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Metrix.Finance

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DeFi Tools

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DeFi Trading Tools

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Video lesson

How to Make Consistent Returns

Liquidity Pools with Consistent Returns

In the ever-evolving world of decentralized finance (DeFi), identifying high APR liquidity pools that also exhibit consistency and longevity is crucial for maximizing your earnings. Rather than merely holding onto cryptocurrency, which can depreciate significantly, strategically deploying your assets into liquidity pools can enhance your potential for profit. This lesson explores the exciting tools and methods for locating these opportunities, as well as the importance of understanding liquidity pools both in traditional finance and the burgeoning crypto ecosystem.

Core Concepts

Liquidity Pools: In traditional finance, liquidity refers to how easily an asset can be converted to cash without affecting its market price. In the crypto world, liquidity pools are smart contracts that hold pairs of tokens, enabling users to trade without relying on a centralized order book. Understanding liquidity pools is vital as they underpin many DeFi services, allowing users to earn fees and rewards through providing liquidity.
Annual Percentage Rate (APR): APR in finance indicates the yearly interest generated by an investment, expressed as a percentage. In crypto, APR is used similarly; however, it reflects returns from liquidity pools or staking. Grasping APR helps you analyze potential returns on liquidity provisioning, enhancing decision-making in your crypto journey.
Total Value Locked (TVL): TVL signifies the total amount of assets staked in a DeFi project or liquidity pool. In traditional finance, you might think of it as the total assets under management in a fund. In crypto, TVL offers insights into a pool’s popularity and stability, as higher TVL typically indicates a more trusted and liquid pool.
Divergence Loss: This term describes the risk of impermanent loss incurred when the prices of assets in a liquidity pool diverge significantly from their initial price ratio. In traditional finance, this concept can be likened to opportunity cost when investing in a volatile asset. Recognizing divergence loss empowers you to make informed choices about which pools to join.
Volume History: Volume history tracks how much of a particular asset has been traded over a set period. In traditional finance, this might be reflected in trading volumes on a stock exchange. Understanding volume history in crypto allows you to assess the trading activity and feasibility of continuing to earn from a particular liquidity pool, so you don’t end up stuck in a low-activity pool.
Correlation: Correlation refers to how assets move in relation to one another. In finance, a high correlation means that as one asset’s price goes up, the other’s goes up too. In the DeFi world, knowing the correlation of assets in a liquidity pool helps you gauge risk. A low correlation may signal that one asset could lose value while the other gains, increasing your risk of divergence loss.
Portfolio Tracking: Portfolio tracking in traditional finance involves monitoring the performance of your investments. In crypto, tracking your portfolio allows you to stay updated on your liquidity pool earnings, performance, and overall health. It’s crucial for making informed decisions about your investments.

Key Steps

1. Accessing DeFi Pools

Utilize decentralized exchanges (DEXs) like Uniswap and Orca to explore liquidity pools.
Recognize the limitations of DEXs, such as the lack of detailed analytics.

Strategy: By becoming familiar with various DEX interfaces, you can efficiently navigate to discover profitable liquidity pools. Engaging with Metrix.Finance can simplify this process by consolidating data and streamlining analysis.

2. Filtering Opportunities

Apply filters to your search for liquidity pools based on APR and TVL.
Set a minimum APR threshold (e.g., above 25%).
Identify pools with TVL exceeding $4 million.

Insight: By narrowing your selections this way, you’re not just chasing high APR but ensuring you’re looking at pools that can support sustained liquidity. This approach echoes traditional investment methods, where choosing stable assets leads to better performance.

3. Analyzing Pool Metrics

Assess daily fee averages; ideal pools should generate at least $2,000 per day.
Evaluate correlation amongst assets in the pool to mitigate risks of divergence loss.

Example: If a liquidity pool consists of traditional stable assets like ETH and DAI, the correlation may indicate lower risk compared to a pool containing highly volatile tokens like meme coins.

4. Simulating Returns

Utilize Metrix.Finance simulations to estimate potential earnings based on your investment parameters.
Consider volume history to determine consistency in fee generation.

Tip: Imagine comparing traditional stocks; the more stable the performance, the more predictable your returns will be. In crypto, tools like Metrix provide a similar reassurance.

5. Conducting Asset Research

Investigate assets with lower familiarity using platforms like CoinGecko.
Assess market cap, role in the DeFi ecosystem, and historical trends before investing.

Insight: Just as a savvy investor researches stocks before committing, delving deeply into crypto assets can save you from unforeseen losses.

6. Portfolio Management

Track performance post-investment to monitor earnings and manage risk effectively.

Learning: Understanding your portfolio – through metrics like P&L – ensures you stay in tune with your investment’s health, drawing parallels to managing a traditional investment portfolio actively.

Blockchain Passive Income

When filtering for high APR, crypto pools mirror traditional finance’s focus on yield-bearing investments, albeit with added complexity given crypto’s volatility.
Tools like Metrix.Finance serve as the modern equivalent of traditional investor tools, offering simulations and insights tailored to the unique crypto market.
However, crypto still faces challenges like transaction fees during high-volume periods that can eat into earnings, unlike traditional finance where such fees are often more predictable.

Examples

While the lesson did not mention specific graphs or charts, one might consider incorporating the following:

A chart comparing APRs across various liquidity pools over time.
A graph illustrating the correlation between daily fees and overall earnings within crypto pools.

Hypothetical Example

Traditional Finance: If you invest $1,000 into a bond generating a 5% APR, after one year, you can expect to earn $50.
Crypto Context: Conversely, investing $1,000 in a liquidity pool with a 30% APR could yield $300 in earnings, harnessing the power of rapid token trades and liquidity fees.

Real-World Applications

Historical performance of cryptocurrencies such as Ethereum shows the significance of entering liquidity pools during periods of high TVL, providing case studies to inform future investment decisions.
Understanding volatility in crypto, including periods of high divergence loss, can offer insights when compared to stable traditional investment periods.

Cause and Effect Relationships

An increase in TVL often leads to reduced divergence loss due to a larger pool of capital stabilizing asset prices.
Similar dynamics are observed in traditional finance; as funds grow, volatility tends to decrease due to enhanced liquidity.

Challenges and Solutions

Challenges: Risks such as divergence loss, insufficient volume, and market volatility hinder profitability.
Solutions: Utilizing sophisticated analytics tools can provide clarity and shield you from potential traps within liquidity pools.

Common misconceptions, like the belief that higher APR alone guarantees profitability, must be addressed. It’s critical to analyze the backing assets and the overall pool performance, moving away from a simplistic view.

Key Takeaways

Understand Liquidity Pools: Knowing how they operate is fundamental to leveraging DeFi opportunities.
Evaluate APR and TVL: These indicators are crucial for informed investment decisions.
Account for Divergence Loss: Being aware protects your capital from unexpected downturns.
Analyze Volume History: Indicates the potential consistency of earnings.
Conduct Thorough Research: Always know what assets you’re investing in to mitigate risks further.
Utilize Tools: Platforms like Metrix.Finance can dramatically improve your research and decision-making process.
Track Performance: Regularly understanding your portfolio ensures a proactive rather than reactive approach.

Discussion Questions and Scenarios

In what ways could understanding traditional liquidity concepts enhance your crypto investing strategies?
Compare the risk of divergence loss in liquidity pools to traditional investment risks. Are they comparable?
What factors do you think can impact the APR in a liquidity pool, and how might they differ from traditional finance?
How would you assess the viability of a new cryptocurrency asset for liquidity pooling?
Imagine a scenario where a liquidity pool sees a major price deviation—what steps should you take to mitigate risks?
What role do volatile assets play in determining a pool’s overall APR, and should that influence your decision to invest?
Can the use of analysis tools like Metrix.Finance help reduce emotional decision-making in crypto, as they do in traditional finance?

Glossary

Liquidity Pools: Smart contracts on a blockchain where assets are pooled together for trading and earning yield.
Annual Percentage Rate (APR): The annual return on an investment expressed as a percentage.
Total Value Locked (TVL): The total value of assets available in a DeFi project or liquidity pool.
Divergence Loss: The potential loss incurred due to the variance in asset prices within a liquidity pool relative to their initial investment value.
Volume History: The record of trading activity for an asset over time.
Correlation: A statistical measure of how two assets move in relation to each other.
Portfolio Tracking: The method of monitoring the performance of your investments, including asset allocation and returns.

By grasping these concepts and utilizing the tools available in the DeFi space, you can truly elevate your investment strategies and maximize returns on your cryptocurrency holdings, aligning perfectly with the aims of the Crypto Is FIRE (CFIRE) training plan.

Continue to Next Lesson

As you unfold the concept of liquidity pools and dive deeper into the world of DeFi, anticipate the next lesson which will further enhance your understanding and skills on this exciting journey toward financial independence with crypto!

Read Video Transcript

“(42) How to Find High APR Liquidity Pools with Consistent Returns (DeFi Passive Income) – YouTube

https://www.youtube.com/watch?v=cNrmdzi51jA

Transcript:

Today I’ll be showing you how to find DeFi liquidity pools that don’t just have high APR, but also show signs of both consistency and longevity. I’m here in Abu Dhabi, but I wanted to come on here and show you this awesome method of how to do so. Just take a look at this wallet here.

They have over $90,000 in these liquidity pools, but if they were just holding on their assets into the market, you can see that their assets depreciated. But since they’re deployed into these DeFi liquidity pools, they’re at a profit. They have been earning income on their cryptocurrency. So today I’ll be showing you how to find positions to do so.

So if you’re on the decentralized exchanges such as Uniswap or Orca, you can’t see much information about liquidity pools that you’re interested into getting into. And it’s hard to spot good positions. So, for example, if you’re scrolling on Uniswap or Orca, you click on a pool off the bat, you can’t even see the correlation, which is a very important stat to know.

You can’t see how correlated the assets are to each other and you can’t run detailed simulations of what type of earnings you could be making on your investment. Similar story over on Orca. On the pools, there’s very limited data that you can see. So we’ll be using Metrix Finance. It’s the best software for finding these liquidity provision opportunities, also simulating your returns to see what type of money you could be making on these crypto investments, and then third, building out your portfolio.

I’ll leave a link below where you can claim a trial to the pro version of Metrix Finance. So you can go ahead and check that out. I’ll go ahead and launch the app. Now we’re going to be looking for positions that show signs of consistency, longevity, and that have solid APR. So we can go to Metrics Finance and hit discover, and we can select the exchanges and networks we want to look at. Remember, there’s risks to this investing, such as divergence loss.

I’m not a financial advisor, so make sure to do your own research. I’m simply here just showing you this tool. So we can go ahead and select our exchanges we want to look at. In this case, we can go pretty broad. We can select all, network, select all.

Now it’s showing a lot of pools 2 000 pools we’d have to look through so let’s go ahead and set up some parameters for a search because we want to cancel out all these one percent apr pools zero percent thirteen percent we want to look for some higher apr positions so off the bat we can go to this little filter button for fees apr look for pools that have higher than 25% APR.

Then for TVL, we can look for pools that have higher than $4 million in TVL. And now we’re down to 132 pools. So we knocked over 2,000 pools out of the equation that we don’t even want to look at. Next, we can go to average daily fees. Because remember, it can be hard to make solid money on these pools if you’re in pools that are only producing about $1,000 a day in fees or less. So we’re going to look for some pools that have higher average daily fees.

I’m going to go ahead and type in $2,000 for the minimum. There we go. Now we’re down to 83 pools. We could even raise this more if we want to. Now we can scroll down and start to see some pools. Now I’m not going to pay attention to the meme coin pools like MAGA47, Pengu, etc. So off the bat, you can start looking at pools that contain assets you’re already familiar with.

But if you’re pretty new to crypto, you can use some tools that can explain to you about different assets. So for example, you can find a pool that is showing solid APR, also solid TVL, and you can simulate it in a new tab. Now, this is a very cool feature of Metrix Finance. You can first paste in the deposit amount of how much you’d want to invest into the pool, and then you can scroll down and see how correlated the assets are.

This is the first thing I like to look at because if it’s showing very low correlation, I might not even want to pay attention to the pool and get into it in the first place. So this pool is showing high correlation, which is a great sign. Then you can go to volume history. This is another very important thing you need to look at. See if it’s showing high volume and high fees per day.

Some pools show high volume one day and then low volume the next. Some pools show weeks of high fees and then some weeks low fees. So our goal is to find pools that are showing signs of consistency and longevity. And in this case, we need to see if they’re showing consistent volume and fees per day.

So the next step would be to find your price range at which what point you want to provide liquidity for the pool. So for example, we can find our min price and max price, and then it will show our estimated yearly earnings, monthly earnings, and daily earnings. And then we could go ahead and change the calculation range at what range is running the simulation.

So we can use like the past 20 days of data, the past 10 days of data, et cetera. And you can see this calculation range. If we set it to 20, it will show a different calculation range also for the volume history. So we can zoom in and see the volume history based on the past 20 days, 10 days, or whatever the number may be. We can even zoom out and see the pool at a very far glance if we want to.

So say you’re looking at a pool and you don’t know what one of the assets are. You can go ahead, click on the name of the asset, copy it, go over to CoinGecko, paste it in, and then you can start reading about the asset. See how much it’s worth, the market cap. You can see more about it.

You can click on the website and start to research about the role the asset plays in the DeFi ecosystem. And you can start to evaluate if you think the asset has a future in DeFi or not. These are all important steps when evaluating if you want to take on exposure to a liquidity pool. So if you do your research and you do want to take on exposure to it, you can go ahead and hit save to your portfolio and you can enter the pool later.

Once you have entered a pool, you can go to the track section, paste in your wallet and see your pool’s performance. You can see your current liquidity, your current earnings, your P&L. And for example, this wallet I have pulled up, the person has over $90,000 deployed, but you can see, as I mentioned before, they there would be a loss if they weren’t in these liquidity pools but since they are in these liquidity pools they’re making earnings and at a profit so make sure to click the link below in the description to claim a free trial so you can see the list of the supported

exchanges for the tracking feature we have the main ones such as Uniswap, Orca, Velodrome, and Aerodrome and make sure to click the link in the description down below to claim a trial to the pro version of Metrix Finance.