- Less volatile assets (like stablecoin pairs) carry little to no risk of loss-versus-balancing (LVR) and impermanent loss (loss-versus-holding or IL) for liquidity providers. It is relatively straightforward to LP and make a price prediction. This means that attracting order flow is very competitive and fees may end up becoming a race to the bottom. A typical strategy might be to deploy a lot of liquidity at very close to and at the peg price with the lowest fee tier.
- More volatile assets are subject to higher LVR and IL. LPs may spread their liquidity across a wider range to capture more volume. This additional volume and lack of liquidity concentration makes it more suitable for LPs to charge higher fees.
Basic Fee Math
We will use to represent fees in constant sum pools. Fees work as follows:- Consider a pool between token and token
- When a trader wants to trade units of token for token through a pool with the price and a fee , they receive as long as there are enough reserves in the pool i.e.,
- When a trader wants to trade units of token for token through the same pool, they receive as long as there are enough reserves in the pool i.e.,