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4 Best Ways to Choosing a Profitable Liquidity Pool

most profitable liquidity pools


Introduction

Choosing the right liquidity pool is not an easy thing, provided that it is a new concept. With a rise in popularity of Automated Marketing Protocols, the demand for liquidity providers to provide liquidity has increased. Several advantages come with providing liquidity. With the use of AMM, the liquidity is brought to decentralized exchanges, enables automated and permission-less completion of cryptocurrency exchange at any time with no need for another trader. Also, anyone can participate in Cardano Network in providing liquidity since you are only required to have ERC-20 tokens on Ethereum. The users can also move their tokens between multiple pools while searching for higher yields.

Although, you may undergo some losses if you invest in the wrong liquidity pool. Below are the factors to help you choose a good liquidity pool:

1. Price Divergence of the Tokens

The price of the token in the pool should not move opposite each other. When it does, the process is known as price divergence, making you incur an impermanent loss. The higher the price divergence, the greater impact of impermanent loss will be felt. As a result, you will experience more losses when you exit liquidity. The strategy for this pool was to buy and hold ETH and not providing liquidity. Therefore, when the token's price divergence, you must buy and hold ETH and not provide liquidity to avoid experiencing loss.

2. Volume

Since we make money only when swaps happen, each day's pools' volume is essential to liquidity pools. For instance, the current volume for an AMP is 0.3% off each transaction therefore, the higher the volume, the more the profit. You need to be aware of the history of the volume and the advanced pool history page and the volume and the advanced pool history page. You need to about the volume of the pool over time.

3. Reserves

Reserve is the same size as the Pool Liquidity. Knowing the size of the liquidity pool is important to ensure that pool is not subject to wild price swings. When the reserves are lower, the more susceptible, it is to price slippage. Meaning, the price ratio will move. Thus, making it is not suitable for liquidity pools. It will also help ensure that the price ratio is not affected by ensuring that reserves do not exit the pool.

4. The Ratio of Volume and Reserves

Another important aspect is the ratio of volume and reserves over time. The ratio gives you the sense of the rate that you should expect moving forward. The ratio number should be increasing or staying constant over time and not decreasing. When the number ratio decreases mean that you are going at a loss.

Conclusion

Providing liquidity might seem an easy and profitable investment, but if you don't know the right thing to do, you may make losses. Therefore, you need to do more research before investing in Cardano Network or any other Automated Liquidity protocols to ensure you acquire the best liquidity providers.