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Liquidity Pools (LPs)

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Metrix.Finance

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Video lesson

Track DeFi LP Performance

Tracking DeFi Liquidity Positions Performance

In the ever-evolving world of decentralized finance (DeFi), understanding how to track your liquidity positions is not just beneficial—it’s essential. DeFi liquidity pools allow you to provide funds and earn a yield, but without proper tracking tools, you might miss out on critical insights. This lesson focuses on the methods of tracking your DeFi liquidity position and how these insights can not only enhance your investment strategy but provide a nuanced understanding of how these principles relate to traditional finance. Essentially, it’s about embracing the future without losing your way in the process!

Core Concepts

Liquidity Pools
In traditional finance, liquidity refers to how easily assets can be bought or sold without affecting their price. In crypto, liquidity pools are smart contracts holding funds that facilitate trading on DeFi platforms. Understanding liquidity pools is crucial, as they are the backbone of DeFi trading.
Automated Tracking Tools
Just as stock traders might use portfolio platforms to manage their investments, DeFi investors can use automatic tracking tools—like those in Metrix.Finance. These tools provide insights into your liquidity position, highlighting metrics that inform your trading strategy.
Profit and Loss Analysis
In traditional finance, understanding profit and loss is vital for investing success. In crypto, tracking these figures becomes even more complex due to factors like volatility and gas fees. Knowing how to calculate these can help you evaluate your performance in liquidity pools.
Annual Percentage Rate (APR)
APR in traditional finance represents the yearly interest generated by an investment. In DeFi, APR can be calculated based on the earnings from liquidity pools, providing insights into how well your assets are performing against the market.
Divergence Loss
This term describes the difference in returns when compared to holding an asset directly rather than through liquidity pools. It’s crucial for determining opportunity costs—whether your investment strategy is working for you or against you.
Token Swaps
This concept in crypto involves exchanging one cryptocurrency for another within a liquidity pool. Understanding token swaps is essential as these transactions affect the liquidity position’s overall performance.
Market Benchmarking
In traditional finance, investors often benchmark their performance against index funds. In crypto, particularly in DeFi, understanding how your investments stack up against holding tokens directly is vital.

Tracking Your Liquidity Position

1. Getting Started with Tracking

Enter your wallet address into a tracking tool like Metrix.Finance
Review the supported exchanges, noting which require pro features versus what is available for free.
Understand the basics: your current liquidity, deposits, and withdrawal capacities.

Your investment journey begins with entering a few simple details. Connecting to Metrix.Finance, you get immediate access to crucial metrics providing a starting point for deeper analysis.

2. Analyzing Current Liquidity Performance

Track current liquidity in your pool and compare it with total deposits.
Monitor earnings, differentiating between claimed and unclaimed funds.
Calculate overall profit/loss, factoring in deposits and current asset values.

Your liquidity performance will give you initial feedback on whether you’re swimming in profits or floundering in losses. Understanding this at a glance is critical in making swift, informed decisions.

3. Evaluating Return on Investment (ROI)

Calculate ROI based on changes in your asset values.
Monitor the annualized APR for various liquidity positions to assess profitability.

Knowing how well your assets are performing relative to your deposits, including how your liquidity positions might be outperforming the market, can empower your investment choices.

4. Assessing Divergence Loss and Opportunity Costs

Compare potential gains from holding assets directly against returns from liquidity pools.
Consider the divergence loss table to evaluate opportunity costs.

This evaluation is essential for understanding the risks and rewards of being a liquidity provider versus a conventional investor. You wouldn’t want to dive into a pool that’s less rewarding!

5. Monitoring Asset Composition Over Time

Review how the value of each asset in the pool changes.
Observe the effects of market fluctuations on different assets held in your liquidity pool.

It’s almost like being part of a market-based reality show, where every twist and turn could alter the stakes dramatically.

6. Projections and Future Planning

Use the projections provided by tracking tools to estimate future gains based on current APR and market trends.
Consider the implications of your findings on future investment strategies.

Forecasting is key in finance, and it’s no different in DeFi. Monitoring these data points positions you for smarter investing decisions down the line.

Blockchain Passive Income

Understanding how these financial concepts manifest within the crypto realm is vital. For example, in crypto, the liquidity of tokens directly affects trading speeds and prices, which can create opportunities but also add volatility. By employing tracking tools, you can compare your performance in liquidity pools to holding individual tokens as you develop your strategy.

The tracking metrics you explore not only give you insights into individual investments but also allow you to see broader trends within crypto markets, thus positioning you ahead of the curve.

Real-World Applications

Consider the historical rise of decentralized exchanges (DEXs). These platforms revolutionized how traders access liquidity, allowing for seamless token swaps without intermediaries. Projects like Uniswap and SushiSwap exemplify the benefits and challenges of DeFi liquidity. By understanding liquidity tracking, you become better equipped to navigate the evolving finance landscape.

Challenges and Solutions

Challenges
As with any emerging market, the DeFi space presents challenges, including volatility and complex user interfaces.

Solutions
Utilizing automated tracking tools simplifies the assessment of your investments. These tools also educate users on navigating liquidity pools efficiently. Moreover, addressing concerns about gas fees against potential earnings will help newcomers frame their expectations accurately.

Key Takeaways

Liquidity Pools are Fundamental: Understanding liquidity pools is essential to participating and benefiting from DeFi.
Automated Tracking Tools Enhance Decision Making: Tools like Metrix.Finance provide crucial insights into your liquidity position and help track performance.
Profit and Loss Tracking is Vital: Being able to analyze these metrics helps formulate better investment decisions.
Understand APR to Gauge Performance: Tracking APR can clarify whether relevant investments are yielding substantial growth.
Evaluate Divergence Loss: Understanding how your strategy stacks up against holding assets outright is vital for minimizing opportunity costs.
Proactive Planning is Key: Use projection capabilities of tracking tools to map out future earnings potential and risk assessments.
Embrace Learning & Adaptation: The DeFi landscape evolves quickly, staying well-informed via tools and practices is crucial.

Discussion Questions and Scenarios

How does understanding divergence loss influence your investment decisions in DeFi compared to traditional markets?
Compare and contrast your earnings experience in liquidity pools versus traditional stock dividends.
What could be the implications of a high divergence loss for a liquidity provider?
How does market volatility impact liquidity pools compared to conventional asset investments?
Discuss how automated tracking tools can help mitigate investment risks for newcomers to DeFi.
If you had to choose between maintaining a liquidity position or holding a diverse crypto asset portfolio, what would guide your choice?
How can historical data enhance your decision-making process in future liquidity investments?

Glossary

Liquidity Pools: Smart contracts holding funds for trading in exchanges, crucial in DeFi.
Automated Tracking Tools: Software that provides real-time analysis of financial assets.
Profit and Loss Analysis: Evaluation of earnings or losses to measure investment performance.
Annual Percentage Rate (APR): Yearly interest derived from investments, reflecting profitability.
Divergence Loss: The opportunity cost compared to holding an asset directly versus through a liquidity pool.
Token Swaps: Exchanging one cryptocurrency for another, particularly in liquidity pools.
Market Benchmarking: Comparing performance of investments against market indexes or averages.

As you conclude this lesson, I hope you feel more ready to embark on your journey in the DeFi space, equipped to navigate the intricacies of liquidity positions. This understanding is only the beginning!

Continue to Next Lesson

Get ready to further explore the exciting concepts within the Crypto Is FIRE (CFIRE) training program, as we dive deeper into the world of digital assets!

Read Video Transcript

How to Track DeFi Liquidity Position Performance (Full Tutorial)

https://www.youtube.com/watch?v=XLew0C3czj0

Transcript:

So in today’s video, we’re going to be diving into how you can track your DeFi liquidity position and liquidity pool performance completely automated. All you have to do is enter your wallet address. And this is based on these supported platforms over on Metrix Finance. And as I mentioned just a couple seconds ago, all you have to do is go over to Metrix Finance and paste in your wallet address.

Some of this information is going to be available for completely free. Some of this other information you will have to be a part of the pro plan for, which is going to be a 14 day free trial right below this video. If you guys do want to get access to that, just to try it out and enter your wall address and see if you find some good insights from the data that’s being displayed here.

With that being said, I want to walk you through the process of actually tracking, talk about what’s a good metric to see, what’s a bad metric to see, and answer any questions that may come up when you first get started with this tool. So again, all you have to do is head over to track paste in your wall address you’ll see a list of exchanges that are supported right up here the ones that are in the gradient those ones are part of the pro plan exclusively whereas the ones over here are part of the free plan but do have limited access in the free plan anyways the first thing that you’re

going to be greeted with after pasting in your wallet address is going to be the current liquidity that you have in the pool this is how much right now you currently have in the pool that you can withdraw from initial capital basically so if you deposited in this instance 22 000 and that’s declined to roughly 20 500 you can withdraw 20 500 basically and my next point is obviously the deposits that you have in this pool right here this wallet address has 22 000 in deposits0 in withdrawals so far from these current open

positions. You can also view your closed positions and all your positions using this tool. Your earnings are broken down into unclaimed versus claimed, and you can also see the total number overall. So on these two positions, this wallet just hit the $1,000 mark basically. And we can see our overall profit loss. This is dollar in, dollar out basically.

If we put in $22,153, we accumulate about a thousand bucks in fees, right? We are only down $576 because we have $20,571 now. So that’s adding these two numbers together and then just strictly taking that number and subtracting the deposits from it. And that gives us our overall profit loss. And if we want to, we can include gas fees.

In this case scenario, they are not that much, only about $10 across these two positions. And you can also see your profit compared to holding in the market. This right here is by far one of the most important metrics in a liquidity position and a liquidity portfolio. And the reason why is because it tells you if your strategy is actually beating holding the market, or if you should forgo all this risk, you should forgo all the additional management that you’re doing with these LPs and just hold in the market basically. In this instance, it is $753, which means if I just invested into

DeSync and Ethereum and Ondo and Ethereum, instead of investing into liquidity pools, I would have $753 less. Since I’m in these two positions, I have $753 more compared to holding the market. So I’m benchmarking against holding the market. And we’ll dive a little bit deeper into that in just a second. But ultimately, that’s a very, very good health indicator.

If it’s negative, that means you are underperforming if you just held your money in the market, as opposed to going into LPs, which means that you’re doing a lot for not really any reason, basically. Your asset gain is how much the price is appreciated, depreciated. So this $22,153 has went down to roughly $20,571. And of course, this ROI right here, that negative 2.

6% is just expressing this number right here as a percentage of my overall deposits basically. This APR that’s being displayed right up here is the actual APR from my position based on what I’ve earned so far in total earnings. So I’ve earned about a thousand bucks over the course of roughly 13 days or so.

So it’s dividing that thousand bucks by 13 days. It’s annualizing that number and determining the actual APR for this position. So this right here is going to be the most accurate data that you can get because it’s based on what you’ve actually got. And then using that APR and your current liquidity, this will project over the course of 24 hours, seven days, 30 days, so on and so forth.

Now, if we wanted to segment specific positions, we could type in just one of the assets like desync, and it would show us all the positions with desync in it. And it also segment it right up here and filter down into just the desync analytics. So that way we can see based on a specific strategy. We could also dive into specific exchanges, networks and stuff like that. Now, those metrics that we just saw right over here are going to be the same right down here.

But when we actually dive into these positions, like for example, if we were to dive into this desync to Ethereum position, we’ll see the same metrics up here. We will see substantially more data now because we’re actually breaking it down into a position by position basis now. So we’ll see how much we currently have in the pool and assets.

So I have about 20% Ethereum and about 80% desync in the liquidity pool. You could see the current asset amounts and their dollar amounts. So $1,800 of Ethereum and nearly $7,300 of DeSync. We could see what we initially deployed in the pool, which was 1.31 Ethereum, which at the time was worth $35.81 and $27,000, nearly $28,000 DeSync, which at the time was worth $62.81, and $27,000, nearly $28,000 desync, which at the time was worth $62.29.

Now we could also see if we held those assets to date, basically. So if we held those assets to date, that Ethereum would have lost about $20, whereas that desync would have lost a little bit more, basically. We could see our earnings broken down. We could see exactly how much of each asset we’re getting, if that’s a 50-50 split, if we’re getting a little bit more in one currency than the other.

And do keep in mind that when you earn actual earnings, they could be paid out 50-50 if there’s equal trading volume. But then all of a sudden, one of the assets could go down substantially, which causes you to have less of it basically, because this is being averaged out based on the deposit amounts.

One of the most important analytic things that Metric Finance can provide that no other tool out there can provide is this divergence loss table. This essentially tells you your opportunity cost of investing into this liquidity pool as opposed to holding any of the assets in the liquidity pool. So if we stuck our money in ETH, we’d have $97.

57, right? Since we’re in this pool, we have $9,093. So we have less than if we stuck our money in ETH. When we factor in our $591 in earnings, we still have less, $73 less than holding just 100% of our money in ETH. When we factor in our $591 in earnings, we still have less, $73 less than holding just 100% of our money in ETH.

That means our divergence loss or our opportunity cost compared to holding in ETH, not factoring in earnings, about $664. Now, if we held all of our money in desync, well, we’re actually at a profit compared to that metric because we’d have $8,866. So that gives us actually in this case scenario, a divergence gain or an opportunity gain uh of 227 dollars which means we are actually profiting 818 dollars compared to if we just stuck all of our money in desync so we’re outperforming that benchmark right there this 50 50 obviously just waits at 50 50 it’s going to find the middle

ground between these two numbers which means we’re profiting versus holding 50 50 ratio we’re also profiting against holding our initial assets which was actually in a 37 63 ratio more weighted towards desync this position liquidity chart will show you your position value over time it’ll show you if you held all your money in desync if you held an eth right if you just held 50 50 the same benchmarks that we see over here on the opportunity cost and divergence loss table we can also toggle those if we want to see specific ones like one of the things I like to do is just look strictly

at the position liquidity over time to see kind of how my deposit has fluctuated while being in this pool. And then our price range right over here. This will show us our min price, our max price, when we’ll be 100% of asset one versus asset two. It will show us how much of each asset was sold basically. So in this case, 0.

648 Ethereum was converted to 8227 desync. And that was an average price of 12,692 desync per Ethereum basically. We could see our current price, our average starting price, as well as a chart of the actual liquidity pool’s price and then our range, right? So that way we can see if we went out of range during a specific period of time. A lot of people don’t realize this, but sometimes their positions snap out of range.

And one of the things that we’ve noticed amongst a lot of metrics pro liquidity providers is by just looking at this chart, they can increase the time that they’re in range. Meaning if they’re in range 80% of the time doing, let’s just say an 80% APR, if they ramp that up to being in range a hundred percent of the time, well, they could be doing a hundred percent APR basically because they’re in range more often.

And then projections is obviously what you’re expected to make over a specific period of time. We will say when you are looking at these broader numbers, do take it with a grain of salt simply because a lot of the times you will not be in a position past 60 days unless you were running a very, very broad range position basically. Anyways, this right here is metrics track.

You just simply enter in your wall address, you can see all this data at your fingertips is all completely automated and it all pulls in directly from the blockchain as soon as you enter your wallet address so that being said if you guys enjoyed today’s video make sure to drop a like and subscribe notifications turned on so you don’t miss out on more valuable content like this and if you guys do need that 14 day free trial you guys want to check it out use one of the best liquidity pooling softwares then it is right below this video.