Binance has just released a feature to earn Alpha points through investments. I want to share some of my thoughts with everyone, hoping it can help you.
Point Rules:
This score is similar to the balance, and I won't explain too much here. You can roughly understand it as previously your balance could just be in U, but the liquidity balance requires two types of tokens, such as Alpha token + BNB.
Here we mainly want to discuss some risks of adding liquidity:
1. Impermanent Loss: Simply put, as shown in the diagram, you deposited BNB and USDT for liquidity, but due to subsequent price fluctuations, the value of the asset combination you hold (which is USDT + BNB in the diagram) becomes lower than the value of the two tokens you hold. In simpler terms, the transaction fees and APR you receive are not enough to cover the depreciation of your principal.
2. We are using the V3 version of Uniswap. As we all know, V3 was introduced to better and more efficiently utilize capital, but the risks have also increased. We can see that when subscribing, a price range needs to be specified. In the V2 version, this range covered the entire price segment (from 0 to ∞). In V3, users need to customize the price range. For example, if the upper range is set to 0.00149-0.00150, once the price fluctuates and drops to 0.001 or rises to 0.002, you may end up holding only one asset (either USDT or BNB), losing the hedging of a two-sided asset combination. However, in V2, the price range from 0 to ∞ always has liquidity, so in V3, while you can earn faster, you can also lose more severely.
3. How to play?
Click the top 【Binance Alpha Wealth Management Center】 or go to 【Liquidity Pool】 to select the supported Alpha token liquidity pools.
4. What should I do?
Binance first needs to select relatively stable tokens for users to add liquidity; otherwise, users may suffer significant impermanent losses. As users, they also need to choose trading pairs with lower volatility. The risks are lower, but the returns are also relatively smaller.
Set your range a bit wider, such as writing 0.000149-0.001 above, which prevents detachment from your set range, but it cannot avoid impermanent loss, it just reduces it. Similarly, the returns will also be diluted.
Provide directional liquidity. For example, if you know through technical analysis that the token you are adding liquidity to will rise, set the range above the price to provide more Alpha tokens. However, the risk here is that if your analysis is incorrect, the losses could be significant.
Then there is hedging, such as opening a futures position in the opposite direction. Theoretically, this can lock in value fluctuations, but it requires certain experience with DeFi derivatives and is complex to manage.
When the market conditions change suddenly or the price approaches the edge of the range, act promptly to actively control risks. You need to monitor the market frequently, which can be time-consuming.
The last point likely requires Binance to follow up by using some automated rebalancing tools to dynamically manage users' V3 positions. Users can adjust their ranges and rebalance, allowing for automated management without needing to monitor constantly. However, this requires full trust in the tools, and I believe that only Binance can provide the safest endorsement for this.
Uniswap V3 does not have a 'liquidation mechanism', but it has a 'spike and lose everything' mechanism. How do we explain this? Because of extreme situations, when a spike occurs, it can trap users. Once your set price range is instantaneously pierced (spiked), your liquidity will become a one-sided asset, equivalent to a 'funds reallocation', which may also cause huge 'impermanent losses', leading to significant losses.