Another profit strategy in the meme market is to enhance returns through passive LP

Original Title: "Memecoin LP II: How I Learned to Stop Worrying and Love IL"

Author: @jackmelnick_, Head of Berachain DeFi

Compiled by: Felix, PANews

Eight months ago, I wrote a post about LP costs, which did not attract much attention at the time, but yesterday the post's readership tripled, so this article uses the latest examples to revalidate this method.

Premise: To make this method work better, you need to position yourself early in memecoins and recognize that a certain memecoin has certain advantages in the medium to long term, and that the trading volume is high. This article uses the BUCK token as an example.

As mentioned in the previous post, you need to set a v3 range, with the lower limit slightly below the current price of the token (usually about 25% lower), and the upper limit relatively higher (this article example chooses about 100 BUCK/SOL or about $2.5/BUCK). This setup minimizes the amount of SOL you need to deposit into the LP, and as the price rises, DCA (dollar-cost averaging) will gradually allow you to transition from memecoins to SOL.

Now let's talk about impermanent loss (IL): here is a paraphrase of @AbishekFi's statement:

IL is a tool, not a loss …… Measuring LP returns is a hot topic, but it actually depends on your preferences as an LP. Do you want asset* A or asset B? Or are you willing to let your position value increase?

The only way this happens is if one / both assets in your token pair appreciate, resulting in impermanent loss. However, if you LP with two assets you don't mind holding, then you are simply creating an on-chain DCA that generates fees at the same time. "

As @shawmakesmagic mentioned, this can be a very valuable tool for token developers, especially for AI agents with ongoing costs. Providing liquidity for a token pair with a v3 range allows developers to profit/pay fees using the fees while participating in the token's appreciation. It will directly adjust value in the long term (depending on how the range is set).

To prove that this method is effective, let's look at a simple example with BUCK, where the author divides it into initial reserves, ongoing impermanent loss, generated fees, and return on investment.

Yesterday, I created a BUCK/SOL LP, providing 17 SOL and 892,000 BUCK. The reason for this is that the Gamestop movement has broad appeal, the token rotation speed is fast, and the volatility and trading volume are extremely high.

The range was set with an upper limit of 100 BUCK/SOL (about $2.5) and a lower limit of 8,500 BUCK/SOL (0.029 USD), which is about 20% lower than the market price of approximately 6900 BUCK/SOL, ensuring that if BUCK drops in the short term, the token pair will not exceed the range.

This represents a total value of about $4,000 in SOL and $30,000 in BUCK (related to the later calculation of impermanent loss).

After 10 hours of extracting the LP, it generated:

• 29.3 SOL and 156,000 BUCK (fees)
• 25.1 SOL and 841,456 BUCK (LP)

The $34,000 deposit generated approximately $12,500 in fees in 10 hours, which is about 88% of the daily fee generation. This is an absolutely incredible number, and even without compounding, the APY reaches 32,120%.

In this case, the impermanent loss was about 50,000 BUCK tokens, which were replaced by another 8 SOL, which is negligible from the perspective of impermanent loss.

To clarify further:

• Deposit (total) = 17 SOL and 892,000 BUCK
• Withdrawal (total) = 54.4 SOL and 997,000 BUCK
• Total profit from LP = 37.4 SOL and 105,000 BUCK

It is clear that the impermanent loss generated by the pool is greatly offset by the fees generated from trading volume. This is optimized in token pairs where the price remains roughly consistent with extremely high trading volume.

Even crazier, it can be further optimized:

• Adjust the LP fee tier from 1% to 2%, as liquidity is deeper and trading volume is larger
• Tighten the upper limit of the initial range to further concentrate liquidity, and if the price rises, rebalance the range over time
• If you want to avoid a drop after the token rises (no round-trip trading), you can pull your LP and rebalance the lower limit of the range to bring it back to 20% of the current bottom price, thus pocketing the SOL income you have DCA'd.

In the meme market, the demand for trading volatility is extremely high, and the sensitivity to price is very low, positioning yourself as a passive LP is an excellent strategy to maximize returns. Especially for token pairs with longer holding times and higher trading volumes, considering users who are uncertain about holding SOL or meme.