Welcome to the world of Concordex, where the future of decentralized finance is unfolding right before our eyes! If you’re a Liquidity Provider (LP) or curious about becoming one, this is the place where innovation meets opportunity. And to make your journey perfect, today we will talk about maximizing your profits as an LP at Concordex.
This blog will discuss using Multiple Fee Levels (MFL) and Concentrated Liquidity (CL) to your advantage. We’ll also give you a roadmap through tricky topics like Impermanent Loss (IL). Buckle up and get ready for a rewarding journey!
How to Use Multiple Fee Levels (MFL)?
Think of MFL as a menu at your favorite restaurant, but instead of picking a dish, you’re choosing how much fee you’d like to be paid when your liquidity is used for swapping. Mouth-watering, right? Here’s a closer look:
MFL allows LPs to select from eight scrumptious fee levels ranging from 0.01% to 1.28%.
When opening a liquidity position, you’ll see a chart showing how liquidity is spread across these levels, each acting as a separate subpool. The spot price may vary slightly between these levels (max 1.27% between the first and last), but they all work together harmoniously, much like a well-orchestrated kitchen.
MFL also helps balance the profitability of positions for LPs and minimize fee costs for users. This is achieved through gradient utilization of liquidity during a transaction. Subpools with minimal commissions are used first, followed by higher ones. This creates competition between LPs, forcing them to choose acceptable fee levels to ensure their liquidity is in use. Thus, consider your risk appetite, market conditions, and favorite financial flavors to select the right fee level for your taste.
What about Concentrated Liquidity (CL)?
If MFLs were dishes in the Concordex kitchen, CL would be more like pots and pans where they are cooked.
In classic liquidity pools, all funds received from LPs are evenly distributed across all price ranges from 0 to infinity. On the one hand, it helps always to have available liquidity in case of sudden price changes. On the other hand, it is doubtful that the price of any token will lose or gain 90% of its value tomorrow. This means that LPs are using their funds irrationally, pouring oil on all pans at once instead of one where they will cook. We need a different concept, right?
CL is a new generation of market-making that allows LPs to choose a price range for their investment. Let’s take the poppiest example:
Today, the price of Bitcoin is around $30k. It is likely that shortly, the chart will range between $28,000–32,000. This means that the bulk of transactions will take place in this price range, and the most logical solution for LPs would be to put their liquidity in this place rather than spreading it over the entire price line from 0 to infinity. Any insight?
This principle allows LPs to use their trading knowledge to plan investments. If you know that the price of an asset will fluctuate, expand your liquidity range and place yourself among the first. If you are sure the market will be stable, narrow the range and don’t spread your forces on unnecessary price values.
The same principle can be applied to working with different cryptocurrency pairs. For example, you can narrow your focus to stable pairs, like a detailed portrait. For more volatile pairs, broaden the strokes, capturing the dynamic dance of fluctuating prices.
When It Comes to Impermanent Loss (IL) and Its Management?
Simply put, IL is the risk of losing some part of invested funds due to changes in the price of assets on the spot market. This is a rather broad topic so we will discuss the concept of IL in more detail another time. But here are two tips that will help you minimize potential losses:
- Choose more stable pairs. The lower the volatility of the tokens in the pool where you invest your liquidity, the less likely IL will occur. Of course, you can get more fees from volatile liquidity pools, and it’s not cool to give that up. So we move on to the second tip!
- Hedge your risks. Concordex allows LPs to participate in multiple liquidity pools at the same time. In doing so, they will, of course, earn passive income in the form of transaction fees. By taking advantage of this opportunity, LPs minimize the impact of ILs on their portfolio.
The bustling kitchen of Concordex is filled with opportunities for every enterprising Liquidity Provider. Like a masterful chef carefully selecting ingredients and cooking techniques, Concordex combines innovation, flexibility, and strategy, enabling LPs to craft a sumptuous feast of financial success. Whether you’re searing, sautéing, or simmering, the tools and recipes at Concordex invite you to explore and perfect your culinary craft in the DeFi culinary world!