Sustainability is a word that is thrown around a lot. I wasn’t shy about it in my last article and I’m not through discussing it. I’m going to continue exploring sustainability in the world of software, business, and finance so you all understand my perspective.
I like to think of sustainability as a debt that must be paid into each process. If left to accumulate it bleeds over into other processes. If your process isn’t built with sustainability in mind, it could meltdown and take other processes with it. Bad quality control processes lead to oil spills, bad diplomatic processes lead to war, and bad health processes lead to the pockets of fat forming around my waistline.
Many of you beautiful readers are one black swan event or tax bill away from getting wrecked, so I’ll lend you some of my insight. In my portfolio, I assess the sustainability of strategies based on three core data points: Runway, Tax, and Downside Risk. These three things represent a simple, quantifiable, and effective means of analyzing sustainability in your De-Finances.
Runway is the amount of time I believe any particular investment will yield tokens competitively. A good runway means that once I make the decision to enter the position, I won’t need to think about it for a year or more. Yield generated from fees and smart emission curves almost always translate to a quality runway.
Tax efficient positions will manage underlying assets and yield on your behalf so you don’t have to withdraw, claim, or manage assets regularly. Every investment I make is managed by Reaper for this reason. Tax is closely tied to runway in that short runways force you to incur more taxable events. I’m American, so make sure you consult with a local professional to see if the same rules apply to you.
Downside Risk can be roughly equated to the likelihood of a negative event that would force me out of the pool or to incur a significant loss on the underlying asset. This would include an extreme market drawdown, security failure, or bank run. Choosing highly liquid, well-traded, and widely utilized assets is key here, along with protocols that are battle tested and well designed.
Sustainability is different for everyone and dependent on your goals. What works for me, might not work for you. So, use my ideas as as starting point for developing your own framework. Apply your framework to your DeFi strategies to figure out where hidden process debt might be accumulating. Then head over to the Reaper discord to chat about possible solutions. Unsustainability can be stealthy or show up in unexpected places, so if you haven’t been thinking hard about them, you might already be dead.
If you\’re curious about incentive sustainability, check out kickflip\’s model here.