Strategy Tokens Could Simplify Trading for Mom and Pop Investors

DeFi portfolio management software Sommelier — bucking a trend of institutional yield-farming adaptation — is betting on a couple of new automated trading strategies catering to mom-and-pop retail traders.

The twin products are designed for ether (ETH) and bitcoin (BTC) holders. They’re accessible via the purchase of two so-called strategy tokens, Sommelier’s ETHBTCTrend and ETHBTCMom. 

The ETHBTCTrend portfolio follows price and volume trends of bitcoin and ether and adjusts holdings accordingly. The momentum portfolio, ETHBTCMom, reacts to price appreciation of either asset.

By definition, strategy tokens expose investors to trading plays without the backend prerequisite heavy lifting. Investors only need to purchase tokens, then sell shares to exit — so there are no lockup periods or liquidity constraints at play. 

A non-custodial token 

The trading strategies for the two newly launched tokens will be provided by ClearGate, a financial firm that has previously worked on quantitative trading in TradFi.

Users are currently only able to acquire ETHBTCTrend and ETHBTCMom on Uniswap V3 on Ethereum and Polygon. But Sommelier co-founder Zaki Manian has plans to make the tokens available on additional decentralized exchanges (DEXs) soon.

Despite some minor similarities, purchased strategy tokens — unlike options, swaps and mutual funds — fall under the purview of smart contracts, ensuring the provider cannot take custody of the cryptocurrency. 

Sommelier is set to act as a liaison between the strategy providers, running machine-learning algorithms off-chain on Ethereum. The algorithms power the smart contracts that govern custody. 

Validators on Sommelier are tasked with taking trading instructions from providers and implementing on Ethereum accordingly — meaning ClearGate won’t actually control user assets — making the strategies non-custodial. 

Strategy tokens are designed for wider investor adoption

Aave on Ethereum has roughly 500 daily active users — a fraction of major DEX players, including Uniswap V3, which facilitates transactions for some 10,000 active users each day. 

According to Manian, it is likely that people continue to engage with DEXs because they don’t understand the complicated processes of placing money in a lending protocol or other DeFi structures.

“But they do have an idea of holding a token,” he said.

Added Manian: “So, the core of what we’re trying to do is to create a token that is a better long term way of holding bitcoin and ether than buying a spot and holding it on an exchange,” Manian said. “ We think that the brain power that we’re bringing to the market through strategies [is] enhancing that.”

Over the long term, Manian is vying for Sommelier to become a “supermarket” for strategy tokens.

“We’re trying to get to a world where if you want exposure to an asset, you won’t have to sit there and watch your computer, adjust limit orders and think about prices and all that stuff,” he said. “You can just buy a strategy token,” he said.

But the process of launching a strategy token hasn’t been simple, Manian said. In part, that’s due to the typical retail investor’s understanding of complex — often esoteric — DeFi concepts are lacking. 

“Tokens and staking are probably the two concepts that we have got to significant mass consumption, every other concept in crypto, I think, is still somewhat niche,” Manian said.

---

Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the Forward Guidance newsletter.

Get alpha directly in your inbox with the 0xResearch newsletter — market highlights, charts, degen trade ideas, governance updates, and more.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.