Liquidity Pool Calculator

1. How Liquidity Pools Work

A liquidity pool (LP) is a smart contract holding two (or more) tokens in equal value. When traders swap token A for token B, they trade against the pool. The pool charges a fee (0.01%-1% depending on pool), which goes to LPs proportional to their share.

Example: Uniswap USDC/ETH pool with $1B TVL. You deposit $100k (50k USDC, 50k ETH). Over one month, the pool generates $1M in fees. You earn 0.01% of that = $100 in fee revenue. Sounds great, but impermanent loss can offset these gains if prices move significantly.

Pool mechanics: The pool maintains x * y = k, where x and y are token amounts. As price moves, the pool rebalances itself. Traders push the ratio, LPs suffer opportunity cost. Fees compensate for this risk.

2. Impermanent Loss Calculation

Impermanent loss formula: IL = 2 * sqrt(price_ratio) / (1 + price_ratio) - 1. If ETH rises from $2k to $4k, price_ratio = 2. IL = 2 * sqrt(2) / (1 + 2) - 1 = -5.7%. You lose 5.7% relative to holding the tokens.

Why? When ETH rises, the pool automatically sells your ETH for USDC to maintain the constant product. You end up with more USDC but less ETH than you would have holding both. You underperform holding 50/50 by 5.7%.

IL risk increases with volatility. Stablecoin pairs (USDC/USDT) have ~0% IL. ETH/BTC might have 5-10% IL on 50% price swings. New altcoin pairs might have 30%+ IL on doubling. Your fee revenue must exceed IL for profit. A pool paying 1% in fees but suffering 5% IL is a net loss.

3. Fee Revenue Estimation

Fee revenue depends on pool volume and your share. Uniswap V3 USDC/USDT 0.01% pool generates $500M daily volume on $2B TVL. Daily fees: $50k. Annual: $18.25M. At 0.01% fee, annual fees per $B TVL: ~$9M.

Your cut: If you provide $100k of the $2B TVL (0.005%), you earn $900 annually in fees. If your IL is -5%, you lose $5k (relative to hodling). Net: -$4,100 (a loss). This is why V3 concentrated liquidity matters—higher fee concentration can overcome IL on the same pair.

High-volume pairs: ETH/USDC at 0.05% fee on Uniswap V3 generates 10-15% APY for concentrated LPs around the current price. New pairs with $1M TVL might advertise 500% APY—mostly unsustainable incentives that disappear in months. Check Dune Analytics for historical pool profitability.

4. Concentrated vs Full-Range Liquidity

Full-range (Uniswap V2): Provide liquidity from price $0 to infinity. Capital is spread thin. Most of it sits unused. Trade happens mostly in narrow price band, so your fee revenue is low relative to capital deployed. No active management needed—just set and forget.

Concentrated (Uniswap V3): Provide liquidity in narrow range, e.g., $1,950-$2,050 for ETH/USDC currently at $2,000. All your capital works in the active trading zone. Fee revenue per dollar deployed is 10-100x higher. Downside: if price moves outside range, you stop earning fees and suffer concentrated IL.

Concentrated requires active management. If ETH falls to $1,900, your V3 position earns zero fees because no trades happen there. Rebalancing means withdrawing, paying gas ($10-100), repositioning. Over a year, rebalancing costs might total $500-2,000. Worth it only if fee revenue exceeds management costs.

Automation: Beefy and Gamma strategies automate V3 rebalancing. Their vaults handle position management, charging 0.5-2% annual fee. This can still beat manual V2 if the base fees are high enough (>5% APY).

5. TVL and APR/APY Analysis

TVL (Total Value Locked) = total capital in the pool. APR = annual fees / TVL. High-TVL pools are usually stable, mature. Low-TVL pools are either new/risky or in declining demand. A 5% APY pool with $500M TVL is more trustworthy than a 500% pool with $100k TVL.

Comparing: Uniswap V3 USDC/USDT 0.01% has $500M TVL, 7% APY. Balancer stable pools have $100M TVL, 3-4% APY. Curve stable pools have $2B TVL, 2-3% APY. Newer protocols like Maverick might advertise 20-30% APY on $10M TVL—requires diligence on audit status and sustainability.

Red flags: APY dropping rapidly (protocol losing volume). TVL dropping faster than APY rising (indicates pool unsustainability). No LP transaction history (suspicious, likely a scam token pair). Very high APY on new pool (unsustainable token emission-based, exit within months).

6. Pool Selection Strategies

Conservative strategy: Uniswap V3 USDC/USDT 0.01% concentrated around peg, 5-7% APY, zero IL risk, billions in TVL. Ideal for capital preservation while earning yield. No management needed if prices stay at peg.

Moderate risk: Curve or Balancer stable pools, 2-4% APY, low IL, automated management. Slightly lower returns than concentrated V3 but easier to execute. Good for $50k-$1M positions.

Aggressive: Uniswap V3 concentrated on correlated pairs (ETH/stETH, wBTC/ETH), 10-20% APY with manageable IL if you rebalance. Requires active involvement but highest rewards on capital.

Speculative: New pool incentives paying 50-100% APY, usually time-limited (6 months). Execute if confident incentives will persist. Exit before they collapse. Time-sensitive but can produce outsized returns.

7. Best Pools by Risk/Reward

Best for stability: Uniswap V3 USDC/USDT 0.01% ($500M TVL, 7% APY, 0% IL). Best for passive income: Curve 3pool (DAI/USDC/USDT, $1B TVL, 2% APY, 0% IL). Best for volatility harvesting: Uniswap V3 ETH/USDC concentrated 0.05% ($5B TVL, 10-12% APY, 2-3% IL).

Emerging: Maverick, Orca, or Raydium concentrated AMMs offering 15-25% APY on specific pairs. Requires research on audit status and team credibility. Potential for high returns but smart contract risk is real.

Avoid: Shitcoin pairs, low-TVL (<$1M) altcoin pools, pools with 0 liquidity history, and offers of 500%+ APY without clear fee sources. If returns seem too good, they probably are unsustainable.

8. Frequently Asked Questions