Market Maker Mentality: Which Kamino Vaults are Best for You?

Learn which Kamino vaults are best for which situations. Kamino makes it easy to provide concentrated liquidity, but it's up to users to choose a vault.

Market Maker Mentality: Which Kamino Vaults are Best for You?
Earn yield from providing concentrated liquidity in multiple Kamino vaults.

Note: This article is not financial advice. Kamino Finance does not endorse any tokens or platforms mentioned in this article.


  • Volatile and pegged asset pairs provide different market-making opportunities.
  • Each Kamino vault can be used to facilitate market making for optimal results.
  • Success as a market maker means choosing the right vault to meet one's goals.

On a centralized exchange (CEX), traders pay fees to the middleman for helping them match orders and execute transactions. In contrast, on a decentralized exchange (DEX) that facilitates trades with an automated market maker (AMM), liquidity providers earn the fees from trades—LPs essentially get paid to trade.

Successfully providing liquidity requires doing due diligence and paying attention to the market. There are several different theories on optimizing returns from market making, but the general idea is that it's essential to participate in pools during periods of high volume and low volatility, which means lots of people are trading an asset around a narrow price range.

This article will provide tips to help users optimize their use of Kamino's vaults. The information in this article is not financial advice, and users should do plenty of additional research to understand their positions when market making.

Volatile Pairs: Higher Risk and Higher Rewards

Providing liquidity for token pairs like SOL-USDH and DUST-SOL earns the highest fee tier on a DEX for a good reason. These pairs can earn outrageous APYs from short-term periods of high volume, but they can also affect users' PnL if assets start changing in price.

Depositing Volatile Tokens Paired with Stablecoins (SOL/USDH)

  • Best during sideways markets (price is stable)
  • Not the best if expecting a token to pump
  • Generates profits without price action
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Volatile assets pegged with stablecoins can earn generous APY.

Traders and arbitrage bots ensure these pairs see constant action, so Volatile/Stable liquidity usually sees the most volume on a DEX. Market makers want to milk these positions for as long as prices are crabbing sideways, as it's an opportunity to profit from a sleepy market that's not making many moves.

Impermanent loss occurs when the volatile token changes price, making these positions less attractive for long-term holding. On the other hand, a long-term point of view for HODLers could be that timing the market is less important than accumulating fees, and there will be a good chance that the token provided will return to its entry price while earning fees on its journey.  

Market Maker Mentality

  • This token is from a strong project and will be valuable in the future, so people will be trading it, and it's not a bad idea to have exposure to this token.
  • This token has strong support and should return to the position's entry price if there are any dips.
  • If it looks like this token will keep increasing in value, it might be better to reduce or withdraw liquidity to optimize profits from price action.

Depositing Two Volatile Tokens (DUST/SOL)

  • Could be a short-term or long-term play
  • Great for longing two high-conviction tokens
  • Best if both tokens rise in value
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Volatile pairs include two high conviction tokens like mSOL and ETH or SOL and DUST.

Providing liquidity for two volatile tokens means putting a high amount of confidence behind the future of both tokens. For example, suppose a user believes SOL and DUST will rise in value in the future. In that case, they will continue accumulating both in fees and can reduce or negate impermanent loss if timed just right over a long horizon.

For example, if a Kamino user begins their position with 100 SOL at $100 and 10,000 DUST at $1, they should be able to withdraw at least 100 SOL at $1,000 and 10,000 DUST at $10. However, if one token does a 10x and the other doesn't follow, the liquidity provider ends up with more of the lower-performing token due to impermanent loss.

However, there's a chance that Solana's success and Dust Labs' success will be highly correlated, which is the same reason BTC/ETH pairs are popular with LPs. Market makers are betting that correlation = less impermanent loss while accruing yield.

Providing liquidity for two volatile tokens, instead of pairing them separately with a stablecoin, maintains maximum exposure to each project while accumulating tokens from fees.

Market Maker Mentality

  • These tokens are both from super-strong projects and will be valuable in the future, so people will be trading them, and it's a great idea to have exposure to these tokens.
  • The prices of both tokens may increase or decrease at different times, but the long-term growth of these tokens will outweigh local volatility.
  • If these tokens remain at similar prices to their entry point, then good. If they both moon at the same time, then great.
  • News is affecting the trade volume between these tokens but not the price, so a short-term play might be worth the risk.

Pegged Pairs: Lower Risk and Lower Rewards

Pegged assets tend to negate impermanent loss, since stablecoins are pegged to $1, and derivative tokens like stSOL are pegged to SOL. The fee tier for these pairs is often the lowest on a DEX due to this fact.

Depositing Correlated and Pegged Assets (stSOL/SOL)

  • Best for accumulating a single asset and avoiding impermanent loss
  • Great option for long-term HODLers
  • DCAs into an underlying asset as derivative token grows in value
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Pegged asset pairs follow each other in price and are good for long-term holds.

Correlated and pegged asset pairs are a great way to increase one's holdings in a specific token. The APY from earning fees and rewards on stSOL-SOL often beats the APY for staking alone, so liquidity providers can optimize their accumulation of tokens they're holding for long-term value.

Liquidity pools on a CLMM require two tokens to be paired for the sake of pricing the assets in the pool. When the assets are pegged to another token, as with liquid staking tokens like stSOL and mSOL, liquidity providers gain maximum exposure to the underlying asset without worrying about impermanent loss.

For example, if an LP deposits 100 stSOL at $22 and 100 SOL at $20 on Kamino, no matter how much SOL changes in price, there should theoretically be equal amounts of both tokens. However, as stSOL is a yield-bearing token, it grows in value from APY earned from staking, and this will cause the proportion of SOL to grow over time to balance the pool.

Market Maker Mentality

  • This token will have long-term value, and holding it is a good allocation of capital since it could multiply in value in the future.
  • If the token moons, there's no action necessary to optimize gains, since both tokens will rise in value at the same rate and same time.
  • Earning low fees is an acceptable condition, since holding this token in a wallet would earn nothing, and earning fees outweigh gains from a 100% liquid staking token position.

Depositing Two Stablecoins (USDH/USDC)

  • Least risk, least reward for deposits
  • Good capital protection strategy during volatility
  • Good long-term savings strategy against inflation
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Providing liquidity for stablecoins can earn a small but steady yield with low market risk.

DeFi users are swapping in and out of different stablecoins whenever they need to repay a loan or participate in a changing landscape of rewards. In addition, arbitrageurs constantly trade stablecoins between exchanges whenever a stablecoin drifts from its peg, so there is a constant stream of trading activity for earning fees.

Many users view providing stablecoin liquidity as participating in a DeFi savings account, since the returns are not outrageously high, but the assets used are stable in value, like dollars. Individuals and organizations can deposit stablecoin pairs on Kamino and will usually earn yields higher than banks provide in traditional finance.

When the market looks particularly volatile, and it's time to exit positions in tokens with directional exposure to the market, then parking stablecoins on Kamino is a way to continue earning while holding stablecoins and waiting for the storm to blow over.

Market Maker Mentality

  • A healthy and diversified portfolio should have a decent stablecoin allocation, but these stables don't have to sit around as inflation rises long-term.
  • Providing stablecoin liquidity earns low but consistent fees, but the risk is minimal since stablecoins shouldn't fluctuate in value.
  • When tokens moon and profits are taken in stablecoins, this dry powder can immediately generate additional profits from providing liquidity.  

Which Kamino Vaults are Best?

Kamino makes it incredibly easy to provide concentrated liquidity on a DEX. However, what Kamino can't do is choose which vaults to participate in on behalf of its users. It's still up to each market maker to figure out when they'll provide liquidity and with which tokens, and that's part of the fun in DeFi!

In the future, Kamino will release more in-depth guides looking at the most popular vaults on the platform. If you enjoyed this article, check out some of these previously published pieces on DeFi and market making: