Why Provide Liquidity Through Kamino?
This article will further explain why users would choose to provide liquidity through Kamino instead of directly with a decentralized exchange (DEX).
Note: This article is not financial advice. Kamino Finance does not endorse any tokens or platforms mentioned in this article.
- Concentrated liquidity pools are the highest-yielding pools on DEXs.
- Kamino solves multiple pain points for users providing concentrated liquidity.
- Depositors can borrow against their vault positions with kTokens.
Kamino Finance makes it easy for liquidity providers (LPs) to maximize their yield when providing concentrated liquidity. Without Kamino, users face an uphill battle against actively managing their positions with no resort to the benefits of decentralized finance (DeFi) composability.
By combining automated rebalancing and auto-compounding services, Kamino unlocks the potential for anyone to become a market maker on the cutting edge of DeFi. In addition, Kamino's kTokens can be used to borrow USDH and increase liquidity through Hubble.
This article will explain why users would choose to provide liquidity through Kamino instead of directly with a decentralized exchange (DEX).
Why Provide Concentrated Liquidity?
A growing number of DEXs built on Solana have begun facilitating swaps through concentrated liquidity market makers (CLMMs). The CLMM excels in supplying liquidity with increased capital efficiency and depth, two features that attract trades.
As can be seen from data shared by Orca, more volume and rewards are captured by CLMMs (called Whirlpools on Orca) than by the Orca pools that operate via the traditional automated market maker (AMM).
As the numbers above show, the traditional AMMs on Orca have attracted over $64 million worth of liquidity. However, these pools have only facilitated a 24-hour volume of less than $4.5 million in trade.
CLMM liquidity pools, on the other hand, have attracted half the liquidity as their AMM counterparts, but they are facilitating around 5x the volume per 24-hour period. The combined weekly fees and rewards captured by CLMM pools are also 29x higher ($75,400) than their AMM counterparts ($2,600).
Why Concentrated Liquidity Attracts Fewer Users Than Traditional AMMs
It appears that supplying CLMM liquidity would be the first choice for LPs seeking higher yields, since concentrated liquidity attracts more volume and more fees than the traditional AMM. However, looking at Orca, this is not the case.
On the other hand, Uniswap, which offers v3 as a CLMM and v2 as an AMM, does appear to attract more liquidity with its concentrated liquidity offering. Still, statistics show that less than 10% of users who swap tokens on Uniswap v3 also provide liquidity.
This is a massive discrepancy in a community like DeFi, which thrives on chasing the highest yield. It also displays a system where users are comfortable paying fees without also earning them, so there must be a compelling reason why such a small part of the community provides concentrated liquidity.
One major problem is that LPs face increased challenges when providing liquidity on CLMMs, despite the possibility of capturing an increase in fees from higher volumes of trade. And for most, the challenges have proven impossible.
Six months after the launch of the Uniswap v3 CLMM, it was discovered that the majority of concentrated liquidity LPs were experiencing impermanent loss (IL) that outpaced their fees earned.
Generally, the ease and reduced risk of providing liquidity on a traditional AMM continue to attract more users' assets than CLMMs.
How Kamino Makes Providing Concentrated Liquidity Easier Than Ever
It's well established that LPs on CLMMs can capture more fees with less liquidity than their traditional AMM counterpart. It's also established that the CLMM is so difficult to manage as an LP that most users have grown wary of providing liquidity.
By bridging the gap between yield and ease of use, Kamino makes it easier to provide liquidity on a CLMM and capture optimized fees. Kamino has been designed to provide optimized market-making solutions with vaults representing multiple strategies for Kamino's users.
Furthermore, Kamino automates nearly every possible aspect of providing CLMM liquidity, so all users must do is deposit their assets on Kamino to begin market making on a CLMM. In addition, Kamino automatically sets and resets price ranges, automatically compounds fees and rewards, so users don't have to do it themselves.
The above chart shows the effects of running Kamino's strategies through backtesting over a month period. While these results are not guaranteed and depend on market conditions, the Kamino APY demonstrated much better performance than the APY advertised by Orca over one month.
Kamino Supercharges Capital Efficiency with Hubble Protocol
Kamino's automated vaults work hard to help optimize yield and increase capital efficiency. At the same time, users can make their capital work even harder with Kamino's kTokens and Hubble Protocol's USDH.
Whenever users deposit their tokens on Kamino, they receive kTokens, which can be described as LP tokens, as a receipt. These tokens have utility within the Solana DeFi ecosystem, as they are fungible and represent the assets provided as liquidity.
As such, users can deposit their kTokens on Hubble and borrow USDH at a generous maximum 98.07% loan-to-value (LTV) ratio–this is the magic of composability. So, while users are earning yield from their Kamino positions, they can borrow against the capital earning that yield do to even more.
Get Ready to Optimize Capital Efficiency with Composability
Solana makes it easy for Kamino to work on top of hyper-efficient concentrated liquidity exchanges. Plus, the network makes it incredibly easy for users to expand their liquidity while earning yield from providing an essential service.
The home of capital-efficient DeFi is arguably set on Solana these days. The network finalizes transactions with lightning-fast speeds and a cost-efficient bottom line, enabling services like Kamino to launch successfully.
The combination of Solana's efficient features also makes it possible for users to benefit from extreme composability between the smart contracts on the network. The possibilities for future integrations are staggering, and this is just the beginning.
For many, it's a no-brainer why users would provide liquidity through Kamino instead of directly on a DEX. The rest must be OK dealing with the hassle of manually rebalancing positions and compounding fees and rewards.