A Step-by-Step Guide To Capture Huge APRs on Optimism

Article by Tom Tramner

The Challenge

We will attempt to achieve our goal by capturing: a) perpetual fees in $USDC from the perp platform, and b) LP rewards provided weekly in $PERP tokens.

This guide was written for all lifelong learners, but it may hold more interest for the intermediate/advanced DeFi user or market participant.

The Experiment

I played around with the Perpetual Protocol on Optimism this weekend, licking my wounds after a crushing defeat for team ETH in the Clash of the L1’s trading competition. I also noted some pretty attractive APRs reported in the “L2 Yield Farming” newsletter from Bankless this past week. I thought it worth checking to see if some of those numbers were achievable for a small fry like myself.

I had the opportunity to participate in the Perpetual Protocol testnet trading competition held on Arbitrum this summer. I was looking at earnings of 79 PERP (~500 USD) to be released in January. I had my eyes on using these funds to participate in the L1 trading competition and to figure out if those triple digit APRs are real or an unobtainable phantom…

The following analysis is based on a 288 USD Pool Position from Friday night through to Monday, with USD amounts represented as a 100 USD investment to keep the math simple. i.e. Inputs: 288/2.88 = $100. | Output in Profits:39.73/2.88 = $13.793

Ready? Set. Go!

Pricing Range Position Selection of 2950

Our V3 Position 50/50 USD ETH. Perpetual protocol will take a maximum SHORT/LONG position of 10x the underlying volatile asset. In this case max will be 0.169 ETH.

Token Price Movement — Exposure Risks

At Price Min: $2851 “Your LP Position is 100% Exposed to ETH ~value: 0.0345 ETH = $98.27 USD 1. Represents a $1.73 LOSS. -1.73% on $100”. “Your position will also be holding a market position LONG against the falling value of the token. ~ value: 0.169 ETH LONG Carries approx. Impermanent LOSS of $10 USD 2. Represents a $10 LOSS -10% at closure.” 3. Total loss of 11.73% At Price Max: $3046 “Your LP Position is 100% USD ~value: $101.57 USD 1. Represents a $1.57 GAIN. +1.57% on $100” “Your positio

Position values at minimum and maximum prices in range.

Looks bad so far! We lose on our LP position if the token moves in either direction. If the token goes above or below the range limits, we are dangerously exposed to continued price momentum in either direction due to automatically opened SHORT/LONG positions.

Outside of the range bounds, we are also making 0 fees! It is best to avoid this position whenever possible, or see below on how to protect yourself*.

Risk Notes (Based on the Above Analysis and Tests):

Impermanent loss (IL) only occurs on closure of position, but IS NOT range-bound limited by your LP settings. Your pool position can surely get rekt if the market moves away from your position and does not return.
Range Selection: A higher bound means that more of your LP position will be used for trades made within the range limits. Capital Efficiency is Key!
Maximum loss will be realized at minimum range bounds and beyond. Your ideal exit WOULD NOT be at this price due to ETH position and LONG trade exposure.
Sometimes, a loss will also be realized with closure at max range, mostly due to impermanent loss potential.
To minimize IL and maximize fees, position exit should be as close to starting price as possible, holding the position long enough to earn 2x pool entry/exit trading fees (~5–10 USD) in captured trading fee revenue (ideally longer as profitability of the trade holds).

*Position protection trade: In order to protect against the downside of open trading positions which may be trapped in an LP Pool that you are not ready to close (see 2 and 3 above), you can open a counter position (LONG at lower range bound, SHORT at upper bound) in the trade market of the Perpetual Protocol platform of equal weight to the locked position. This acts as an insurance mark for the cost of opening the position (~ 0.00066 ETH), establishing a price neutral position (if correctly weighted). When the price gets back into a range you are happy with, you can close the insurance trade position and continue with your pool, or close them all and let the profit/loss balance out on the IL and trade positions.

Controls for managing your perpetual protocol v2 position can be seen here, including all markets on the left and side of the screen. Active position information above and buttons to increase or remove liquidity from any active positions or create new ones on the right hand side bottom.

Screenshot showing Perp V2 Pools Page

Risks out of the way, now onto the good stuff…

Fees & LP Rewards

So, if you’re like me then what really piques your attention are those juicy APRs posted at Perp and as posted by the Bankless team in their terrific newsletter on L2 Yields. At the end of the day, if you’re starting from zero, you can really appreciate that boost to your starting capital.

Pool Base APR: 9.3% — 562.4% Pool Rewards APR: 2.1% — 129.4% Mark Price: $2,875.54 TVL: $6.8M Volume (24h): 3.5M 24h Fees: $3,487.4

Experiment pool info

ETH Pool APR reporting. At the time of writing, 2/14 2:30pm

Total Liquidity: $2,833.95 Total Fees: $125.238 Impermanent Position: 0.3897 ETH (LONG) Impermanent Loss: -16.00955 horizontal line Base APR: 246.2% Rewards APR: 54.4% Margin Ratio: 40.62% Account Leverage: 2.46x

Perpetual Protocol V2 Dashboard: Provided Liquidity

My LP Position at the same time

The base APR is earned as a percentage of trading fees captured in your market trading pool. These fees are earned perpetually and are immediately available in your free collateral, allowing for periodic reinvestment. The rewards APR is earned weekly and paid in PERP tokens.

Let’s dig into those APR ranges and see what we can expect based on the current projections from the protocol. We will compare these values at the high and low ends and see how they stack up against a live pool trade, with a timeframe of 3+ days from Friday through Monday.

Table showing $1000 in play in Perpetual protocol v2 markets. Calculations for the low end of the APR ranges (9.3 and 2.1 percent) yield projected earnings of $0.32 per day, while the high end (562.4 and 129.4 percent) yield projected earnings of $19.43 per day. Actual trade projections yield a projected earnings of $8.44 per day, with real earnings per day, in fees only coming in at $13.79 throughout the experiment.

Juicy APY’s on app.perp.con as an LP $USD 100 ($1000 Leveraged)

APR’s holding up under short-term scrutiny of a 2 day+ live pool.

So far those quoted LP ranges appear to be holding up (could be an outlier, do your own research). With perp.com now offering 7 markets, and each of them incentivized with LP rewards in PERP, they all have the opportunity for similar gains. Check the daily trading volume (24h) of the pool before ape-ing in.

Shows a trade with an open position on Friday, February 11th in the evening and position close in the mid-morning on the 14th of February. Upper and lower range bounds are marked on the chart at approximately 2850 and 3050.

5 day Ethereum Price chart showing range and trade closure

The Final Analysis

Our $100 investment is poised to earn between $0.32 — $19.43 per day (actual earnings are currently tracking at $13.79/day, or over $400/month if optimistically extended through). With transaction costs on the steady decline on Optimism’s mainnet, $5 can realistically cover at least two transaction costs to put on the pool position and later close it. You will have to subtract the impermanent loss from your closed position in order to calculate your final APR, but here are the numbers I’m looking at for the trade as a whole:

profit = feeEarn — 2*txfee — IL; PP = 8.43 (USD)

We’re able to minimize IL down to only -0.36 USD because closure of the position was price neutral over the time of the trade. Since our initial investment was 100 USD, we can say we’re looking at a daily profit of 8.43 USD, or 8.43% with our simplified numbers.

Projecting out to an annual APR (with no compounding), this gives us an astonishing APR of 365 * 8.43% = 3,076%! That’s an Olympus OHM-level APR, though it does depend on whether trading volumes remain high, locked capital remains low, and rewards stay strong. All of those assumptions are not ones I’d want to be responsible for projecting over the next year, but we sure can enjoy those yields while they last.

Author Bio

Tom Tranmer is a lifelong learner and computer enthusiast turned builder turned engineer and developer who finally found my way into Web3. Father of two, serial entrepreneur with eclectic business pursuits and dreams of tennis while working. Tranmer Web Services, Paris Tennis Club, Bankless DAO. You can also find his writing at startingfromzero.substack.com.

BanklessDAO is an education and media engine dedicated to helping individuals achieve financial independence.

Disclaimer: this isn’t investment advice. This article has been written for informational and educational purposes only and it reflects my personal experience and current views, which are subject to change.

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