Learning Objectives
- Understand impermanent loss (IL) - Calculate IL for liquidity provision under different price scenarios
- Analyze yield farming strategies - Compare risk/reward profiles of DeFi investment options
- Apply portfolio theory to DeFi - Optimize allocations based on risk tolerance and return expectations
- Evaluate protocol risks - Assess smart contract risk, liquidity risk, and market risk
- Make data-driven decisions - Use quantitative analysis to justify investment choices
Context
You are a DeFi portfolio manager with $10,000 USDC to invest. Your goal is to maximize returns while managing risk exposure across multiple DeFi protocols and strategies.
The DeFi ecosystem offers various yield generation opportunities, each with different risk profiles:
- Liquidity provision - Earn trading fees but face impermanent loss
- Lending protocols - Stable yields with smart contract risk
- Staking - Network security rewards with price exposure
- Yield farming - High APR but extreme risk
- Stable holdings - Zero risk but zero return
Your Task
- Allocate your portfolio - Distribute $10,000 across 5 available strategies (portfolio_worksheet.html)
- Calculate impermanent loss - Use the IL formula to determine LP position losses under price changes (il_calculation_guide.html)
- Model 3 price scenarios - Calculate your portfolio returns under:
- Scenario A: ETH +50% (bullish market)
- Scenario B: ETH stable (sideways market)
- Scenario C: ETH -50% (bearish market)
- Justify your strategy - Write 2-3 paragraphs explaining:
- Your risk tolerance and allocation rationale
- Which scenario benefits your portfolio most and why
- How you balanced yield farming vs. conservative strategies
- Present your findings - Prepare a 2-minute summary of your portfolio performance
Available Strategies (5 Options)
| Strategy | APR | Risk Level | Key Risks |
|---|---|---|---|
| ETH/USDC Liquidity Pool | 30% | High | Impermanent loss, smart contract |
| USDC Lending (Aave) | 8% | Low | Smart contract only |
| ETH Staking | 4% | Medium | Price volatility, slashing |
| New Protocol Yield Farm | 100% | Very High | Smart contract, rug pull, token dump |
| Hold USDC (Wallet) | 0% | None | Opportunity cost only |
What to Submit
- Completed portfolio_worksheet.html - Your allocation decisions
- Completed return_calculator.html - Returns for all 3 scenarios
- Written justification - 2-3 paragraphs explaining your strategy
- Oral presentation - 2-minute summary (in-class)
Important Notes:
- Your total allocation must equal exactly $10,000
- You must allocate to at least 2 different strategies (no single-asset portfolios)
- Show all impermanent loss calculations with formulas
- Consider APR as annual return - calculate 1-year returns
- Include price change impact on ETH-denominated positions
Grading Breakdown (50 points)
| Component | Points |
|---|---|
| Portfolio allocation (valid, diversified) | 10 |
| Impermanent loss calculations (correct formulas) | 10 |
| Scenario modeling (all 3 scenarios complete) | 10 |
| Written justification (clear reasoning) | 10 |
| Presentation (clarity and insights) | 10 |
Tips for Success
- Start with risk assessment - Determine your risk tolerance before allocating
- Use the IL guide - The pre-computed table saves time on calculations
- Consider correlations - ETH staking and LP positions both gain/lose with ETH price
- Don't over-optimize - Real portfolios balance risk and return, not just maximize yield
- Show your work - Partial credit requires visible calculations
Real-World Connection
This assignment mirrors actual DeFi portfolio management decisions. Professional yield farmers use similar frameworks to:
- Optimize capital efficiency across protocols
- Hedge impermanent loss with derivatives
- Rebalance based on market conditions
- Assess smart contract risk through audits and TVL
Optional extension: Research one real DeFi protocol (Uniswap, Aave, Lido) and compare actual historical APRs to this assignment's assumptions.
Related Resources
Assignment Resources
© Joerg Osterrieder 2025-2026. All rights reserved.