Q. Claiming fees, swapping, adding/removing liquidity will cost ~$30-$100. Claiming fees - how often is claiming fees? Aren’t we collecting fees constantly by providing liquidity? Adding/Removing liquidity is repositioning? What in the process is swapping - is this the repositioning?
A. Anything you do that writes to the blockchain will cost you in fees (it is what pays for the security of the network). Claiming fees will cost you but depends on the congestion of the network. So I would say between $50-$400bucks just to claim fees.
You will generally pay $400-$1500 in fees to Add, Claim, Swap, Reposition. So anything under $20K in your liquidity pool is not worth it. Having said this, ETH Layer 1 is becoming too expensive. You can do the same thing with ETH Layer 2 BUT THIS IS PRETTY IS NEW AND SO YOU TAKE ON ANOTHER LEVEL OF SMART CONTRACT RISK. In addition, because the fees you collect is a function of volume and your total percentage in the pool, we don’t really know the APR on these unless you experiment with them.
Side Note: There are protocols that do all this for you automatically but you are introducing additional layers of smart contract risk but you have less control. The APY are much less.
Definitions:
Claiming fees - this will claim the fees you collect when you provide liquidity. This does not auto-compound so you have to do this manually. You can collecting fees constantly but you have to collect them. How often you claim fees depends on numerous things. I aim for about once a month. Claiming fees happen automatically when you liquidate so it can be as soon as 1 day, or 1 week. The key is, you don’t want to claim the fees if it will cost you more in the fees you yourself you pay.
Add/Remove Liquidity - This the pool you add or create.
Reposition: This is when your pool is out of range.
If you have a Liquidity position, you remove liquidity
This will involve claiming your fees
Then you add liquidity. Add a New Pool with a new price range.
Swap: This is when you exchange 1 token for another token. In this instance you are the customer. When you create a pool, you need both tokens and so you sometimes need to swap one token for another.
Separately, you are the market maker for one pair of token swapping.
Concentrated Liquidity and Yield
Q. I dont fully understand why a tighter liquidity bound yields more return. Not sure what is not clicking
A. A tighter bound provides better capital efficiency. The tighter the bound the more yield but then the greater the impermanent loss.
Here’s a simple analogy (not exactly perfect).
Let’s say you have 100 apples and will provide these apples at a price between $100-$200. At each one dollar price point you provide 1 apple.
Now lets say you have 100 apples but instead you will provide these apples between $150-$160. At each one dollar price point you are providing 10 apples.
The amount of fees you collect is a function of volume and your percentage of total lock value in the pool. In the case of second case above, you are providing 10 vs. 1 along a one dollar increase so it’s a higher percentage and thus you get a higher collection % of the fees and ultimately APR.
Token Crashes
Q. if your token crashes you have other worries than impermanent loss. If you choose a token you want to hold anyways then you would have lost due to decrease in price anyways right
A. If ETH crashes, then there was probably some event (blockchain hacked, gov crackdown, etc). At that point you entire price (in dollars) will decrease anyways, so impermanent loss is the least of your worries.
On the flip side, if ETH goes down just because of bear market conditions, you will have more of ETH. So if you think the case of ETH is a valid one, then this is not necessarily a bad thing (although in USD terms, overall you will be down).
Impermanent Loss
Q. Mentioned before but impermanent loss still sounds like “opportunity loss” not necessarily hard dollars lost. Is there such thing as impermanent gain? When the price goes down you lost less than if you were to just hold the token?
A. In our case when the pair is USDC and ETH, they don’t call it Impermanent gain but this is what happens. You will have more of ETH than when you started with, if the price goes down. So if you think the case of ETH is a valid one, this is a GREAT THING.
When you have ETH paired with another Token, you have impermanent loss in both direction.
Q. A video stated you still make money as long as the impermanent loss is less than the fees you collect. Am I wrong when I think at the end you still made money via fees, the impermanent loss is just a loss of money you never technically had
A. You are thinking of Impermanent loss exactly correct. But Crypto people don’t think this way. It’s an opportunity cost of providing liquidity vs. holding. However, there is some validity to it, since if you have just held (which is easier and less of a headache) you would have more while doing less. So there are ways to reduce this loss as much as possible so you can enjoy both collecting fees and also the upside of ETH the asset.
Arbitrage
Q. I watched a different video on impermanent loss - and they discussed arbitragers. Are we providing liquidity to “arbitragers”? These are just normal people? Does this happen because not all prices can be the same at the exact same time on each platform?
A. We are providing liquidity for anyone that wants to swap between USDC and ETH. This includes artibragers, bots, Apps that use uniswap, retail, institutions - basically anyone/entity that wants to swap between USDC and ETH using Uniswap.
Liquidity Amount
Q. We discuss the price bands; however, I did not read much about how much of each token to start with. Does that matter?
A. I would say at least 20K if not more if you are going to do Layer 1 market making. For Layer 2 market making, you can provide much less, but there are many unknowns here.
You can do the same thing with ETH Layer 2 BUT THIS IS PRETTY IS NEW AND SO YOU TAKE ON ANOTHER LEVEL OF SMART CONTRACT RISK.In addition, because the fees you collect is a function of volume and your total percentage in the pool, we don’t really know the APR on these unless you experiment with them.
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