When you are a liquidity provider (LP), you collect a 0.25% fee on every trade (0.3% on Uniswap V2) (times your percentage of the liquidity pool). Looking at coingecko, all of the bankless token liquidity pools are BANK/ETH. Crypto is volatile, prices will always go up and down over time. You have people selling and buying non-stop. Looking at the price chart for BANK over 90 days, it bounced between 0.05 and 0.15 while mostly being closer to the middle. Currently our treasury makes ZERO profits from this liquidity. Bankless liquidity providers as long as they leave their liquidity for a while, end up profiting over time. Between Aug 29 to Nov 9, the price of BANK went from 0.1 to 0.1. During that time, ETH went up about 25%. This means that there was about 2-3% impermanent loss for LPs from the ETH price change versus BANK’s price change. However, I wouldn’t be surprised if these LPs collected around 10-20+% in fees during that time. That’s a profit of 7-17+% in 2 months!
This is why people are so excited about “DeFi 2.0”. A DAO can use the same strategy as OHM, to buy their own liquidity (incrementally, so the buy in versus time to profit is gradual). That becomes income for our treasury. There is little to no risk in using this strategy (compared to simply holding BANK or ETH) as long as you hold the liquidity for a long duration (3-12+ months). Our DAO will hold this forever unless we later decide to adjust the LP tokens in our treasury. If you have more questions on how liquidity providing works, you can look up Uniswap V2’s explanation/guides. We will be using non-concentrated liquidity tokens, so these are more stable than Uniswap V3’s liquidity.
It is difficult to understand how liquidity providing at first works, but I recommend reading about it. A simplified version of it is basically that … you are setting limit orders along the price range. And when he limit order gets filled, you collect 0.25% profits. As the price moves back and forth over a long time, the prices of your assets (the tokens you are trading), remain relatively stable on average. Your fees collected keep growing and growing though. Before OHM (Olympus DAO) came along, it was rare for a DAO to own their own liquidity. Now there is a proven method of doing so though. There is a reason that Uniswap has billions of dollars in liquidity providers. Its a great way to earn money over time.