Strategies
Information on Orphic LP strategies
Last updated
Information on Orphic LP strategies
Last updated
Fees and impermanent loss are the respective forms of yield and risk for concentrated liquidity. Liquidity providers (and Orphic) generally seek to maximize fee production and minimize impermanent loss through strategies. Strategies are "rules" or guidelines that guide the management of Orphic vaults. Orphic strategies are heavily automated, using automatic triggers to conduct management practices like compounding, rebalancing, and setting ranges.
Fees are driven by volume or, in other words, more trading happening. More volume equals more fees. But, in concentrated liquidity, fees are also driven by concentration and range. A liquidity provider who concentrates their liquidity near the trading price will receive significantly more fees than someone who sets their ranges wide.
Impermanent loss is notoriously difficult to explain. But, at the core, it's any losses LPs sustain from the changing prices and ratio of the assets the LPs deposited into the pool. Those losses happen because the prices of the assets go up or down (it happens both ways), and the ratios of the assets change from your deposit to your withdrawal. Contrary to full-range liquidity, concentrated liquidity pools are rarely 50-50.
Impermanent Loss is primarily driven by volatility.
Examples: If a user deposited $1000 into a pool and later withdrew $800, and holding that deposit would have been worth $900, then the user experienced $100 of impermanent losses. Likewise, if the LP withdrew $1200, and holding that deposit was worth $1300, then the LP experienced $100 of impermanent losses.
It is mathematically possible to separate and measure the fee production and impermanent loss of any liquidity position using abstract methods, but it's far easier to evaluate the performance of an LP position by comparing holding the assets at the exact ratio at the time of deposit.
If the fees > IL, the LP vs HOLD will be positive. If the IL > fees, the LP vs. Hold will be negative.
As the name implies, impermanent loss is only "permanent" if it's realized. This means the vault/pool is rebalanced. Rebalancing is sometimes necessary but generally avoided if possible due to the downsides of impermanent loss.
Gas costs to maintain a pool also count against an LP's yield, but the fees are only statistically relevant on certain blockchains. With some costs to rebalance $20+ and some costing less than $0.10. Users can check fees on L2Fees.info by CryptoStats.
Orphic has a number of different strategies for users of the protocol. Some of these focus on certain asset classes, as well as a number of advanced hedging strategies.
Dynamic ranges are the most common strategy for Orphic.
Liquidity ranges are automatically rebalanced when certain rebalance triggers are hit. Liquidity ranges can be set for a pair and rebalances are automatically triggered by the price moving a certain percentage one way or another.
Accrued fees will be compounded back into the position regularly on behalf of LPs compounding yield. Auto-rebalancing allows for a passive LP experience
The wide-range strategy caters to long-term liquidity providers and their risk preferences. It takes into account high volatility and rewards in the selection of ranges.
Wider ranges generally have less impermanent loss in a high-volatility environment. Over the long run, the savings in impermanent loss will likely outweigh the higher fees in a narrower range.
In a low volatility environment, wider ranges may earn less in fees and perform worse due to earning at a lower fee multiple.
The narrow-range strategy caters to short-term liquidity providers and their risk preferences. The narrower ranges will earn more in fees and rewards but likely incur more losses in a high-volatility environment.
In a low volatility environment, narrower ranges generally earn more in fees and perform better due to earning at a higher fee multiplier without suffering much impermanent loss.
In a high-volatility environment, narrower ranges incur more impermanent loss and divergence costs. Over the long run, the higher fees in a narrower range will likely not outweigh the impermanent loss.
Example Pools
ARB-USDC Pair 0.05% - Arbitrum
WETH-USDT Pair 0.05% - Mainnet
OP-WETH Pair 0.05% - Optimism
POL-WETH Pair 0.05% - Polygon
In Development
In Development
In Development
In Development
Orphic can curate custom strategies for a variety of applications like exotic staked assets, protocol liquidity, treasury management, and more. Please contact the team for more information.
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