Continuing thread from How much do you earn on liquidity mining?
> I wonder if you could minimize the risk a bit by using one of the lower-fee networks, higher frequency rebalance but smaller position?
I did try using the ones I mentioned earlier, and had profits, but not nearly as much as on Ethereum directly. It seems if you have smaller positions, using lower-fees network is better as otherwise transaction fees eat up a lot, but for larger positions, vanilla Ethereum is the way to go.
Fees are split up based on how much of the liquidity you provide for that specific trading tick, so as long as you're in range, you'll get part of the fees, split up by the other liquidity providers + protocol fees. So larger positions ~= in general more fees to collect
I did try using the ones I mentioned earlier, and had profits, but not nearly as much as on Ethereum directly. It seems if you have smaller positions, using lower-fees network is better as otherwise transaction fees eat up a lot, but for larger positions, vanilla Ethereum is the way to go.
Fees are split up based on how much of the liquidity you provide for that specific trading tick, so as long as you're in range, you'll get part of the fees, split up by the other liquidity providers + protocol fees. So larger positions ~= in general more fees to collect
4mo|
Anonymous
||I think the biggest risk is the way the constant product formula works (assuming I am interpreting what I am seeing correctly). If you pick a pair with high fees and then select a narrow band to provide liquidity in, the "wings" of the constant product formula can drastically eat into your profits because you'll be buying up the "loosing" coin at a rate that's greater than 1-to-1. I think this is what is called divergence loss?
3mo|
Anonymous
||Yes, you're more or less spot on. "Divergence loss" is also commonly referred to as "impermanent loss" in the community.
3mo|
Anonymous
||That makes sense, I feel like fees should be even more expensive for the risk a (concentrated) LP takes on for a pair that doesn't involve a stablecoin... which is maybe what is driving motivation for more flexible calculations in uniswap v4
3mo|
Anonymous
||