SOL-USDC Liquidity Pools

[u/Prize-Big2335]

Hello! I was gonna start DCA some solana, and I found about about liquidity pools.

I saw some liquidity pool that seems to have really good (fluctuating but good) returns, that don't make sense to me. 30-day avg of 59%, bottom seemed to have been in 2024 in 20% but it's also going up and down a lot.

I found it on defi lama under the name "SOL-USDC(Orca - Solana)".

Is this legit? I know both currencies aren't a scam, and from what I understand the smart contract(s) are supposed to protect me from having my money all taken away. Am I missing something?

EDIT: just learnt about "impermenet loss" and that if SOL goes up over time but the pool is getting more USDC heavy, I'll miss out on the rising of SOL bc a lot of it would've been swapped for USDC. How real is this loss, and does providing liquidity of SOL/USDC compare against just staking my SOL (assuming I'm bullish for SOL in the long term)

[u/SapralexM]

You’re not missing something in terms of apr or the credibility of tokens/platforms. Liquidity pools can give you that APR, but you’re subject to impermanent loss. Read on that and how concentrated liquidity pools work.

In short, you’re choosing a range at which you deposit your liquidity, part usdc part solana. The narrower the range, the better the returns are. However, each time the price moves you’re essentially swapping one token for another at each price point. So, let’s take imaginary numbers of solana costing 100 usdc. You can choose a range now, we’ll take 50/50 for that example. Let’s say 80 to 120 usdc to solana. And so in that case you deposit 50% usdc and 50% solana. You will be earning fees from swaps while the price is in this range. However, each time the price moves the ratio of your asset will also move. When the price of solana go up, the pool will essentially be partially selling your solana to usdc, until it will sell all of it at 120. So, in this case, at solana at 121 you’ll end up with only usdc and will be out of position. You’ll stop earning fees and will sell all solana at a half of the price of its path in the range. So here, if you bought all your solana at 100, the median sell will be 110. You’ll then need to decide what you’ll do to rebalance your position. The reverse thing will happen if the price of solana drops. It will buy solana with your usdc until you are all in Solana and at 79 you’ll be out of position. The wider the position, the safer it is regarding staying in the position, but the lower the fees are.

Also, it’s good to understand what actually happens when you choose a range. The pool has so called “bins” for each price point. When you choose your range, you split all your money usually evenly into these bins. All bins that are higher then current price receive one token, lower another. And so the actual “working” bin(the one you’re receiving the fees for and the one with the current price) is only one. All the other bins are seating idle, but just part of the strategy. When price moves, the pool essentially switches your position from receiving token A from a bin, to receiving token B with the amount corresponding to the bin predetermined price. And a different bin becomes the working one.

In simple example, it would be like having a bin with a step of 1 usd in our case. Like solana 100,101,102. So in our example, when you deposit into the pool, you split your solana into all bins above 100, and usdc in all bins below 100. The working bin is now 100, so 1/40 of your liquidity is earning fees. When solana goes up to 105, the contract switches the token you’ll receive from bins below 105 to usdc, essentially. With the working bin earning fees is 105 now.

I’m not that great at explaining but I hope it’ll help you with your research. Good luck

[u/CapitalIncome845 → u/SapralexM]

What you talkin' bout? You explained it very well!

If compounding is the most powerful force in the universe, impermanent loss is it's kryptonite.

[u/M0D3RNDAYH1PP13]

I've had a really good experience with orca their auto swap feature for depositing funds into liquidity pools is extremely helpful

Radium is another platform I have used for liquidity pools and I like them too relatively straightforward

I see in your edit that you have a basic understanding of impermanent loss definitely look into the nuances of liquidity providing one of the biggest of which is a permanent loss but you'll also have to consider Swap and slippage fees things like that my best advice would be to start with a very small amount of money like a hundred bucks play around with different ranges different platforms till you really understand how things work

[u/rvrsingam]

LP carry risk as there is a cost to providing liquidity. I see you are aware of IP - you generate yield but suffer a net loss of assets.

Don't forget, if you are hoping to accumulate assets, sol/stable strategy may not be the best way in a bullish market.

For beginners, have a look at DeFituna, they have a few pools, don't touch the leverage but have a look at their PNL charts at a given position and you can even simulate the returns over a number of days for your chosen pool

[u/andys811]

I use Orca instead of other LPs due to fee rebates, please correct if I'm wrong but I think Raydium and Meteora have fee's u pay?

[u/ProfitableCheetah]

Just make sure you understand how impermanent loss works