better to be patient and not trade too often

  – Evgeny Gokhberg

• Holding goods is good if they remain structurally sound.

• We will continue to hold if the goods are structurally sound and the communication is strong

  – Evgeny Gokhberg

• The latter part of the market cycle is critical to altcoin profitability.

• You need the last part of the cycle to enter

  – Evgeny Gokhberg

Market power and liquidity

• Investors should approach trades with a clear understanding of risk.

• Be clear about risk expectations and avoid over-trading

  – Evgeny Gokhberg

• Compounding gains in crypto works best by holding assets.

• The way to compound the benefits is to do nothing

  – Evgeny Gokhberg

• FOMO is the biggest destroyer of returns in the market.

• FOMO is one of the biggest destroyers of returns

  – Evgeny Gokhberg

• The current market volatility may be related to credit issues.

• I think it has to do with liquidity, but who knows?

  – Evgeny Gokhberg

Market forecasts and opportunities

• There is hope for good market movement if key levels are held.

• As long as we hold these levels, there is hope for a positive move

  – Evgeny Gokhberg

• The market shows the stability and performance of altcoin compared to Bitcoin.

• Alts don’t break compared to BTC; there is stability

  – Evgeny Gokhberg

• The current market is more like small stocks versus large stocks.

• It’s like small caps versus majors in traditional markets

  – Evgeny Gokhberg

• Investors should not be afraid to sell during market depression.

• Don’t be afraid to sell; maybe it’s the opposite

  – Evgeny Gokhberg

Break down between the basics and the price

• There is a significant disconnect between DeFi fundamentals and price performance.

• There is a disconnect between fundamentals and prices in DeFi

  – Evgeny Gokhberg

• Liquidity is the main factor affecting the market narrative.

• Liquidity affects market dynamics and price movements

  – Evgeny Gokhberg

• The lack of money causes inefficiencies in crypto software and assets.

• There is not enough money in the storage space to operate

  – Evgeny Gokhberg

• Gold’s rise is drawing attention away from illiquid assets like SaaS stocks and Bitcoin.

• The increase in gold attracts money, affecting the small property

  – Evgeny Gokhberg

Banking system and profit

• The banking system can create greater capacity through regulatory reforms.

• Regulatory changes can lead to huge profits for the bank

  – Evgeny Gokhberg

• Reusing the banking system will increase liquidity and impact the business cycle.

• Re-use of bank money will be re-use of money through the program

  – Evgeny Gokhberg

• Current market conditions indicate a lack of sufficient funds.

• The market shows insufficient capital, which affects performance

  – Evgeny Gokhberg

• Gold peaks often precede Bitcoin’s performance, indicating potential changes in the market.

• Gold peaks, then Bitcoin does; the signs are close

  – Evgeny Gokhberg

Risk tolerance and investment decisions

• Risk tolerance is important in investment decisions, especially in volatile markets.

• Risk tolerance starts with reducing awareness

  – Evgeny Gokhberg

• Investors should consider a benchmark like ETH to manage risk.

• Use a benchmark like ETH to effectively manage risk

  – Evgeny Gokhberg

• High beta assets get a big drawdown compared to major cryptos.

• High beta assets have bigger problems than major crypto

  – Evgeny Gokhberg

• Investors need to be realistic about their risk tolerance and potential losses.

• Ask yourself if you are willing to bear the potential loss

  – Evgeny Gokhberg

Market adjustments and opportunities

• The current market correction does not indicate that the entire crypto market is broken.

• The market looks like a sharp correction within a bull market

  – Evgeny Gokhberg

• The market can change quickly, but a long-term decline is not imminent.

• A long-term decline doesn’t sound imminent right now

  – Evgeny Gokhberg

• Current market conditions should be viewed as an opportunity, not a signal to give up.

• This is an opportunity, not a sign to abandon the industry

  – Evgeny Gokhberg

• Market noise will ultimately be just that—noise.

• The noise in the markets will be just that—noise

  – Evgeny Gokhberg