Providing liquidity
Last updated
Last updated
While there are many factors to consider (eg. token incentives on specific DEXes), and no guarantees can be made, the short answer is that yes, the InfinityPools LP yields should be much higher on average than spot AMMs.
This is because liquidity providers' active liquidity generates yield from spot flows going through the InfinityPools AMM and, on top of that, liquidity that is out of range generates yield by being borrowed for leverage.
Liquidity providers generate yield from two different sources: spot trading fees and lending out liquidity. While lending out liquidity on InfinityPools is very similar to selling covered options, providing liquidity to its spot AMM doesn't have as straightforward of an analogy (as with any other spot AMM).
However, there are a few strategies that traders can execute to bring the InfinityPools overall yields and options premiums closer together. For example:
If the rates on InfinityPools are below options premiums (traders are underpaying for volatility), then traders can create a strangle (going long and short simultaneously on the asset). This strategy buys up cheap volatility and pushes InfinityPools rates up. This strategy will only initially be possible by trading with two separate wallets or by interacting directly with the InfinityPools smart contracts.
If the yields on InfinityPools are consistently above options premiums, then traders can provide liquidity to the protocol and hedge their exposure with options or perpetual futures.
After closing a liquidity position, the provided assets and fees generated are unlocked on an exponential schedule (50% after 1 day, 75% after 2 days etc.). However, if you are worried about price risk after you close a liquidity position, you will be able to hedge it for a fee.
