CenturionDEX

LP Profitability

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Is providing liquidity profitable?

A position is profitable when cumulative fees exceed impermanent loss plus transaction costs:

Profit=Fees earned−Impermanent loss−Gas costs\text{Profit} = \text{Fees earned} - \text{Impermanent loss} - \text{Gas costs}

Fee income

Three factors determine fee income:

  1. Swap volume routed through the pool
  2. Your share of in-range liquidity — only positions whose bounds contain the current price earn fees
  3. Fee tier — 0.01 %, 0.05 %, 0.30 %, or 1 %

In v3, a concentrated position has a capital-efficiency multiplier mm:

m=11−Plower/Pupperm = \frac{1}{1-\sqrt{P_{\text{lower}}/P_{\text{upper}}}}

The effective fee APR:

Fee APR=m⋅daily_volume⋅fee_tier⋅365total_in_range_TVL\text{Fee APR} = \frac{m \cdot \text{daily\_volume} \cdot \text{fee\_tier} \cdot 365}{\text{total\_in\_range\_TVL}}

Worked example: CTN/USDC 0.30 % pool

ParameterValue
Deposit$10,000
Range$1,800 – $2,200 (spot $2,000)
Daily volume$5,000,000
In-range TVL$2,000,000

Concentration multiplier:

m=11−1800/2200=11−0.9045≈10.47×m = \frac{1}{1-\sqrt{1800/2200}} = \frac{1}{1-0.9045} \approx 10.47\times

The position behaves as though $104,700 were deposited in a v2 pool.

Fee APR=10.47⋅5,000,000⋅0.003⋅3652,000,000≈2,866%\text{Fee APR} = \frac{10.47 \cdot 5{,}000{,}000 \cdot 0.003 \cdot 365}{2{,}000{,}000} \approx 2{,}866\%

This is gross APR assuming 100%100\% time in range — real returns will be lower.

Impermanent-loss drag

IL is not a one-time event; it accumulates continuously as the price drifts. The critical insight: fees scale linearly with volume, but IL accelerates with price divergence. In trending markets IL can overwhelm fees; in range-bound markets fees dominate.

Quantifying the drag

For the position above (range $1,800–$2,200, m≈10.47×m \approx 10.47\times), a 10%10\% CTN price increase ($2,000 → $2,200):

v2 IL at 1.1×=21.11+1.1−1=−0.23%\text{v2 IL at }1.1\times = \frac{2\sqrt{1.1}}{1+1.1} - 1 = -0.23\% v3 IL=−0.23%⋅10.47=−2.41%\text{v3 IL} = -0.23\% \cdot 10.47 = -2.41\%

On $10,000 that is a $241 loss, recoverable in about three days of fee income at $78/day.

However, if CTN reaches $2,200 — the range boundary — the position converts entirely to USDC and earns zero fees until the price returns. The fundamental question is always: will in-range fee income exceed IL at the time of withdrawal?

Choosing a range

StrategyBest forTradeoffs
Tight (± 5 %)Stablecoin pairs, range-bound marketsHigh APR, high IL if price breaks out, frequent rebalancing
Medium (± 20–50 %)Major pairs (CTN/USDC)Balanced fees and IL, moderate management
Wide (± 100 %+)Volatile or newly listed tokensLower APR, lower IL, less management
Full rangePassive "set and forget"Equivalent to v2; lowest fees per dollar, minimal IL amplification

Rebalancing costs

When the price exits a range, the position stops earning. Two options:

  • Wait for the price to return (zero cost, but zero income while out of range).
  • Rebalance — close the position and open a new one centred on the current price. Each rebalance costs gas and realises accumulated IL.

Rule of thumb: do not rebalance unless the expected fee income from the new position exceeds the gas cost within a reasonable time horizon.

Full P&L example

Setup: $10,000 into CTN/USDC 0.30 %, range $1,800–$2,200 (spot $2,000). Pool averages $5 M daily volume and $2 M in-range TVL.

PeriodCTN priceIn range?Daily fee incomeCumulative fees
Days 1–15$1,950–$2,050Yes$78$1,170
Days 16–22$2,200–$2,350No$0$1,170
Days 23–30$2,050–$2,150Yes$78$1,794

At day 30, CTN is $2,100 (r=1.05r = 1.05):

v2 IL(1.05)=−0.06%\text{v2 IL}(1.05) = -0.06\% v3 IL=−0.06%⋅10.47=−0.63%  →  63\text{v3 IL} = -0.06\% \cdot 10.47 = -0.63\% \;\rightarrow\; 63 Net P&L=1,794−63−5=+1,726(17.3% monthly)\text{Net P\&L} = 1{,}794 - 63 - 5 = +1{,}726 \quad (17.3\% \text{ monthly})

Adverse scenario — CTN drops to $1,600 (r=0.8r = 0.8), exiting the range on day 10:

v2 IL(0.8)=−0.62%\text{v2 IL}(0.8) = -0.62\% v3 IL=−0.62%⋅10.47=−6.49%  →  649\text{v3 IL} = -0.62\% \cdot 10.47 = -6.49\% \;\rightarrow\; 649 Fees (10 days in range)=780\text{Fees (10 days in range)} = 780 Net P&L=780−649−5=+126\text{Net P\&L} = 780 - 649 - 5 = +126

Even with a 20 % adverse move the position was slightly profitable — but an earlier exit from range would easily push it negative.

Practical checklist

  1. Check pool volume — low-volume pools earn negligible fees regardless of range.
  2. Estimate fee APR from 24 h volume and TVL.
  3. Assess volatility — trending tokens carry higher IL risk.
  4. Choose the right fee tier — stable pairs → 0.01 % or 0.05 %; volatile pairs → 0.30 % or 1 %.
  5. Set a range that reflects your thesis — if you expect CTN between $1,800–$2,200, set that range.
  6. Account for gas — significant on L1, negligible on L2s.
  7. Monitor and adjust — no range stays optimal indefinitely.

Further reading