Written by: jackmelnick_, Head of Berachain DeFi

Compiled by: Felix, PANews

Eight months ago, I wrote a post about LP costs, which did not attract much attention at the time, but yesterday the post's readership tripled, so this article revalidates this method with the latest examples.

Premise: For this method to work better, you need to lay out Memecoin early and acknowledge that a certain Memecoin has a certain advantage in the medium to long term, and that the trading volume has to be large. The example in this article uses BUCK token.

As mentioned in the previous post, you need to set a v3 range, with the lower limit slightly below the current price of the token (usually about 25% lower), and the upper limit relatively high (the example in this article chose about 100 BUCK/SOL or about $2.5/BUCK). This setup minimizes the amount of SOL you have to deposit into the LP, and as the price rises, DCA (dollar-cost averaging) will gradually transition you from Memecoin to SOL.

Now let's talk about impermanent loss (IL): here is a quote from @AbishekFi:

"IL is a tool, not a loss... Measuring LP returns is a hot topic, but it actually depends on your preferences as an LP. Do you want asset A or asset B? Or are you willing to let your position value rise?"

The only way this can happen is if one or both assets in your token pair appreciate, resulting in impermanent loss. However, if you LP with two assets you don't mind holding, you are simply creating an on-chain DCA that generates fees simultaneously.

As @shawmakesmagic mentioned, this could be a very valuable tool for token developers, especially for AI agents with ongoing costs. Providing liquidity in a v3 range for a token pair allows developers to profit/pay fees using the fees while participating in the token's rise. It will directly adjust value over the long term (depending on how the range is set).

To prove that this approach is effective, let's look at a simple example of BUCK, where the author divides it into initial reserves, ongoing impermanent loss, generated fees, and return on investment.

Yesterday created a BUCK/SOL LP, providing 17 SOL and 892,000 BUCK. The reason for doing this is that the Gamestop movement has broad appeal, with rapid token rotation, high volatility, and trading volume.

Set the range with an upper limit of 100 BUCK/SOL (about $2.5) and a lower limit of 8,500 BUCK/SOL ($0.029), which is about 20% lower than the market price of about 6900 BUCK/SOL, ensuring that if BUCK drops in the short term, the token pair will not exceed the range.

This represents a total value of about $4,000 in SOL and $30,000 in BUCK (related to the impermanent loss calculated later).

After 10 hours of withdrawing the LP, it generated:

  • 29.3 SOL and 156,000 BUCK (fees)

  • 25.1 SOL and 841,456 BUCK (LP)

$34,000 deposit generated $12,500 in fees in 10 hours, which is about 88% of the daily fees generated. This is an absolutely incredible number, with an APY reaching 32,120% even without compounding.

In this case, the impermanent loss resulted in a loss of about 50,000 BUCK tokens, which were replaced by another 8 SOL, which is negligible from the perspective of impermanent loss.

To illustrate more clearly:

  • Deposit (total) = 17 SOL and 892,000 BUCK

  • Withdrawal (total) = 54.4 SOL and 997,000 BUCK

  • Total profit of the LP = 37.4 SOL and 105,000 BUCK

It is evident that the impermanent loss generated by the pool is greatly offset by the fees generated from trading volume. This is optimized in token pairs where the price remains roughly consistent with extremely high trading volume.

What's crazier is that it can be further optimized:

  • Raised the fee tier of the LP from 1% to 2% because of deeper liquidity and higher trading volume.

  • Tightened the upper limit of the initial range to further concentrate liquidity, rebalancing the range over time if the price rises.

  • If you want to avoid a drop after the token rises (no round-trip trading), you can pull your LP and rebalance the lower limit of the range to hit 20% of the current bottom price again, thus pocketing your DCA'd SOL income.

In the Meme market, trading volatility is in high demand, and sensitivity to price is very low, positioning oneself as a passive LP is an excellent strategy to maximize returns. Especially for token pairs with longer holding periods and higher trading volumes, considering users who are uncertain about holding SOL or Memes.