pool settings in practice
What settings should you use for your two-sided liquidity pools? What does that mean for you as a seller/buyer, etc.?
Three main components that come into play when interacting with any two-sided liquidity pools:
- Spot price = the "base" price set when the LP is being created
- Fee = the percentage perceived by the LP
- Delta = the percentage (if exponential curve) or value (in SOL, if linear curve) that will increase the price after each sale within that pool
Let's put it simply:
When you buy an NFT instantly from any pool, the amount that you pay, as a user, is [Spot price + Fee + Delta] of that LP.
When you sell an NFT instantly to a pool, the amount that you will receive, as a user, is [Spot price - fee] of that LP.
In case this LP buys an NFT (so a user sells to the LP), this is what happens:
- LP pays 1.2 SOL and gets the NFT
- User sells the NFT to the LP and gets 1.158 SOL [1.2 SOL - 3.5%]
In case this LP sells an NFT (so a user buys from the LP), this is what happens:
- User buys the NFT from the LP and will pay 1.3662 SOL [1.2 SOL + 3.5% + 10%]
- LP gets the 1.3662 SOL
Now that you understand how each parameter works and what it means for the LP but also for the users interacting with the pool, let's now have a look at what types of parameters can be explored for certain pool sizes...
It's a tricky question, but we will try give you a bracket in which you can experiment. The best way to get a feel for it is to try it for yourself, after all, understanding the market in which you're planning on becoming a liquidity provider can only benefit you!
If you want to be able to cover potential market movements with your 10 NFTs, you want to make sure you cover a broader range of the price spectrum. That means that if your NFT has a floor price of 5 SOL and if price fluctuates, you want to make sure that you can capture some volume with the amount of NFTs you have.
A delta of 5% for such a situation offers a relatively good coverage for the range of price it might fluctuate in and still keep your pool relevant!
In this case, you can set your delta around 1%, which should be big enough to cover the range in which the price can fluctuate, also taking into account the amount of NFTs you own.
Doing so will allow your pool to stay relevant and in range.
For the fees, it's entirely up to you, but don't forget: as we explained above, you will indeed receive the fees paid by the users, but if you want to be competitive, keep a close eye on what the other LPs are doing for the collection you're planning on providing liquidity for.
Regardless, if you'd like to set something "within benchmark", then you go opt for a 3.5% fee, or if you're the first one to set up a pool there, you can go for higher, but know that the percentage of fees will decrease rapidly as more people will find about the profitable opportunity!