Hello frens,
If you have read and followed the lessons from our articles, you’ve learned how to create positions that avoid impermanent loss (IL). IL is the profit killer, so we want to avoid it at all costs. However, we also want to avoid remaining in pools that are far outside the current trading range. How do we balance between these two extremes?
The answer is cutting up our capital into multiple chunks, so we can take advantage of multiple ranges at once.
As always, none of this is financial advice. Smart contracts are risky. Crypto is risky. Only use what you can afford to lose completely.
Chasing Ranges
At v3 University we recommend entering pools with one token and exiting them with the same token. By doing this, we avoid impermanent loss (IL), which is the profit killer in all AMMs.
Let’s dig a little deeper into this and see how this works. If I start an ETH - DAI pool with 1000 DAI at the price range of 990 - 1010, and the price drops below 990, my pool will now have approximately 1 ETH. Let’s assume the price of ETH dropped to 900 DAI, and I wanted to move my liquidity down to this level so I don’t miss out on fees.
I am now putting 1 ETH into a pool at 890 - 910. If ETH goes up in value, and I’m back to 100% DAI, I would have 900 DAI. I have lost 100 DAI due to moving the pool range in the opposite token than I originally deposited it with.
If you want further proof, this article by reuptake shows via backtesting how crippling IL can be if we move around a lot.
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