Single-Sided Strategy Pros and Cons
How to place a Single-Side of liquidity
Your Risk Warnings
What is a 'Single-Sided Strategy' ?
In most decentralized exchanges, liquidity providers (LPs) must provide two assets to a liquidity pool. However, Liquidity Book allows for single-sided liquidity, enabling LPs to contribute just one type of asset to a pool, unlocking new types of liquidity strategies. In this article, we explore how to place a single-side of liquidity and the pros and cons of doing so.
Placing a single side of liquidity using Liquidity Book, would typically give you a shape that looks like one of the below:
Advantages of deploying a Single Side
Single-sided liquidity allows you to stay exposed to just one asset, which is beneficial if you have a strong preference or bullish outlook for that particular asset. It is therefore perfect use of a single side deployment if you are aiming to enter/exit a token in favor of the other token in the liquidity pool.
EG if you have 100 USDC you want to trade that for eg AVAX, you can deposit your 100 USDC and if the market moves in your favor, in this case if the price of AVAX falls relative to USDC, your USDC will convert into AVAX tokens.
Disadvantages of deploying a Single Side
While you avoid the risk of impermanent loss from asset pair volatility, you're still exposed to the volatility of the single asset you deposit. In addition, the yields from single-sided liquidity may be lower if you were to compare to a scenario where you are deploying two tokens into a Liquidity Pool. You essentially have to wait for the market price of the assets to change and bring your liquidity into a range, where fees can be accrued.
If you are using a single side for a specific strategy, such as entering or exiting a token, you may have to monitor this process to ensure you can withdraw your liquidity if and when it converts. However, you can automate this using the Limit Orders feature in the 'Orders' tab on the specific liquidity pool page you want to use. Read the guide for how to do that here.
How to setup and deploy a Single Sided Liquidity position
Deploying a single side takes just a few steps and is very similar to deploying a normal or two sided position. Following the guide below.
Enter the Amount of Tokens:
In the input field for the token you wish to deposit (either USDC or AVAX in this example), enter the number of tokens.
Leave the input field for the other token (the one you’re not depositing) empty.
Select Your Liquidity Shape:
Choose the liquidity shape you want to deploy: Spot, Curve, or Bid-Ask. Each shape has different characteristics and risk profiles and you should read the Shapes guide to understand further.
Set Your Desired Price Range:
Use the sliders to set your desired price range. Position both sliders to the left or the right of the 'Active Bin' to focus your liquidity on one side of the market.
For example, to deposit USDC, adjust the sliders to the left side of the AVAX-USDC market.
Deploy Your Liquidity:
Once you are satisfied with your range and the amount, click on the option to deploy your liquidity.
Confirm the transaction in your wallet and wait for it to be processed.
Review and Manage Your Position:
After depositing, monitor your position regularly. You can adjust or withdraw your liquidity based on market conditions and your investment strategy.
Examples of how to deploy a single side:
Engaging in providing Liquidity using the Liquidity Book protocol involves risks, including but not limited to impermanent loss, smart contract vulnerabilities, systemic failures, liquidity crunches, regulatory changes, market volatility, and operational errors. Your capital is at risk; only invest funds you can afford to lose. No assurance or guarantee is provided, and LPs assume all responsibility for their investments. Seek independent financial advice as needed.
If you have any questions about Liquidity Shapes and how to deploy them please join the Trader Joe Discord for further assistance