About Providing SPOT Liquidity

Providing liquidity on stablecoin pairs is one of the best ways to generate yield in decentralized finance today. This is largely due to:

  1. Safety: The perceived safety of stablecoin pairs as refuges from volatility through unpredictable market conditions

  2. No Impermanent Loss: The protection from impermanent-loss on Automated Market Making platforms like Uniswap that stablecoin pairs offer.

  3. Healthy Source of Yield: The yield on stablecoin LP positions comes from a percentage of decentralized trading volume which more sustainable in the long-run and easier to manage than yields derived from project stimulus programs.

What's Different About Providing SPOT Liquidity?

The key thing to note about providing (SPOT, stablecoin) pair liquidity on AMM platforms is that SPOT has mean-reverting price volatility.

This means:

  • Greater Potential Yield: Although SPOT price is floating it is expected to be mean-reverting towards the AMPL price target (like AMPL) while rotations are active. In the long-run this extra volatility translates into natural trading volume from arbitrage and can result in higher fees. For an overview of how the SPOT system works see About SPOT.

  • Minimal Impermanent Loss: Although SPOT is more volatile than a stablecoin and it's price loosely tracks AMPL's. Over long periods of time a (SPOT, stablecoin) pair can experience some impermanent loss because SPOT is CPI-tracking but this effect is minimal. For an overview of how the SPOT system works see About SPOT.

  • Safe Collateral: Similar to a stablecoin the SPOT token can be held as a refuge from volatility through unpredictable market conditions. To better understand the safety of SPOT's collateral see About SPOT and About Durability.

Putting it all Together

In short, a (SPOT, stablecoin) AMM position is potentially higher yielding than a traditional stablecoin pair position. Moreover a (SPOT, stablecoin) pair position is safer to hold than floating priced pair positions and current generation decentralized stablecoin pair positions.

Last updated