Assignment Overview

Duration: 60 minutes in-class

Format: Individual work followed by presentations

Prerequisites: Students should understand:

  • Basic DeFi concepts (AMMs, lending protocols, staking)
  • Risk-return trade-offs in finance
  • Portfolio diversification principles

Materials Needed:

  • Printed worksheets (instructions, portfolio_worksheet, il_calculation_guide, price_scenarios, return_calculator)
  • Calculators or spreadsheet software
  • Timer for presentations

Recommended Class Timeline (60 minutes)

0-5 min: Introduction
  • Distribute materials
  • Review learning objectives
  • Clarify that this mirrors real DeFi portfolio decisions
5-10 min: Guided IL Walkthrough
  • Walk through one IL calculation together (Scenario A)
  • Emphasize students can use the pre-computed table
  • Show how to combine IL + APR + price impact
10-40 min: Student Work Time
  • Students allocate portfolios and calculate returns
  • Circulate to answer questions and catch common errors
  • Give 10-minute warning at 30 minutes
40-55 min: Student Presentations
  • 6-8 volunteers present (2 min each)
  • Select diverse risk profiles (conservative, balanced, aggressive)
  • Ask follow-up questions to clarify reasoning
55-60 min: Debrief
  • Discuss key takeaways as a class
  • Connect to real-world DeFi protocols
  • Preview next lesson on advanced DeFi topics

Pro Tips for Facilitation

  • Start with a live demo: Project the portfolio_worksheet.html and show how to allocate $10,000 across strategies. This visual helps students understand the task.
  • Normalize using the IL table: Tell students "You're welcome to calculate IL from scratch, but the table is provided to save time and reduce arithmetic errors."
  • Encourage diversity: Say "There's no single 'right' answer - your allocation should reflect YOUR risk tolerance."
  • Walk through one scenario together: Before students work independently, calculate Scenario A as a class using a sample $5,000 LP allocation. This builds confidence.
  • Use strategic questioning: When circulating, ask "What happens to your ETH staking position if ETH drops 50%?" to prompt critical thinking.

Common Student Mistakes (and How to Address Them)

Mistake #1: Applying IL to All Strategies

What happens: Students calculate IL for ETH staking, USDC lending, etc.

Root cause: Misunderstanding that IL only applies to liquidity provision in two-sided pools.

How to fix:

  • Remind students: "IL only happens when you provide liquidity to a trading pair like ETH/USDC."
  • Ask: "Does USDC lending involve holding two assets in a pool? No? Then no IL."

Mistake #2: Wrong Price Exposure for LP

What happens: Students treat ETH/USDC LP as 100% ETH exposure.

Root cause: Forgetting LP is 50/50 split (half ETH, half USDC).

How to fix:

  • Clarify: "When you put $5,000 in ETH/USDC LP, it's split into $2,500 of ETH + $2,500 of USDC."
  • Show: "So if ETH goes +50%, your ETH portion gains +50% but USDC stays flat. Average gain = +25%."

Mistake #3: IL Sign (Positive Instead of Negative)

What happens: Students write IL as +2.02% instead of -2.02%.

Root cause: Confusion about what IL represents.

How to fix:

  • Emphasize: "Impermanent LOSS is always negative. You're losing relative to just holding."
  • Reminder: "The formula gives a negative number. If you got positive, check your math."

Mistake #4: Forgetting to Add APR

What happens: Students calculate IL and price impact but forget the 30% LP trading fees.

Root cause: Focusing on the complex (IL) and missing the simple (APR).

How to fix:

  • Checklist: "For every strategy, did you calculate the APR yield?"
  • Explain: "The 30% APR is WHY people tolerate IL - fees usually outweigh the loss."

Mistake #5: 100% Allocation to Yield Farm

What happens: Students put entire portfolio in 100% APR strategy.

Root cause: Chasing yield without considering risk.

How to address:

  • Don't penalize, but probe: "What risks are you taking with this allocation?"
  • Follow-up: "Would you actually do this with your own money? Why or why not?"
  • Teaching moment: "In real DeFi, many 100% APR farms have failed. High yield = high risk."

Mistake #6: Total ≠ $10,000

What happens: Allocations sum to $9,500 or $11,000.

Root cause: Arithmetic error or misunderstanding the constraint.

How to fix:

  • The interactive HTML has auto-validation - make sure students use it!
  • If using paper: "Add up your allocations before moving to calculations."

Discussion Prompts for Debrief

Use These to Spark Class Conversation

  1. "Who had the highest return in the bull market? What was your strategy?"
    • Look for students with heavy ETH exposure (staking or LP)
    • Discuss: Did they get lucky or did they analyze the upside correctly?
  2. "Did anyone stay profitable in ALL three scenarios? How?"
    • Highlight conservative portfolios (50%+ USDC lending)
    • Discuss: What did they sacrifice to achieve downside protection?
  3. "Why might someone choose 30% APR ETH/USDC LP over 100% APR yield farm?"
    • Target answer: Risk management, protocol maturity, audit status
    • Connect to real DeFi: "Uniswap is battle-tested, new farms are experiments"
  4. "What surprised you most about impermanent loss?"
    • Common answer: "It's smaller than I expected" (because 30% APR covers it)
    • Probe: "When would IL become a serious problem?" (Answer: extreme price moves)
  5. "If you could rebalance your portfolio based on market conditions, would you?"
    • Discuss active vs. passive management
    • Real-world: Many DeFi users rebalance based on market sentiment
  6. "Would you change your allocation if the time horizon was 1 month vs. 1 year?"
    • Shorter horizon → less time to earn APR → IL matters more
    • Longer horizon → more fees accumulated → IL matters less

Real-World Connections

Connect assignment concepts to actual DeFi protocols:

Assignment Strategy Real-World Protocol Current APR (Approx.)
ETH/USDC LP (30%) Uniswap V3, Curve, Balancer 5-20% (varies by pool depth)
USDC Lending (8%) Aave, Compound, MakerDAO 3-10% (varies by utilization)
ETH Staking (4%) Lido, Rocket Pool, Coinbase 3-5% (Ethereum consensus rewards)
New Protocol (100%) Early-stage DeFi 2.0 projects 50-1000% (unsustainable, often crashes)

Optional homework extension: Ask students to research one real DeFi protocol and compare its actual APR, TVL, and audit status to the assumptions in this assignment.

Important Notes on APR Assumptions

The APRs in this assignment (30%, 8%, 4%, 100%, 0%) are simplified for pedagogical purposes. In reality:

  • LP APRs vary wildly based on trading volume, pool depth, and fee tiers (Uniswap V3 has 0.01%, 0.05%, 0.3%, and 1% fee tiers)
  • Lending rates fluctuate with utilization (Aave USDC can range from 1% to 15%)
  • Staking rewards are relatively stable around 3-5% for Ethereum
  • High-yield farms are temporary and often collapse after token emissions stop

Tell students: "The APRs here are illustrative. In real DeFi, you'd check current rates on DeFi Llama or protocol dashboards."

Adapting This Assignment

For shorter class periods (45 min):

  • Pre-assign portfolio allocation as homework
  • Use class time only for calculations and presentations

For online/asynchronous delivery:

  • Students record 2-minute video presentations
  • Use discussion board for portfolio sharing and peer feedback

For advanced classes:

  • Add leverage (borrow to increase position size)
  • Include hedging strategies (e.g., buying ETH put options)
  • Model gas fees and slippage

For introductory classes:

  • Remove yield farm option (too complex)
  • Provide pre-filled IL calculations (focus on allocation decisions only)

Assessment Calibration

What constitutes an "A" portfolio?

  • Valid allocation ($10,000 total)
  • Correct IL calculations (using formula or table)
  • All 3 scenarios modeled
  • Clear written justification that shows understanding of risk/reward
  • Confident presentation with insights

Key insight for grading: There is no objectively "correct" portfolio allocation. A conservative portfolio (80% USDC lending) can earn the same grade as an aggressive one (60% ETH staking) if both are well-justified.

What to penalize heavily:

  • Fundamental misunderstandings (e.g., applying IL to non-LP strategies)
  • Missing entire scenarios
  • No written justification or copy-pasted from classmates

What to reward:

  • Clear articulation of trade-offs ("I sacrificed upside for stability")
  • Recognition of real-world DeFi protocols
  • Creative risk management (e.g., "I'd rebalance based on ETH price momentum")

Troubleshooting Common Class Issues

Issue: Students finish calculations in 20 minutes and get bored

  • Have "extension challenges" ready: "Calculate returns for ETH +100%", "Add a 6th strategy: BTC/USDC LP (25% APR)"
  • Ask them to help struggling classmates (peer teaching)

Issue: Students struggle with IL formula despite the guide

  • Point them to the pre-computed table: "Just use the -2.02% and -5.72% values from the table"
  • Reassure: "The learning goal is understanding WHAT IL is, not memorizing square roots"

Issue: Presentations run over time

  • Use a visible timer (project on screen)
  • Give 30-second warning
  • If time is tight, have students present in pairs or small groups instead of to the whole class

Issue: Students ask about real-world protocols you're unfamiliar with

  • It's OK to say "I'm not familiar with that specific protocol - let's look it up together"
  • Use DeFi Llama (defillama.com) to check current TVL and APRs in real-time
  • This models curiosity and continuous learning

Closing Reflection Questions

End the class with one of these:

  1. "What's one thing you learned today that you didn't know before?"
  2. "Would you actually invest in DeFi based on what you learned? Why or why not?"
  3. "How does DeFi yield farming differ from traditional savings accounts or stock investing?"
  4. "What questions do you still have about DeFi that we didn't cover today?"

Follow-Up Lesson Ideas

This assignment naturally leads to:

  • Lesson on smart contract risk: Discuss audits, exploits (e.g., Rari Capital, Cream Finance)
  • Lesson on token economics: Why do yield farms offer 100% APR? (Token emissions and dilution)
  • Lesson on advanced DeFi: Leveraged yield farming, auto-compounding vaults, options strategies
  • Guest speaker: Invite a DeFi protocol founder or professional yield farmer
  • Simulation project: Have students track a real $100 paper portfolio over 4 weeks

© Joerg Osterrieder 2025-2026. All rights reserved.