Author: @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: To make this method work better, you need to lay out memecoins early and acknowledge that a certain memecoin has advantages in the medium to long term, with high trading volume. 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 bound slightly below the current price of the token (usually about 25% lower), and the upper bound relatively higher (around 100 BUCK/SOL or about $2.5/BUCK in this example). This setup minimizes the amount of SOL you need 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 statement 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's value increase?

The only way this happens is if one or both assets in your token pair appreciate, leading to impermanent loss. However, if you LP two assets that you don't mind holding, then you are merely 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 for a token pair with a v3 range allows developers to profit/pay fees using the fees while participating in the token's rise. It will directly adjust the value over the long term (depending on how the range is set).

To demonstrate the effectiveness of this approach, let's look at a simple example of BUCK, where the author breaks it down into initial reserves, ongoing impermanent loss, generated fees, and return on investment.

A BUCK/SOL LP was created yesterday, providing 17 SOL and 892,000 BUCK. The reason for this is that the Gamestop movement has broad appeal, with fast token rotation, high volatility, and extremely high 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 approximately 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 approximately $4,000 in SOL and $30,000 in BUCK (related to the impermanent loss calculated later).

Withdraw LP after 10 hours, it generated:

  • 29.3 SOL and 156,000 BUCK (fees)

  • 25.1 SOL and 841,456 BUCK (LP)

The $34,000 deposit generated a fee of approximately $12,500 within 10 hours, which is about 88% of the daily fees generated. This is an absolutely incredible figure, reaching an APY of 32,120% even without compound interest.

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

To clarify:

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

  • Withdrawn (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 significantly offset by the fees generated by trading volume. This is optimized in token pairs that keep the price roughly consistent with extremely high trading volume.

What’s even crazier is that it can be optimized further:

  • Adjust the LP fee tier from 1% to 2%, as liquidity is deeper and trading volume is larger.

  • Tighten the upper limit of the initial range to further concentrate liquidity, and if the price rises, rebalance the range over time.

  • If you want to avoid a drop after the token rises (without back-and-forth trading), you can pull your LP and rebalance the lower limit of the range to once again reach 20% of the current bottom price, capturing the SOL income you have DCA'd.

In the meme market, the demand for trading volatility is extremely high, and sensitivity to price is very low. Positioning yourself as a passive LP is an excellent strategy for maximizing returns, especially for pairs of tokens with longer holding times and higher trading volumes, considering users who are uncertain about holding SOL or memecoin.

Further reading: A deep dive into two DEX mechanisms: How to mitigate LP profitability risks?