How to Simulate LP APR Before Investing (Potential Performance)
https://www.youtube.com/watch?v=reezNDAifgg
Transcript:
So if you’ve invested into liquidity pools before, you’ve probably experienced the problem of looking at platforms like Aerodrome, seeing a 620% APR, diving in and then getting a 50% APR, or going over to Uniswap, looking for different pools and not being able to find a bunch of different pools. Or when you do find them, seeing APRs of say 25%, so you pass up on that opportunity only to realize that somebody in that pool is doing 75% or 125% or platforms like Orca Trade, where you do have a general idea on what those APRs can be. You dive
into the pools, but ultimately this is only estimating data over the course of 24 hours. This is a very, very common problem within decentralized finance. And ultimately the reason why is because these APRs typically do not look at a longer horizon. They look at very, very short-term data.
And that’s just simply because these exchanges have so much data to aggregate that it would be too costly to be able to actually have a built-in simulator for determining potential APR. Additionally, it would be way too complex to have that built right into the platform. So that’s where third-party platforms like Metrix Finance come into play. Within our simulate tool, you’re able to simulate results before actually deploying your capital now we talked about in one of our previous videos how you can find pools using metrics finance in our future videos we’ll talk about
how you can build out portfolios and track your performance so if you guys want to stay tuned for those make sure to drop like and subscribe when notifications turned on also there is a link right below this video to actually use metrics finance get a free 14-day trial and follow along with this video but point is say we are discovering pools on Metrix Finance Discover, on DeFi Llama, over here on Uniswap, or on Aerodrome or Orca, right? And we discover, okay, we got RapidCoin to USDC right here on the 0.3% fee tier, say Uniswap v3 pool. We can take that contract address
and copy it, which is right here in the URL, or you can head over here to the links and the contract address is right here as well and we can paste that in where it says address or we could pull up uniswap v3 ethereum network and then just type in wbtc and then also type in usdc and then select the fee tier so once we get here we’ll be prompted to select the fee tier right over here i’m going to select the 0.3 fee tier so that matches up with what we found over on uniswap.
org and from there we are greeted with a load of different data a whole terminal that we can start to customize and determine our range and the thing is metrics finance is only as accurate if you make it so if you’re looking for a solution where you could just look at the numbers after inputting your range and be like okay that’s the return that i get then you’re at the wrong place and the reason why is because your return is going to be determined by a variation of factors some of those factors include number one, where are other people
providing liquidity? For the instance of rapid Quinn to USDC, you can see there’s about 5 million on this price. There’s 5 million on this price. There’s 5 million on this price. There’s 5 million on this price. You go over here, you have about $170,000. Additionally, volume is factored into that how much volume is actually happening because volume determines the amount of fees that are happening.
So that is also being factored in. And in this case scenario, it doesn’t really make sense to factor in 30 days of volume into our analysis when recently volume has gone down. Recently volume has gone from doing 115 million, 300 million per day to now doing 50 million, 25 million. So it doesn’t make sense to have such a high average if recently we are not holding up to that average.
So metrics finance allows you to have complete composability of your analysis and ensure that you are getting to the T results instead of like give or take like 25% APR, right? Or instead of looking at something, seeing a 600% APR and then instantly getting a 50% APR or instead of looking at something getting a 25 percent APR but then actually diving in and getting a much much higher return additionally your range is a big deciding factor of what your APR is going to be now in the instance of looking at rapid going to usdc i would go through the process of selecting my range in this instance i’m going to
do a min price of 92 000 and i’m going to do a max price of roughly 108,000 just to start with. And you’re probably going to notice a trend right here. I am using the 30 day high and the 30 day low as a starting point for my range. I’m not just going to deploy my capital into here and call it a day.
The reason why is because I haven’t customized this. I haven’t made this fit my analysis quite yet. From here is where I’m going to start to adjust things, right? I’m going to say, well, the trend recently is obviously wrapped Bitcoin retracing in regards to USDC over the past 30 days.
We can kind of see that we went from the beginning of the month, roughly $108,000 all the way down to recently at $96,000 or so. So I would be fine to cut out some of that if I really wanted to, but I’d be more interested in adjusting my min price down a little bit until I get to a point where I’m comfortable.
So if I put maybe 88,000, that will give me about 60% rapid liquidity pool and about 40% USDC in the liquidity pool. Your range determines the ratio of your assets. So if we do say 80,000, you could see we now have a lot more USDC. So always make sure you’re adjusting your range and make sure you’re factoring in your asset ratio. That’s a huge thing that you should be looking at in your range.
Additionally, one of the other things you should be doing is adjusting your deposit amount and saying, what happens if I deposit a thousand versus 10,000 versus a hundred thousand versus a million, right? And in this instance, you can see that APR doesn’t really change because there’s just so much money already in this pool.
There’s roughly $130 million, whereas some other pools that might only have a million or 5 million or so, you might start to dilute the returns. You need to be careful of that. But with that being said, our range of 88,000 to 108,000 with a $10,000 deposit is showing roughly $15 per day, but we don’t know if this is accurate.
And the reason why is because we haven’t dove into our simulation process quite yet. We need to do a couple different things to make sure that this is accurate. Number one, we need to scroll down and look at the volume history and see that this is actually declining. So I wouldn’t want to use 30 days of volume for my analysis. I wouldn’t want to use the past four days of volume or so.
And in this instance, once we change that to four days of volume, all of a sudden we are doing 17% APR. A lot, lot lower, right? And in this case, Uniswap is actually showing a higher return over here of roughly 25% APR. And we dive in and it ends up changing. The other thing that we need to do is zoom into this liquidity distribution chart.
And we need to see, hey, there’s 5 million here, there’s three and a half million here, there’s four and a half million over here. So when we adjust that price over here, we might be getting a 25% APR. Over here, we might be getting an 18% APR. But over here, we are getting a 16% APR. The reason why is because there’s more capital on these price points.
So while we aren’t adjusting the actual price of the pool, we are adjusting the price that is used to actually calculate potential returns. And the reason why is because if there are points within our range where there are high amounts of liquidity, we need to see how we’re going to perform at those points. Because yes, we might be over here doing a 705% APR.
But if we’re only there for a couple hours, and then all of a sudden we go back to the point where we’re doing a 17 apr yes we will come out to higher than 17 because we have some of that high data that’s high 700 apr that helps skew our results up but ultimately we do have to factor in that we are still going to retrace to a point where we are doing 16 17 per year so this is exactly what metrics finance allows you to do you can adjust your current price to see how your position performs over different price periods. You can scroll down
and you can also adjust the volume history to make sure that you are only factoring an accurate volume. You can also on the simulation page see exactly how your position is going to perform as specific price points happen. So over here, when the price is 100,000 USDC per wrapped Bitcoin, we will have 0.
034 wrapped Bitcoin and 67 33 usdc whereas we start with 0.0598 additionally we could see exactly how much usdc in total we’re going to have across rapid coin and usdc uh over specific price points so at our price of a hundred thousand we’ll have three thousand thirty six usdc worth of rapid coin at that price and then if we look at by total value this will just show us the USDC value over the course of time.
Now, this is because we are looking at RAT Bitcoin to USDC. The quote asset is USDC, which is why it assumes USDC there. We could toggle these if we wish to do so, which will show us how many RAT Bitcoin tokens equal one USDC. It’s not really logical to look at it that way. Now, the other very, very important thing that we can do through simulate, which I personally think is a must do before you enter any liquidity pool, is simulate the volatility performance and see how your position holds up during volatility.
So I usually like to go over to CoinGecko and see how much a specific asset can move in the period of a day, seven days, 30 days and simulate from there. Right. And if I plan on being in a position for two weeks, well, let’s see how much it can move in a day or a week. Right.
And I know Bitcoin can go to one hundred thousand dollars in a day which would put it up five percent it could probably even go higher than five percent in a day so let’s just say maybe 102 000. that’s an average day if we see a very very good day in the market six and a half percent for Bitcoin that’s going to create roughly 0.93 percent of Divergence loss in which we need 20 days of position fees which is that 16 17 APR or 4.
61 cents per day we need 20 days of that in order to cover this opportunity cost divergence loss that we have over here so this pool doesn’t really make sense in my opinion because if we can move that much in a day yet it takes us 20 21 days to cover that and that’s just a break even it’s not that good of an actual return in here I would look for a better opportunity and guys assuming that you think that this is a good fit for your portfolio you can save this to your portfolio which will put it right over here on the build page where you can start
to build out your d5 liquidity pool portfolio directly within metrics finance so that way you eliminate the need for having to actually have spreadsheets to go and copy and paste data from metrics over to the spreadsheet and then all of a sudden a day later the results changed and now you need to go and copy and paste more data completely eliminates that pain additionally it completely eliminates the pain of investing into pools that show super high APRs like 620 percent or over here say 25 and you actually get 17 or over here you might get 50 or something over
on orca that’s just not going to be consistent with what it’s showing like it might be showing 1600 on arc to soul over here on orca but you dive in for say seven days 14 days maybe you’re actually getting a thousand percent or hey maybe you end up getting 2500 because this is a low day right metrics finance allows you to do that and metrics finance allows you to look at up to the past 365 days of data so that way you can have more of an advanced analysis when it comes to your liquidity pools and truly make sure that you’re making data-driven decisions and you’re
not just gambling your money away at returns that look high look good but ultimately are not when you actually dive into them i hope you guys enjoyed this video if you did drop a like subscribe notifications turned on remember there is a 14 day free trial that you guys can access for metrics pro right below this video if you guys do want to check that out see you guys next one peace out
