LP Pools – The Basics

When you provide liquidity in a DeFi pool, you’re (most often) putting up two assets (like SUI and USDC) so other people can trade between them. In return, you earn a small fee on each trade. This process is automated through something called an Automated Market Maker (AMM), which calculates prices based on the amount of each asset in the pool.

What’s Uniswap V3 All About?

Uniswap V3 introduces a concept called concentrated liquidity. Instead of spreading your assets evenly across all prices, you focus them within a specific price range, where most trading happens. This way, you earn more fees with less capital. But, if the price moves outside your range, your position goes "out of range" and temporarily stops earning fees until the price returns to your range.

Key Concepts to Remember:

1. Price Range: Choosing a price range is essential. A narrow range can give higher returns but is more likely to go out of range. A broader range keeps you in the game longer but might earn lower fees.

2. Impermanent Loss: This is the risk of earning less compared to just holding the tokens. If prices fluctuate a lot, the pool rebalances your assets, which can lead to a temporary loss. However, fees you earn can help make up for this loss over time.

3. Stable vs. Volatile Pairs: Stable pairs (like USDC-USDT) are safer with lower impermanent loss but often offer lower returns. Volatile pairs (like SUI-USDC) can give higher returns but carry more risk due to price swings.

Bottom Line: Providing liquidity in a pool is a way to earn passive income, but it requires choosing the right price range and understanding the risks, especially with volatile pairs. Think about your strategy: are you aiming for higher returns with some risk, or stable but slower gains?