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Beginner Guides teaching the fundamentals of choosing liquidity pairs?

To a beginner (and maybe just in general) farming/staking/mining can be complicated. I am currently in the research phase of my DeFi journey, and the main thing that i am confused with lately is how people crunch the numbers to figure out what investment will work best for them. Are there any guides explaining the fundamentals of choosing liquidity pairs? For example, i was reading some comments on this subreddit last night, and learned that Pool volume is a very important metric to consider. It seems to obvious to me now… higher volume = more transactions = more transaction fees to collect, but as a beginner i naively never considered that – what else am i not considering yet that i should be?

Really want to learn more about:

Risk analysis (on pairs, projects, tokenomics)

impermanent loss vs rewards for farming

Skills to vet the safety and longevity of any new “hidden gem” projects

Any online tools/calculators to make the math easier and/or somewhere that can teach how to crunch the numbers correctly

What red flags and risks a beginner may not be aware of, and how to spot them (in regards to warning signs a project may be acting maliciously, or that a token is about to flop, important changes in code ext)

What do you think?

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14 Comments

  1. As you make enough mistakes to go from gambler to investor, you will discover basic criteria to suit your risk-tolerance. I suggest you write a plan, then test the plan, then revise the plan. Rinse and repeat until you are profitable. Be ready to revise your plan daily!

    Personally, I’ve modified my criteria several times just over the last month.

    Pro-tip #238: Don’t put all your fiat into one app

    ​

    Key metrics:

    * App TVL
    * LP TVL
    * 24hr VOL
    * Performance of underlying tokens, including those tokenomics
    * Age of app: launched yesterday might fold tomorrow, around for 6mo has probably weathered a few attacks.
    * Native coin tokenomics (inflationary/deflationary to what extent, fee structure)
    * Does the app have a valuable service, i.e. “should” it grow
    * If the app is new, does it have some “unique” incentive solution to the problem of tokens going to zero within a few weeks
    * As far as IL, the “safest” is a stable-pair (USDC/BUSD, etc.), then a non-native pair of significantly supported tokens (Cake/BNB, etc)
    * IL is a bigger issue the less-correlated the underlying tokens are. Ideally the two underlying tokens would chart identically. That being said, the lower the risk, the lower the reward.
    * No matter how juicy the APR, if the underlying tokens or the reward token lose 99% of market value or Volume, you will lose money (*cough* Iron Finance *cough*).
    * Consider that a 50% APR LP that DOES NOT COLLAPSE will perform better than 1,000,000% APR that rugs you on day 3
    * Audits are not guarantees, but they are better than no audit. Check out Rugdoc before speculating on a new app, at least.
    * Do they have active social media? Telegram, Twitter, Medium articles that aren’t just clones of another project

  2. The three factors to consider generally are transaction volume, fee percent, and liquidity TVL. Volume x fee percent = fees paid over the volume time period. Divide that by TVL and you get fees per dollar of liquidity over the timer period . You can use that to compare pools.

  3. The basics are:

    Pool volume – higher traded more profits for LPs

    Fee % – many pools use the 0.3% uniswap default but some pairs have multiple pools with different fee %. Keep in mind that higher fee % doesn’t always mean more profits for you as a LP (check my [last post](https://www.reddit.com/r/defi/comments/ocy0i4/uniswap_v3_liquidity_providers_earn_50_more_by/))

    avg 24H fee / TVL – this ratio is probably the #1 metric you should focus on

    pair correlation – the more correlated the tokens in a pair are the lower impermanent loss you can expect. Pairs like USDC/DAI have no impermanent loss under normal circumstances

    concentrated liquidity – Uniswap V3 specific, buy you have to learn it to get good returns

    Let me know if you have trouble finding any of these numbers.

  4. so I understand that as an LP, you trade off the fees you can earn (a function of VOL traded / TVL) with the chance of IL.

    what about farming those LP tokens? how do you evaluate that? for instance, I’m an LP for O3-BUSD on pancakeswap.

    There’s an APR of 235%, a liquidity of $5.2M and a 1x multiplier. How do these numbers interact with each other?

    Pair info: [https://pancakeswap.info/pool/0x7759283571Da8c0928786A96AE601944E10461Ff](https://pancakeswap.info/pool/0x7759283571Da8c0928786A96AE601944E10461Ff)

    can’t link to the farm directly, since they’re all just herE: [https://pancakeswap.finance/farms](https://pancakeswap.finance/farms)

    TIA

  5. Pool volume is one thing, more volume, more fees for liquidity providers. Liquidity is another thing, more liquidity, less is your share as liquidity provider. This is classic supply and demand problem. If you want more profit, choose a pool with lots of demand and lack of supply. And stay away from shit coins since they have very short live.

  6. An absolute fundamental when you have a very large sum in LP Farming is to set up price alerts (I use TradingView). Any sudden and unexpected significant price movement can then be closely observed before calculating your appetite for loss based on divergence between the two assets in your LP.

    It’s essential to fully understand the impact of Impermanent Loss before staking in any LP…

  7. In as much as research is very important, I feel the understanding of the risks of the pool is very important as it could lead to a massive loss of funds from the pool and this can come in different forms such as rug pulls smart contract bugs, etc.

    Getting insurance cover or a rebasing risk parity token that keeps your pool rewards is another way to stay ahead of the game.

  8. Does anyone have a good resources for most corollary asset pairs? Coinbase has a rather rudimentary feature, but want to find a better place to gauge correlation and thus assess potential IL.

    Thanks in adv

  9. This is great I think most are struggling to this. I’m not a newbie tho but I’m in experimental phase. Mentioned above metrics are very usable. I’m now looking for ant math or formula (if any) to use.

  10. We have significant experience with this. It is an ever changing opportunity and expanding fast. Let us know if you have questions on the pools/risk or opportunities.

Still haven’t broken a sweat

Day 12 of Unresolved Coinbase Case #06617751 – USDT Transfer Pending (No Transaction Hash)