Risk & Mitigation

Risks from LPing on Uniswap V3 pools

A higher reward comes at a higher risk of Impermanent Loss and Liquidation. Here is the recap on the key concepts that introduce amplified risks for users from leveraged liquidity providing on Homora.
Key Concept 1: Liquidity in user’s LP position earns trading fees only when the market price of the LP falls within a selected active range Key Concept 2: Earned trading fees are not automatically accrued to the user’s position
Higher Risk of Impermanent Loss
With key concept 1 , users will experience a higher risk of impermanent loss given the same ratio of price change. The narrower the price range, the higher the risk of impermanent loss.
For example, Suppose Alice provides liquidity on Uniswap WETH-USDC 0.30% pool at 1.5x price ratio while Bob provides the same amount of liquidity at 2x price ratio. In that case, Alice will experience more impermanent loss when the LP price deviates.
The table below shows the statistics determining the level of impermanent loss depending on price ratio at different speculated price change factor:
To manage impermanent loss, we recommend users to select the width of the price range based on their risk-tolerance level. For basic users who are new to the concept of impermanent loss, the wider price range achieved by the highest possible recommended price ratio of 2x is recommended.

Risks Mitigation

With key concept 2, users will experience a higher risk of liquidation given the same ratio of price change as user’s debt value keeps increasing while the collateral value remains the same. Moreover, higher risk of impermanent loss accelerates liquidation risk as well. As a result, user’s position debt ratio increases and there is liquidation risk once debt ratio reaches the 100% threshold level.
To manage liquidation risks, there are 2 main ways that Homora helps to prevent users from potential liquidation risks:
1. One-click reinvest button REINVEST button helps increase the collateral value of user’s LP along with the increasing debt value, lowering the debt ratio that results in liquidation. Recap on one-click reinvest button here.
2. Higher Liquidation buffer for Uniswap V3 pools Liquidation buffer for Uniswap V3 pools is increased by 10% (from the normal pool cap of 95%) to help prevent users’ positions from getting liquidated as volatile asset price moves. Users are able to open a leveraged liquidity providing position on Homora only when the debt ratio after leverage is < 85% on Uniswap V3 pools.