Total Volume + Fees
Welcome aboard the S.S. Poolfish for this week's voyage through the seas of DeFi! This week we take a look at impermanent loss and how it may be a misnomer, some cool collection of V4 hooks that we found and a look at reference points for LPs such as ETH, USD or HOLD on tools from Revert.finance
Hayden Adams on Impermanent loss
Recently, Hayden Adams tweeted about his rationale behind coining the term 'impermanent loss', which was to explain the concept simply to new users how path independent nature of AMMs can lead to it.
This path independence simply refers to the starting and ending point of the position and whether an LP rebalances or not, which essentially means that IL is intrinsic to AMM and any product claiming to solve 'IL' is merely providing options for rebalancing.
The response was a mixed tidal pool of thoughts, as one user pointed out that it is a super bad term because it is misleading for less sophisticated people and may reckon this loss always washes away over time. Others were quick to criticize as much as calling it dishonest and tricking new comers.
Uniswap V4 and Hooks
Uniswap V4 is a monumental wave poised to crash onto the shores of liquidity provisioning in the coming months . This major protocol upgrade coming in a few months, introduces innovative features like hooks and singleton architecture, custom-built to enable boundless creativity in liquidity provision across a vast ocean of token pools across many chains.
Let's look at two of the many notable examples featured here:
Dynamic Fee by ArrakisFinance
What this contract does
As an LP, you provide liquidity to keep the LP pool calm and stable. Price volatility can mean trouble in terms of IL. So the Dynamic Fee hook was born.
It dynamically changes the trading fees based on price volatility between trades.
Fees go up when trading against the price trend.
Fees go down when trading with the price trend.
The contract tracks the pool price between swaps to calculate price movement or "delta".
It uses the price delta to dynamically adjust the swap fee up or down from a reference fee based on volatility.
With less volatility, your pool stays balanced⚖️. You earn fees 💰 more consistently over time with less impermanent loss.
The TWAMM hook
The Time-Weighted Automated Market Maker allows submitting limit orders on Uniswap V4 that sell a fixed amount of tokens per second over a specified duration.
The contract accumulates these orders and handles executing them virtually over time.
Let's take a scenario for a passive LP who wants a more hands off strategy. With the new TWAMM system, they can set limit orders that sell a fixed amount of tokens per second over longer durations like 1 week.
They place a large order to sell 1000 tokens/second to capture profits if prices rises during the storm.
The TWAMM contract accumulates their order into the order book for that token pair.
Over the next week, prices did surge over 10% because of the storm!
As swaps occurred on the pool, TWAMM will execute order virtually over time.
This will move the price towards what it would be if the full order was executed.
Our LP will earn proceeds in the other token based on the price rise.
So in simple ✨ terms, it earns you money from long-term trades on Uniswap that you don't need to actively manage yourself!
There are many many more creative hooks that have been developed by Uniswap as well as a very passionate community surrounding it. You can view a full list here
Learnings from Revert finance tools
As liquidity providers, we are constantly looking for ways to maximize our returns and minimize our risks. Let's go over some features of one of the popular tools called revert.finance
Here is screenshot of of an LP position, specifically the reference value parameter on the top right. By tracking the HOLD, ETH, and USD values of our positions, we can get a better understanding of how our investments are performing and make informed decisions about when to adjust our strategies.
As LPs, we need solid reference points to gauge performance amidst volatile tides. Let's explore some beacons to track positions:
HOLD Value: Shows current value if we simply held the deposited tokens. Useful for comparing to LP returns during price swings.
ETH Value: Calculates value as if deposited ETH instead of other tokens. Helps track performance versus ETH as a base currency.
USD Value: Evaluates USD amount invested at deposit prices. Allows tracking performance versus fiat, like most traders use day-to-day.
On expanding the the position we can see more stats like total fees, divergence loss/impermanent loss, avg/daily fees etc. These statistics and reference points especially in USD help LPs like us evaluate positions as prices ebb and flow. Tracking these can help us rebalance positions regularly as prices change to maintain your target allocations.
Top Pools 🌊 of the week
ETH/RPL in the exotic pairs category for the ones feeling adventurous
SNX/ETH for the balanced swimmers
ETH/USDT in the 5bps category for the cautious paddlers
That's all for this edition - may your pools be deep and your yields be high! Till then, happy LPing!
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