A simple guide to selecting Liquidity Pools (LP) based on your market views

CeFI lending is ded and it’s also been shown that DeFI lending has either tail risk or rates that have been pushed down so far that they are now below govt bonds thus making Liquidity Providing the optimal way again to generate yields for your crypto assets.

Before we begin, you should be aware that even if the relative token price moves by more than 50%, Impermanent Loss (IL) will only incur losses of less than 5% which you should more then make up for in fees and farming rewards.

https://dailydefi.org/tools/impermanent-loss-calculator/

Moving on, you select your LP based on how you believe the market will perform in the medium term, ie 6-12 months

1. Bullish market view

You should choose an LP pair with tokens that are positively correlated with one another. Popular choices include BTC-ETH and ETH-BNB. You could also get a derivative token pairing like STKBNB-BNB and ABNBC-BNB that will reduce IL to near 0. Yields for these pairings range from 5-15% APY on popular DEXes in ETH and BSC.

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2. Neutral market view

If you believe the market will remain sideways for some time, select an LP pair with a stable coin as the quote token. The stable coin quote will add convexity to your profit profile which limits your gains if the token price rises yet it will also greatly reduce losses if prices falls. Here's a Google Sheet that will help you visualize the effect.

https://docs.google.com/spreadsheets/d/1iBeNjI8tco3qUucYdEaQ-wjrhQZjtZ_nUEuBdFE3uvs/edit?usp=sharing

Example LPs are ETH-USDC and BTC-USDC. Yields: 7-20% APY

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3. Bearish market view

If, on the other hand, you believe a final capitulation is still imminent, the only sensible option is to park it in a stable-stable LP pair such as USDT-USDC, BUSD-USDC or Curve's Tricrypto. 1-5% annual percentage yield.

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For more explanation on the different type of DEXes and the underlying AMM algorithm, check out my twitter thread here.

https://twitter.com/HappyHippo DeFI/status/1539500510088077312