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Welcome to PyreSwap! - The Long Version

How to Assess Risk and Plan Strategy for PyreSwap’s Incantation WitchVault

How to Assess Risk

The concept of “Active Staking” has not seen widespread use, if any use at all, within DeFi, and should be considered a new invention.

Thus, you should consider that possibly both yourself, and the other participants, view this mechanism as completely foreign, and are not familiar with the risks involved.

To assess risk in The Incantation WitchVault (IWV), there are hypothetically endless factors to consider.

However, the most novel ones, that you are not likely yet familiar with, involve the concept of negative yield and its associated risk(s), which manifest in the form of smoldering.

But smoldering is not the only risk factor to consider!

Factors to Consider

The most important things to understand about risk assessment pertaining to smoldering, the Incantation, and the IWV, include (but are not limited to):

  1. The quantity of participants staking in the IWV per epoch.
  2. The size of staked positions, as well as average positions, and relative proportions.
  3. The cumulative staked amount, along with its relative proportion to the Incantation.
  4. The sequence and timing of staking in the IWV per epoch.
  5. The activity known as “flogging” the IWV, and its likelihood of occurrence.
  6. The activity known as “usurping” the Incantation/IWV, and its likelihood of occurrence.
  7. The Incantation becoming Arcane, and the IWV guarding against new stakers.
  8. Abrupt and bizarre changes to the price of pyreGAS, potentially caused by speculation.
  9. Large and abrupt changes in pyreGAS supply; not reflected [immediately] by chart information.

We will now briefly describe the above list, and how they generally affect risk assessment for the IWV and smoldering.

Quantity of Participants Staking

For every participant staking, at least one smolder must occur. In a scenario where are there are zero current stakers, the first entrant also triggers a smolder, but this smolder does not affect anyone else. However, as the quantity of participants scales, this fact can be negated through approximation. Therefore, the total potential negative yield (also known as the “smolder cap”) can be assumed to be around 0.1% for each staked participant, per epoch. This assumption is not perfectly accurate! Additionally, the only way quantity of future participants can be assessed, is by analyzing the quantity of past participants. Obviously, this will entail a margin of error, which should be taken into consideration.

IWV Position Sizes, Averages, and Proportions

Contrary to other staking mechanisms one might be familiar with in DeFi, the largest IWV position staked is not necessarily the one with the greatest advantage or influence. Rather, since smoldering applies negative yield as a percentage, the largest IWV staker needs to consider that they will suffer the largest reductions due to negative yield. (And exponentially so from flogging.) Additionally, they will be the largest factor in the depression of positive yield.

Therefore, when assessing risk in the IWV, it is primarily necessary to keep your own greed in check. Not only can being the “whale of the witchvault” increase your potential losses, it will also reduce your proportional gains. When assessing risk for the IWV, one can also potentially posit that for the sake of “net yield optimization,” it may actually be most tactical to commonly keep the size of your stake to that of slightly less than the average staked position size, historically.

Cumulative Staked Amount

The positive yield (indicated in the IWV dashboard as EPR, DPR, and APR) is updated at the speed-of-blockchain, with each new staking transaction recorded, along with each new epoch transpiration. It is calculated by measuring the pending amount of pyreGAS to be distributed as Incants to the IWV at the next epoch transpiration, against the total current participant-staked amount, and expresses this ratio as a percentage. This pending amount does not accrue in real-time, but rather is a static token quantity “queued” for the next distribution (Incantation). It is replenished from swap fees, once per epoch. Since the risk profile of the Incantation tends to favor participants staking as late as possible in the epoch, the [ranging] yield (%) that is displayed by the IWV dashboard for the majority of the six (6) hour period prior to the Incantation will possibly not be the same yield (%) that is delivered upon distribution.

When assessing risk in the IWV, it can be necessary to discount the amount of realized positive yield for this reason.

Sequence and Timing of IWV Staking

Consider a scenario where the IWV receives fifty (50) stakes from fifty (50) stakers for a given epoch’s Incantation. The first staker waits until the last minute, and 49 other stakers stampede in behind them prior to the Incantation’s delivery, leaving mere seconds to spare. The first staker, who we can call Staker #1, receives 49 smolderings, and the last staker, Staker #50, receives none. Therefore, negative yield is not distributed evenly among stakers, but rather as a gradient.

Due to the difficulty in prediction of staking sequence among participants, it may be necessary when assessing risk in the IWV, to completely discount the sequential “lateness potential” of your entry timing. It is also considered good practice to assume you will be one of the first to stake, and adjust your exposure and position accordingly for this outcome. If you turn out to be incorrect, this will just manifest as “bonus” net yield in your favor. If you turn out to be correct, you will at least receive the yield you were expecting.

Flogging the IWV

Consider a scenario where the IWV receives fifty (50) stakes, but instead of these 50 stakes coming from 50 stakers, it only comes from two (2). In this scenario, the first staker, who we can call Staker #1, stakes his pyreGAS in the IWV normally, in a single transaction. The second staker, who we can call Staker #2, then decides to stake a tiny “dust” amount of pyreGAS into the IWV forty-eight (48) times in a row, (increasing the staking transaction count in that epoch to 49), before staking in his “real” position at the last second before the delivery of Incants. This strategy smolders Staker #1 a total of 49 times. What Staker #2 has performed here in this scenario is known as flogging the IWV. This is completely legal and valid to do! However, its likelihood of occurrence, as well as its capacity (limited time window) to “inflict” increased negative yield on others, is mitigated not only by the law of diminishing returns, but also the [unpredictable] activity of the other actors, as well as the aggregation of their variegated risk appetites and strategies.

When assessing risk for the IWV, it may be astute of you to assume a proportional baseline of flogging activity is always likely to occur, and mentally discount the displayed positive yield (EPR), and the potential net yield outcome, accordingly. (Studying the history of flogging activity and its frequency using on-chain data will help here.) If you turn out to be incorrect, this will just manifest as “bonus” net yield in your favor. If you turn out to be correct, you will at least receive the yield you were expecting.

Usurping the Incantation

Consider a scenario where the IWV receives fifty (50) stakes from fifty (50) stakers for a given epoch’s Incantation. As you may now have learned, the first staker, also known as Staker #1, has now received smoldering 49 times, while the last staker, Staker #50, received none. At the transpiration of the epoch, the Incants are distributed. As mentioned before, the negative yield from smoldering is distributed along a gradient, that (when measuring net yields) favors later stakers over earlier ones. However, in this scenario, Staker #1 decides that they are going to attempt something unusually risky, to “partially recover” some of their smoldering losses. They are going to, in rapid succession, “claim and unstake” their pyreGAS from the IWV at the first available moment of the new epoch, and then before anyone else claims/unstakes, they are going to stake this new amount of pyreGAS back in, and then claim and unstake again. When assessing risk for the IWV, it is important to remember that unlike other staking mechanisms, your rewards are not “realized,” until the instant you claim them. Meaning, if new stakers enter after rewards are already distributed (but before they are completely claimed), they will, in fact, dilute the Incants by dividing the positive yield reward among a larger staked amount, that wasn’t calculated for at the time of distribution. This, effectively allows them to “usurp” rewards from other stakers, if the other stakers do not realize their gains fast enough, by rapidly claiming their Incants and unstaking at their earliest chance, in the new epoch. This type of strategy is known as usurping, and it can be done with pyreGAS sourced from anywhere, and can even potentially happen accidentally, (due to participants waiting so long to stake that the epoch transpires, and Incants are distributed, before they manage to enter).

When assessing risk for the IWV, mind that claiming and unstaking Incants as rapidly as possible is generally a good practice. Remember that the IWV is an “Active Staking” mechanism. Your rewards are not realized until they are claimed. The occurrence of usurping is mitigated mostly by the actions of the other participants, who chronologically have “first mover advantage” over the usurpers [potentially] diluting rewards, or usurping each other in staking-succession. (In a scenario where the Incantation is Arcane, usurping is an even higher concern to those staked inside the IWV, and is likely to be attempted by a large number of participants, at the first unguarded opportunity.)

Arcane Incantations & Staking Guards

Consider a scenario where, for a given period of time, staking in the IWV is not permitted. The smart contract itself refuses to allow new stakers to take position. The main way this can occur is TWAP (of pyreGAS) being recorded as 1.01 or higher. This is referred to as the Incantation (or the IWV) becoming Arcane. In this usage of the word arcane, we mean “known or knowable to only a few people.” Contrary to the “usual habit” of rapidly claiming and unstaking as soon as Incants are reserved, the IWV being Arcane now incentivizes a drastically different behavior: Staying staked! If no new stakers can enter the IWV for this period of time, this means that no usurping can occur, no flogging can occur, and no smoldering can occur, either.

This means that the net yield of the Incantation is now comprised entirely of positive yield, with no negative yield. And if the majority of stakers rapidly claimed and exited in the first minute of the new epoch from “muscle memory,” the positive yield for the next Incantation will be divided by a potentially much smaller number of participants, and their staked pyreGAS, which will sequentially be that much more rewarding to the stakers who are smart/brave/crazy enough to remain inside.

When the IWV becomes arcane, it can be expected that the majority of the rest of the GPSE community, from all factions, and possibly all chains, will temporarily “unite” in opposition to the coven conclave, which is a collective name for the staker(s) that remain inside the IWV, “protected” from the rest of the participants, and the risk associated with their behavior. The conclave members will be challenged with keeping the TWAP above 1.01 (for the goal of collecting yields from sequential Arcane Incantations over multiple epochs), while the rest of the participants will be very incentivized to crash its price below that, for the purpose of “unlocking” the IWV, (removing its arcane status,) and subsequently also attempting to usurp any reserved Incants from the conclave, at the earliest chance, in the first “unlocked” opportunity.

There is an auxiliary way that a staking guard can be placed on the IWV, and this guard is a “usurper guard” that is meant to block staking for the first 600 seconds of a new epoch. This guard is by default off and is not likely to be exercised, other than for “tutorial and/or troubleshooting” purposes.

Changes in pyreGAS Price

Consider that in the IWV, positive yield is delivered in the exact same token (pyreGAS) that the participants are using to swap (trade), meed, or stake. This positive yield is also comprised of a static “pending” amount of the same token, waiting to be distributed upon the transpiration of epoch. Therefore, when the price of pyreGAS changes, the positive yield changes in direct proportion. Additionally, this means that negative yield is also directly proportional to the price of pyreGAS. Not all participants for a given epoch’s Incantation are “playing.” Some may be “passing” and others “pestering.” The scaling culmination of these variegated activities probabilistically will change the price of pyreGAS, in both directions, virtually all the time.

These price changes can affect your overall return, and when assessing risk in the IWV, it is important to keep that in mind. Historical price behavior may provide insight into how this risk can be mitigated.

Changes in pyreGAS Total Supply

Consider that for an epoch’s worth of time leading up to the next Incantation, participants may be engaging in a variety of behaviors that affect the parameters of pyreGAS. One of these activities is known as “meeding” and this activity has the ability to expand the supply of pyreGAS [by a limited amount] per epoch. While meeding is only available under certain conditions, it can potentially cause a “surprise” surge in supply for pyreGAS. This can lead to disruption and noise on the price chart, over time, or all at once.

When assessing risk for the IWV, it would be astute to forecast the potential circumstances for supply surges of pyreGAS that could jeopardize your strategy or position.

How to Plan Strategy

While the above paragraphs are not comprehensive expositions, they should provide enough context for understanding many of the risks involved with the IWV.

The gestalt of these assessed risks ends up manifesting a generalized “trio” of approaches to Incantation strategy.

The Three Strategies

These three strategies are categorized by the following names:

  • Playing
  • Passing
  • Pestering

Playing

Playing can be described as any and all approaches to the pursuit of claiming Incants as yield. It does not discriminate or differentiate based on mode of pyreGAS acquisition, size of position, or timing of entry/exit to IWV staking. Scenarios where “playing” is not considered viable are generally rare: For example, an arcane IWV. Generally speaking, a participant may decide to “play” when the observed parameters are within their risk appetite, but may deviate to another style when parameters change.

"Playing" can also be used as an autohyponym to describe participating in general, as well.

Passing

Passing can be described as any decision a participant makes to forego playing the Incantation, (meaning the pursuit of claiming Incants,) and is a decision that can be made at any time by a participant, and even reversed. During a given epoch, one might witness a variety of price fluctuations and EPR changes, that cause pursuit of the yield to be “disqualified” according to their strategy, or outside of their risk appetite. In this event, the participant may choose to “pass” instead of playing, in which case they may end up behaving more as a “trading speculator” than as a “staking utilizer.”

Pestering

Pestering can be described as any behavior a participant chooses to engage in that is focused more on the antagonism of other participants, rather than their own individual benefit. (Although the two are not mutually exclusive.) Participants can engage in pestering whenever they choose to, and pestering can be a complement to any “playing” or “passing” strategy, or its own unique style commitment.

Examples of “pestering” include, but are not limited to, deliberate usurping and/or flogging other participants.

The Long Version will be periodically updated throughout PyreSwap's development.