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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.Perceived 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.
The key thing to note about providing
(SPOT, stablecoin)pair liquidity on AMM platforms is that SPOT has mean-reverting price volatility.
- 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.
- No Impermanent Loss: Although SPOT is more volatile than a stablecoin and it's price loosely tracks AMPL's. A
(SPOT, stablecoin)pair will not experience long-lived periods of impermanent loss while rotations are active. For an overview of how the SPOT system works see About SPOT.
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.