Transcription
The number one biggest mistake liquidity providers make is they jump into a liquidity pool, let's say on Aerodrome for wrapped ETH USDC, and they chase high APYs, set too tight ranges, and impermanent loss just completely eats away any fees they earn from providing liquidity. And then they say, "Hey, this LP thing doesn't work."
In today's video, we're going to completely fix that. I'm going to show you exactly how to hedge your positions so you can keep all of the upside of being a liquidity provider while protecting and minimizing the downside. By the end of this video, you're going to understand how to hedge and if you have any positions open right now, because whether you like it or not, you are long in your LP. You'll be equipped with the tools, the strategies, and the math on how to hedge those positions. So, if the markets do drop, you can recoup any impermanent loss that you may see in your LP.
So, first thing you need to understand is impermanent loss. I'm going to make this really, really quick. As the price of the underlying asset moves, in this example, you have wrapped ETH USDC, as ETH drops in price, your LP is converted into ETH. Now, some people may say, "Oh, that's not a bad thing cuz I want to buy more ETH anyways as price drops." And you are correct. But, when we're providing liquidity, we don't necessarily want to lose US dollar value of our LP.
Now, there is times where you can use your LP to actually just dollar cost average into the markets. We've done a lot of videos on that. But, in this instance, let's just say you don't want to. You've got, you know, a hundred and and thirty thousand dollar position open, and you don't want to lose ten thousand dollars worth of USD value because you're using this LP for cash flow. Impermanent loss happens when at the bottom of this range, if I rebalance this position, I lose around six thousand dollars in US dollar value on this position.
Now, luckily, we're not just stuck being forced to accept that. You can do something about it. You can open a hedge. So, as this position loses dollar value, your short on a perps DEX like GMX can actually recoup any impermanent loss, making it a really solid strategy if you want to place a hedge against the markets seeing some red days.
So, here's exactly how you do it. Let's say that you want to enter this wrapped ETH USDC position. And let's say you want to enter it at a 16% wide range, which is pretty tight, but we'll just use it for this example, or even a a 30% wide range, 15 and 15. Understand that when you enter this position, you are long. If the price of ETH goes up, you make money, and if the price of ETH goes down, you lose money. Now, I'm simplifying that because an LP is non-linear, of course. So, if you deposit $10,000 in this position and the market goes up by 10%, you're not going to make $1,000. And if the market drops by 10%, you don't lose 10% of value on your LP. It'll be less because you're not 100% in ETH.
Now, back in the day, we used to have to do some complex calculations. Nowadays, you can just jump on defibuddy.io, it'll do the math for you. So, we've got on the low side of this position uh 1811. So, we'll go to defibuddy.io, go to tools, go to hedging calculator, and we're going to enter a $10,000 position at a minus 15 plus 15 range. So, 1812, 2451 should be close. 1811, 2445, close enough. And what we want to calculate is if you get to the bottom of this range, how much value will your LP lose? And what size position do we have to open up on a perp stack to recoup that loss?
So, again, defibuddy.io, we enter in our information. I'm going to go daily yield of zero just to make this calculation even simpler. I'm going to go continue to hedge strategy, and we're going to go to the break even at range. Go to defibuddy.io, you can play with all the other strategies here, but in this instance, break even at range, see hedge details. And if I scroll all the way down, this chart will will really simplify this for you. Here is the bottom of a range, here is the top of a range. In the middle, our naked LP, the orange line is $10,000. If I do not hedge this position and I hit the bottom of that range, I will lose around $1,200 of value in my LP, meaning I'll be fully converted into ETH and that ETH will be worth $8,886 instead of what my LP was worth, which was $10,000.
Give me a thumbs up if you're following along. This is super important. This This will literally make you a much more profitable DeFi investor if you can follow this. Now, if I hit the top of my range, my LP will be worth $10,336 and it'll be fully converted into USDC. So, what we are calculating here is I need to open a short that makes me $1,200 if I hit the bottom of my range. So, DeFi Buddy will calculate that for us. I need to short 3.4843 ETH or $7,427 worth of ETH on a platform like We're going to use GMX. So, I would simply take this number, I would copy and paste it over here at 2x leverage. There we go, 2x. Whoops, 2x. And at my take profit level, which is at the lower bound of my range, I would My estimated P&L would be $1,100 and that does include some fees that are going to be taken. And if you remember, at the bottom of my range, I want to recoup around 11, 1120, 1130.
So, just to recap, if I entered this position here on Aerodrome. So, just to recap, if I if I entered this position here on Aerodrome at 1811 to 2445 again. Couple dollars have changed here and there cuz the market keeps shifting. At the lower end of my range, my LP would be down just over $1,100. We use defibuddy.io to calculate what size short would I need to open on a perp decks like GMX to be able to recoup that just over $1,100 at the bottom of my range.
Now, that is like the the base strategy. That's the first thing we'll teach you as you fast track clients. After that, you can start playing with this. There's different strategies that you can layer on top of this. You don't have to open your short right off the bat, which often times I don't when I enter an LP. If I am bullish and long, I won't open a short right off the bat, but I will automate or place an order in to open my short at a predetermined price point. Another strategy is you can actually increase the size of your short to actually make you money, not just keep up with the impermanent loss, but actually make you money if the markets turn.
With that said, if you'd like to see more content like this on Delta neutral plays on more advanced DeFi strategies, then definitely subscribe to the channel, like this video. We actually have a whole playlist on this. We've created a suite of free tools to help you through it. Check out defibuddy.io. And of course, if you'd love to join the conversation that's being had inside UIG or fast track, then we'd love to be able to support you and to become an actually profitable DeFi investor. I think it's it's pretty easy to click some buttons and like enter DeFi or or, you know, become an investor, open a position, but it's really everything that happens before you open that position. And then it's everything that happens after. How do you manage that position? How do you manage the portfolio? There can be a lot of moving pieces to actually being profitable. It's not as simple as just clicking a button and saying, "I'm good. Set it and forget it." And we'd love to support you through that. We've got an awesome community. We're always talking about this stuff. We're always in there. We're always building portfolios, managing portfolios, talking about positions. And we've built the UIG in a way that could be accessible to absolutely anyone. It's a coffee per day. If that's of interest to you, then everything you need is in the description below. And with that said, happy investing, stay hedged, and we'll see you in the next video. Peace.