Mastering Concentrated Liquidity (V3) Pools. Making Profit While Providing Liquidity

5 min readJun 19, 2024

We launched on Terra with Delta Neutral strategies farming Mirror V2 liquidity pools. Since then, concentrated liquidity (V3) pools have started dominating the market. We went through various iterations and came back to LP yield strategies. We upgraded them and made them ready for V3 pools, and they are ready to compete with any protocol offering LP farming strategies.

Concentrated liquidity (V3) pools introduced by Uniswap, allow liquidity providers to provide liquidity within specific price ranges. This mechanism increases the capital efficiency and increases generated fees by the LPs and reduces the slippage, but requires active management and deep market understanding to remain profitable.

🌽 Liquidity & Yield Farming

Providing liquidity involves various challenges such as impermanent loss, rebalancing costs, and losses to arbitrageurs. To be profitable, it’s essential to smartly rebalance positions while optimizing gathered fees. Simply generating high APRs isn’t sufficient; profitability matters more. For instance, we tested strategies generating over 300% APR, but overall results showed a -60% loss.

An example is our High APR ETH-USDC strategy, which averages 200% APR but is -13% versus HODL (just holding the coins) since its launch. This means simply holding the tokens would have resulted in 13% more value.

Making a profit while providing liquidity is complex. Narrow ranges often lead to losses, while wider ranges yield returns similar to just holding the tokens. Finding the right balance and strategy is crucial for successful LPing.

🅰️🅱️LPs Options

1. Manually Manage The Positions
• Manually manage, rebalance, and compound positions
• Requires good market understanding, otherwise it is highly unprofitable
• Demands constant monitoring and manual adjustments. Tools like Revert can assist

2. Provide Liquidity In A Full Range
• Deposit in an infinite range, similar to classic V2 pools
• No position management required, but generates lower APR as active LPs capture most of the fees
• Performance is usually slightly worse than just holding the tokens

3. Use Automated Liquidity Managers (ALMs)
• Deposit in an ALM for automated position management
• It sounds good in theory but they are struggling with beating HODL as well, that’s also why you won’t find any other project that benchmarks their performance to HODL
• Focus primarily on high APR without considering net results, making profitability uncertain. A high APR doesn’t equal a profitable strategy.

The struggle of beating just holding the coins is real

🛑 The Challenge Of Beating HODL

When you LP, you are exposed to impermanent loss and arbitrageurs. Generated fees must cover these and more for LPing to be profitable. However, relying solely on APR is insufficient for long-term success. At Brokkr, we focus on overall performance, including asset price movement.

📊 Brokkr LP Trading Strategies

To profit from LPing, you either generate fees or you use the pool rebalancing to maximize the asset price appreciation. Our top strategies combine trading with providing liquidity for optimal results, getting the most out of the asset prices and generated fees.

Our approach involves providing liquidity directionally. For instance, in the ETH-USDC pair, liquidity is provided in ETH when its price rises and rebalanced to USDC when the price falls. This strategy maximizes gains during price appreciation and minimizes losses during declines, reducing impermanent loss.

While potentially risky and volatile, this strategy performs well in active markets. Our live results for three months confirm our backtesting expectations:

ETH-USDC = +8.4% vs. ETH, +8.8% vs. HODL
BTC-ETH = +3.6% vs. HODL
ETH-GMX = +27% vs. HODL

No other ALM matches this performance. But it is important to note the performance heavily depends on the timeframe and the price movement.

Brokkr Performance (17/3/24–17/6/24)

➡️ Next Steps

Expand and Add More Pools: Prioritize bluechip coins and introduce additional strategies showing promising backtesting results
V3 Delta Neutral Strategy: Finish development of the strategy that hedges against price movements, ideal for farming points and rewards on new chains
Expand to Other EVM-Based Chains: Focus on Blast, Base, and Mantle. Engage with DEXs for partnerships and potential grants

⛓️ New Chains Launch Plan

LP Strategies — Deliver great returns and are useful for incentives farming
Indexes — Integrating chain projects under one umbrella
DNS — Great for farming points and incentives with solid returns

💪 Future Enhancements

• Native Crosschain Strategies — Enabled by THORChain’s V5 router from Oleg, this will unlock crosschain strategies, indexes, liquidity aggregation, and much more!
• V4 DEX Adjustments — Adjust strategies to V4 DEXs
• V4 DEX Hooks — We’re developing hooks that offer additional pool functions. We’re partnered with Algebra to deliver the highly demanded plugins, starting with Liquidity Locking & Liquidity Incentives. All plugins will have a small volume fee that generates revenue for Brokkr.

V4 AMMs revolutionize DEX functionality, adding extensive customization options and transforming user interactions in trading and LPing. We are leading the way in developing these new features for DEXs.