Original title: Memecoin LP II: How I Learned to Stop Worrying and Love IL
Original author: Capn Jack Bearow, Head of Berachain DeFi
Original translation: Felix, PANews
I wrote a post about LP costs 8 months ago, which didn’t attract much attention at the time, but the number of views on the post increased threefold yesterday, so this article re-validates this method with the latest examples.
Prerequisite: In order for this method to work better, you need to deploy memecoin as early as possible, recognize that a certain memecoin has certain advantages in the medium and long term, and the trading volume must be large. The example in this article uses the BUCK token.
As mentioned in the previous post , you need to set a v3 range with the lower end of the range slightly lower than the current price of the token (usually about 25% lower) and the upper end of the range higher (about 10% for this example). 100 BUCK/SOL or about $2.5/BUCK). This setup minimizes the amount of SOL you have to deposit with LP, and as the price rises, DCA (regular fixed amount investment) will gradually allow you to transfer from memecoin to SOL .
Lets talk about impermanent loss (IL): Here is @AbishekFis statement:
IL is a tool, not a loss… Measuring LP returns is a hot topic, but it really depends on your preference as an LP. Do you want asset A or asset B? Or would you rather your position be worth more? ?
The only way this can happen is if one/both assets in your token pair appreciate in value, resulting in impermanent loss. However, if you LP two assets that you don’t mind holding, then you’ve just created a On-chain DCA that also generates fees.
As @shawmakesmagic mentioned, this could be a very valuable tool for token developers, especially for AI agents that have ongoing costs. Providing v3-scope liquidity for a token pair allows developers to use fees to Profit/pay fees while participating in token appreciation. It will directly adjust the value in the long term (depending on how the scope is set).
To prove that this approach is effective, let’s look at a simple BUCK example, which the author divides into initial reserves, ongoing impermanent loss, incurred expenses, and return on investment.
A BUCK/SOL LP was created yesterday, offering 17 SOL and 892,000 BUCK. The reason for this is that the Gamestop campaign has broad appeal, fast token rotation, and extremely high volatility and trading volume.
The range is set from an upper limit of 100 BUCK/SOL (about 2.5 USD) to a lower limit of 8,500 BUCK/SOL (0.029 USD), which is about 20% lower than the market price of about 6900 BUCK/SOL, ensuring that if BUCK falls in the short term, the token will be The pair will not go outside the range.
This represents a total value of approximately $4,000 in SOL and $30,000 in BUCK (relevant for calculating impermanent loss later).
After 10 hours the LP was extracted, which yielded:
29.3 SOL and 156,000 BUCK (fees)
25.1 SOL and 841,456 BUCK (LP)
$12,500 in fees in 10 hours on a $34,000 deposit is roughly 88% of the daily fees. This is an absolutely incredible number, even without compounding, the APY is 32,120%.
The impermanent loss in this case is a loss of about 50,000 BUCK tokens, which are replaced by an additional 8 SOL, which is negligible from the perspective of impermanent loss.
To make it clearer:
Deposit (Total) = 17 SOL and 892,000 BUCK
Extraction (Total) = 54.4 SOL and 997,000 BUCK
Total profit of LP = 37.4 SOL and 105,000 BUCK
It is clear that the impermanent loss generated by the pool is more than offset by the fees generated by the trading volume. This is optimized in token pairs that keep prices roughly consistent with extremely high trading volumes.
Even crazier, this can be optimized further:
Adjusted LP fee tier from 1% to 2% due to deeper liquidity and higher trading volume
Tighten the upper limit of the initial range to further concentrate liquidity, and rebalance the range over time if prices rise
If you want to avoid a fall after the token has risen (no round trip trading), you can pull your LP and rebalance the lower limit of the range to 20% of the current floor price again, thereby pocketing the SOL you have DCAed.
In the meme market, where trading volatility is extremely high and price sensitivity is extremely low, positioning oneself as a passive LP is an excellent strategy to maximize returns. This is especially true for tokens with longer holding periods and larger trading volumes. coin pairs, and took into account users who are not sure whether to hold SOL or meme.
