How to LP in a Bull Market
Be formless. Shapeless, like water. If you put water into a cup, it becomes the cup. You put water into a bottle and it becomes the bottle. You put it in a teapot, it becomes the teapot. Now, water can flow or it can crash. Be water, my friend. — Bruce Lee
One of the best traits of traders is being able to adapt to changing market conditions, especially during a possible bull market.
This is especially true for liquidity provision, which presents unique opportunities and challenges.
For this reason, we have prepared a guide on how to leverage our two most prominent strategies through the GLP and Trader Joe (TJ) Auto-vaults to allow you to better understand how they perform differently according to the market.
Each of them has distinct features, catering to different risk appetites and market conditions.
Understanding these differences is crucial for anyone looking to navigate the LP terrain effectively and take full advantage of Struct Finance.
Differences in GLP vs TJ Mechanics
GLP Vault Mechanics
The GLP vault mechanism is intrinsically linked to the GLP price and market volatility. Investors must frame their risk appetite accordingly, as these factors can significantly influence returns and risk exposure.
This approach makes GLP vaults somewhat more predictable, as their operations are closely tied to these measurable metrics.
TJ Vault Mechanics
In contrast, TJ vaults are significantly influenced by divergence risk or impermanent loss (IL). This factor becomes crucial when considering liquidity provision in these pools, as IL can greatly affect returns, especially in volatile market conditions.
TJ vault mechanics also consider pool fees and trading volumes. These elements determine the profitability and attractiveness of different pools within the TJ ecosystem.
It’s important to note that Struct vaults in the TJ framework carry similar risks to Auto-pools. This means that despite the different operational mechanics, the underlying risk factors remain relatively consistent across both types of pools.
Utilizing GLP and TJ in Different Market Conditions
GLP Vault Strategy
GLP vaults typically offer a more directional investment approach, as seen in pairings like USDC/USDC. These pairings do not suffer from impermanent loss, making them a potentially safer bet in certain market conditions.
The funds deposited in our GLP vaults are converted to GLP, which is an index composed of approximately 30% stablecoins and 70% blue chip tokens (wBTC, wETH, AVAX).
This strategy is particularly effective in a bullish market where the direction is more predictable and the absence of IL can be a significant advantage.
TJ Auto-pools Strategy
TJ Auto-pools offer a more range-bound strategy. This approach is less about betting on a market direction and more about capitalizing on market stability or trading within a certain range where liquidity is deposited.
The management of IL in TJ pools is a critical component. Choosing the fixed tranche in these pools might help mitigate the effects of IL, which can be particularly rampant in volatile markets.
While GLP vaults focus on directional strategies with no IL, TJ pools offer a more nuanced approach that balances potential IL against pool fees and trading volumes.
Due to their design, the former might be more adapted in a bullish scenario, benefiting from market volatility, while the latter might be more beneficial during periods with less volatility and range trading. In a bullish scenario, TJ Auto-Pools might incur high IL.
For this reason, choosing a stablecoin TJ Auto-Pool such as EURC/USDC might be less risky because of less IL. Nonetheless, as we have mentioned above, Auto-Pools are not the best product in case of strong market movements, as they are highly impacted by IL.
This comparison highlights the varying risk profiles and potential rewards in different LP strategies, where selecting a pool with stablecoins helps mitigate the risk of volatile price movements.
At first glance, the TJ EURC/USDC vault might seem to have a similar design to the USDC/USDC GLP-based Vault.
However, they work in completely different ways.
GLP vs TJ Vaults
In order to have a thorough understanding of how these vaults behave differently, let’s have a practical example using a GLP vault and a TJ Auto-Pool vault, assuming a 10% price movement in BTC.
GLP Vault: USDC-USDC
This Vault is created for users who have a bullish outlook for the market.
As mentioned above, our GLP Vaults are particularly adapted to maximize returns during periods of market growth and volatility.
Let’s assume a user deposits $1000 into this vault.
The USDC funds deposited in our vaults are swapped into GLP, which is an index composed of stablecoins and blue-chip cryptocurrencies.
What happens if BTC goes up 10%?
The price increase of BTC will be partially captured by the GLP index.
At Vault expirations, users will receive the funds deposited + a 10% APR (average APR for fixed tranche) + a 4% APR thanks to the Bitcoin price increase — as BTC comprises about 40% of the GLP index.
In addition to this, the vault will be able to capture further upside from other assets comprising the GLP index, although in the minority (wETH, AVAX).
TJ Auto-Pool Vault: EURC-USDC
The Auto-Pool vaults perform better when price trades across a defined range. Consistent price movements affect Auto-Pools, leading to IL.
Let’s assume a user deposits $1000 into our TJ Auto-Pool vault.
What happens if BTC goes up 10%?
The price increase of BTC will not be captured by the Auto-Pool vault.
At vault expirations, users will receive the funds deposited + the Auto-Pool APR.
Furthermore, users might also incur in IL.
In this case, the EURC might trade at a discount or a premium, contributing to losses.
Let’s use a practical example using our BTC.b/AVAX Auto-pools according to the historical performance of BTC and AVAX during the previous month.
During the last 30 days, BTC price rose by about 8.1%, while AVAX rose by over 86%.
If you had deposited funds in our BTC.b/AVAX Auto-pool Vault, this would have led to an IL of about 3.57%.
Users could mitigate the impact of IL by choosing to deposit liquidity in an Auto-Pool vault based on stablecoins or in a price bucket tilted towards the upside. Nonetheless, depositing liquidity into an Auto-Pool could be particularly risky in a highly volatile situation.
These types of vaults are less performant during price movements, and less able to capture an upside. They perform better in range training situations, and perhaps for this reason they are less suited in bullish/bearish scenarios.
Conclusion
Navigating liquidity provision in a bull market requires a deep understanding of how to take advantage of these movements.
Our GLP and TJ vaults come with different sets of risks and rewards, tailored to different market conditions and investor appetites.
By being aware of these differences and the inherent risks involved, investors can make more informed decisions, aligning their strategies with their risk tolerance and market outlook.
The GLP products might be a better choice in a scenario of high volatility, while TJ Auto-Pools are better suited for periods of range trading and generally lower volatility.
Offering both of these products allows our users to assess market conditions and deploy their capital accordingly.
To gear up for our Auto-Vaults launch, this week we will kick off 4 test vaults in AVAX/USDC, BTC.B/AVAX, wETH/AVAX, and EUROC/USDC.
These vaults will not be available to the public, yet, but testing will allow us to measure their performance in a live environment to assess how to best structure their public launch.
More options for your yield are coming soon.
Sooner than you expect!
