Why it matters: People are getting more bullish about ETH recently. When it comes to long-term portfolio building, DCA has been considered as one of the most effective investment strategies.
Zoom in: The time-weighted average price is a mathematical calculation of price over time often used by large traders. Dollar cost averaging is an investing technique to buy or sell the same dollar amount of an asset in order to get a better price. SIZE offers the first DeFi primitive for users to execute trades at 30-minute TWAP with zero price impact.
Zoom out: Since SIZE’s 30-minute TWAP is a building block of day/week-long DCA, we are thinking about adding the support for DCA so that you can use SIZE to build long-term portfolio. If you are interested in this feature, have any feedback, or simply want to use it from Day 1, click here and join the waitlist for DCA! Please also share it with your friends and help them secure their spot on the waitlist for this feature. We will have a surprise for the 20 people with the most number of referrals.
What is TWAP?
Time-weighted average price (TWAP) is a strategy used by traders to minimize the price impact of large orders.
TWAP aims to better reflect the true market price of an asset by averaging the price of an asset over some time. It is a more sophisticated strategy often used in traditional financial markets.
For example, the average of all the WETH-USDC prices over 30 minutes would be considered a 30-minute TWAP. This will be a smoother representation of market prices and can offer a benchmark for traders that are looking to place large orders.
What is DCA?
Dollar-cost averaging is an investment strategy where a set amount of capital is deployed at fixed intervals. Often it is used to add or reduce an investor’s position while minimizing the effects of market volatility.
For example, instead of trying to time the market and buy $100,000 of ETH all at once, a trader may buy $10,000 of ETH each week for 10 weeks. In this way, dollar-cost averaging is an effective investment strategy that avoids trying to time the market. While a trader might not get the lowest price for her trade, she can also avoid paying the highest price as well, getting an average of many different trades.
Many people practice a form of DCA by investing a part of their paychecks into a retirement savings account every month. Deploying a similar amount of capital each month dampens volatility and is a solid strategy to grow your investments.
The Difference Between DCA and TWAP
While often used interchangeably, dollar cost averaging and time-weighted average prices are slightly different. DCA is an investment strategy whereas TWAP is a calculation of an asset’s price.
The confusion comes because in traditional finance executing an order based on a TWAP often means using regularly spaced orders, very similar to a DCA strategy.
In traditional finance, OTC desks and brokers will often offer clients trade execution at or around a time-weighted average price. This offers a neutral benchmark for both parties to agree on. A client will come with a large order and what often happens is the trading desk will then execute the client’s order in small pieces over a set period. The client can get a better price than if the entire trade was executed at once.
TWAP then is usually for traders looking to enter or exit a large position without too much price impact. DCA is usually for longer-term investors that don’t want to worry about timing the market.
These two audiences also tend to have different psychologies. Traders who use TWAP are often trying to enter or exit a position quickly while getting the best price possible. DCA is more the domain of long-term investors who want to build a portfolio without deciding on when to do trades.
DCA and TWAP in Crypto
Several protocols offer users the ability to conduct DCA transactions. These work by a user depositing USDC or another stablecoin and then a smart contract will execute a regular buy based on the DCA period specified by the user.
You may also be familiar with the DCA strategies provided by centralized exchanges like Coinbase, which will let you set weekly or monthly buys of a certain dollar size through their UI.
SIZE is different because it allows traders to execute at the 30-minute TWAP price with zero price impact.
DCA protocols work by executing multiple market buys of an asset over a set time. On Ethereum mainnet, this can be expensive because of gas fees. With a DCA buy or sell every hour or even every day, the cost of gas fees could heavily eat in to the investment. For this reason, most DCA protocols are running on Layer 2 networks or are for buys spaced further apart.
Use TWAP with SIZE
Integral SIZE offers the first DeFi primitive to allow users to execute a trade at a TWAP price.
Instead of a traditional swap, Integral SIZE uses Uniswap v2 as a price oracle. Once an order is submitted, the protocol queries Uniswap to get spot prices over the next 30 minutes. By calculating the arithmetic mean of these prices, the protocol uses this time-weighted average price to execute your order. All of this is done on-chain, and without needing a custom price curve.
SIZE calculates the 30-minute TWAP of an asset and then executes a swap at this price. In this way, large trades are executed with no price impact with transparent pricing.
While SIZE launched with just the 30-minute TWAP, we expect to make other durations available based on feedback from the community. You can trade on SIZE today with the WETH-USDC pair or the WETH-CVX pair with other altcoin pairs to be added soon.
Start using SIZE today at https://integral.link/ and provide any questions, comments, or feedback in our Discord or on Twitter.
This post is for informational purposes only and is not financial advice.