My First Real Dive into Concentrated Liquidity Pools

gadrian in #hive-167922 • 18 days ago

I've heard about concentrated liquidity for quite some time. Maybe as far as the end of the previous cycle or the beginning of the current one. Not sure if at that time it was only theoretical or there were platforms providing the option to concentrate liquidity. So, it's been a few years since then.

But now there are enough platforms which offer this possibility, and it's likely the future in defi. One of them, at least.

Now, I've only started testing one of them, the Dynamic Liquidity Market Maker (DLMM) on Meteora with one of the simplest strategies possible: a spot volatility strategy on one of the major SOL-USDC LPs with high liquidity and daily volume. But I've watched a couple of videos, and I've seen a number of strategies, some simpler, some more complicated. None of them as simple as just proving liquidity to a pool and forgetting about it, from what I could see. Well, maybe except if we are talking about a full stablecoin pool.

Most strategies involve constant tweaking of the range in which you provide liquidity, plus choosing a good "shape" of the distribution of your liquidity within the range, and a good pair in case the price goes out of range and you end up holding only one of the tokens in the pair. I've seen quite a few what I would call reckless strategies where the LP didn't care what one of the tokens was or even if they would rug pull, as long as they potentially earn a ton of fees for a short while. That seems to stem from the meme coin mentality, translated to the LP world.

Given the amount of tweaking these positions may need to stay in range, they could be a use case where investors would rather use AI agents in the future to fine tune their LP positions. Maybe they already are doing that.

So far the fees I earned in the 1-2 hours I've been in the pool aren't worth mentioning, but they are adding up. By watching the position evolve, it seems to work a lot like leveraging, because at small price differences the distribution of the tokens in your position change dramatically. So... one would have to be careful about that!

My current range for my concentrated liquidity, let's hope it stays there for a while to have a good initial experiment:

Note that on Meteora, you may not be able set a range as wide as you feel comfortable due to tech constraints. You can narrow it as much as you want but you can't widen it more than 69 bins (small price steps where liquidity is provided).

It is obvious that concentrated liquidity attracts a lot of liquidity. If fees are also small and the blockchain is relatively stable (which Solana may not be), this can be a recipe for success which says more about why Solana is so hot right now, meme coins aside.

I don't know if this would be considered something useful on Hive (concentrated liquidity), but if it would, I think at L2 is where its place should be.

I know some of you have been using DLMMs (or other concentrated liquidity pools) for a while. If you have some advice for a noob on Meteora and in the concentrated liquidity area from your experience, I'll appreciate if you shared it. Thanks in advance!

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#concentrated-liquidity #defi #meteora #solana #proofofbrain #hive-engine #pimp #cent #bbh

18 days ago in #hive-167922 by gadrian

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uwak 18 days ago

I've got to learn about the concentrated liquidity pool from you know. I will dive more into it later

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gadrian 18 days ago

I'm glad I draw your attention to them. Just be careful when using them! It's easy to lose if you don't know what you are doing. So, if you start diving into them, start small until you understand the basics.

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achim03 18 days ago

Nice to see that you are also dealing with these pools. I've been trying out stuff and the last days were quite eventful market wise. I've seen a lot of videos on Youtube as well and realized that a lot of people didn't really know what they were doing.

I tried a strategy during the past days where I took quite a narrow band and provided a one sided liquidity. The market price went through the band quite a lot of times and the fees collected were quite interesting. I try to avoid rebalancing immediately because this generates fees and it actually means realizing the impermanent losses...

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gadrian 18 days ago

I tried 3 scenarios for now. The main position was a standard spot strategy with all the 69 bins and the price in the middle. With the other two positions I wanted to test the one-sided positions combined with a curved strategy. One of them barely made any fees because the price went down, the other still makes some fees, but it made more fees around the price where I added liquidity and less the further we are getting from that point.

I see the price is slowly grinding up again, but I wonder, for the main LP (the one with the spot strategy), if the price would have kept going down sharply compared to my lower range point, should have I left the LP over night hoping for a recovery or not? Right now, the position only has SOL, no USDC, since it's out of range and down. My reasoning is that unless I want to rebalance at a lower range, I should leave that over night, especially if another range isn't clear for the next few hours.

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achim03 17 days ago

The thing with rebalancing can be tricky. When you are out of range, you end up with only one of the two tokens and if price dips even more it doesn't change much for you. Your asset will go down with the market but you don't lose anything remaining in the position. I've come to the solution that the best in such cases is simply to wait. The chances are big that the price comes back and I start to earn fees again. I avoid paying fees and I don't need to swap any tokens.

However, I had a range between 215 and 230 and I saw that it made no sense to stay in it with prices being around 198 - 205. So I rebalanced it but I put only the one token that I had remaining. Like that I didn't need to swap and within minutes I was in range again.

I also tried the curved strategy. It makes a ton of fees when it's in the higher part of the curve but quite little when it's in the lower part. I think standard spot is more adequate for pools with at least one volatile token.

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gadrian 17 days ago

How long have you had the 215-230 range?

I saw I am out of range this morning and seemed quite unlikely to go into the range on the short term (still out of that range now, was briefly in), plus it seemed to play in a tighter range below what I had, and I rebalanced my position in a much tighter range 203-207. So far, so good. I also removed the liquidity from one of my tests yesterday and added it on top of the same range as curve. I didn't nail this one so well, as it moved away from the big bins relatively soon. But if it goes back down and plays at the bottom of that range again, I might earn more fees.

By the way, do you prefer the pool with 0.02% base fee and a higher volume compared to liquidity or the one with 0.10% fee and a lower volume to liquidity? The fees/TVL per 24h were almost identical last time I checked.

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achim03 17 days ago

How long have you had the 215-230 range?

I went out quite fast because it dropped under 200 and I didn't believe it would go back immediately.

By the way, do you prefer the pool with 0.02% base fee and a higher volume compared to liquidity or the one with 0.10% fee and a lower volume to liquidity? The fees/TVL per 24h were almost identical last time I checked.

I tend to go for the lover fees if the ration fees/TVL is similar. I think that bigger fees only are triggered when there is an arbitrage option. So in my opinion smaller fees will get more regular transactions but I'm not 100% sure about that :-).

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gadrian 17 days ago

I chose the one with the smaller fee too. So far it doesn't seem like we are wrong about it.

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jfang003 17 days ago

I haven't touched any of those DLMMs. It seems interesting though because you are going for a more stable pool. I think that is a good thing. Is the only reward you get, the fees from transaction?

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gadrian 17 days ago

Is the only reward you get, the fees from transaction?

I've seen some pools are incentived additionally by the project (usually by new tokens that create a pool), in the farming rewards style. Obviously, unreliable on the long term, as always.

Also, I think we receive some platform tokens from Meteora (or an airdrop), not sure yet, by using the platform.

But trust me, those transaction fees, for well-chosen concentrated liquidity ranges. get really interesting. We are talking hundreds of percent in APR in my case yesterday, although it doesn't make sense to calculate APR, since you usually need to withdraw and change the range often.

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takhar 17 days ago

I've only read about Concentrated Liquidity pools recently while reading the Docs of Bluefin, a spot and perps dex on Sui. There's auto-rebalancing feature for certain pools when the chosen price range is out of the market price. In theory, this feature makes sense but I don't know how it'll perform in practice, especially when the market is really volatile or if associated fees are involved with every rebalancing.

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gadrian 17 days ago

In theory, this feature makes sense but I don't know how it'll perform in practice, especially when the market is really volatile or if associated fees are involved with every rebalancing.

You are right. It probably depends on how often rebalancing happens, how expensive fees are, and how big the positions are. From what I know, fees on Sui are small, and if positions are big enough, it may be worth it even in volatile markets and in tighter ranges.

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takhar 17 days ago

Yes, I think that part helps. If the fees are small then it wouldn't cost much even during volatile periods. Volume on the other seems moderate but I guess there's room for growth with new networks.

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