LP is something that a lot of people have used to grow massive amounts of wealth
Providing liquidity in a way makes you the exchange
when fees are accrued they are paid to you in proportion to how much of the pool is yours
if you are 1% of the pool and $1000 of fees were collected that day then you should have made $10 of that
On a side note I was trying to make the right image for this post using AI and wow the prompt is everything lol one or two missing words and I was getting some freak ahh images lol
The risks of providing LP is if one of the tokens you provided spikes and the other doesnt
this happens more often with stable pairs where the stable coin obviously doesn't move but the coin its paired with does
USDC/ETH for example, if ETH goes wild then you will end up having less ETH in the pool
Now, if the fees were massive enough to compound its way to overcome this impermanent loss.
what is IL? its just that, the cost of doing LP where simply holding the token might have been better off
now some might argue stable/stable pairs are the best because both are staying at $1 and you can just earn fees
the risk in these are if one of the stables depegs or breaks
lets say DAI/USDT
what happens if USDT becomes sanctioned worldwide for example, everyone will get rid of their usdt and get dai
leaving you with no dai in your LP and its all been "drained" and you are left with a bag of USDT and all that comes with it in this hypothetical scenario
however lets say you have ETH/BTC pairs, if they both go up pretty evenly you are cooking hard especially if you have tight ranges on a V3 pairing
what this means is you choose the spread
when you select full range it means you make money on all the trades in that pair
but if you choose a tight range then any trade in between what you selected will actually get you more fees
doing this tight range LP though requires you to be on top of it, when you are out of range you will have no more of one side of the pair and won't get any more fees until price falls back within your range. Doing this can be really profitable if you can manage your ranges and compound your gains. great things have happened to those that have mastered this
it can be intimidating when you see all that goes into v3 pairing but just like anything else once you get used to it its a piece of cake
I see LEO LSTR and SURGE are making some noise over at BASE I have a feeling this will bring a lot of attention and dollars our way, maybe providing LP over there with some of our coins will end up being quite the play :) we need someone to set it up, then someone to follow, that'll kickstart the floodgates opening wide.
Posted Using INLEO