APR Calculations
Understanding APR in CLMM Pools
In a Concentrated Liquidity Market Maker (CLMM) pool, fees are distributed based on the liquidity provided by each position within a specific price range, or “tick.” When the price trades within a tick, fees are allocated proportionally to in-range positions. Calculating an accurate APR for a single tick based on trading volume over time is feasible. However, estimating APR across all ticks and multiple LPs in the pool is highly complex, so projected returns for CLMMs should be viewed as approximate estimates.
Methods for Estimating APR in CLMM Pools
XenDEX offers three methods to estimate APRs for CLMM pools, each with a unique calculation approach:
Overall Pool Estimated APR
Delta Method - Estimated APR for individual user positions
Multiplier Method - Estimated APR for individual user positions
Each method is detailed below.
1. Overall Pool Estimated APR
This calculation provides an estimated APR for the entire pool by making the following assumptions:
Trading fees and emissions per block are extrapolated across all liquidity in the pool, including positions that are currently out of range.
This estimated APR reflects the average return for the pool, assuming all liquidity is actively trading.
2. Delta Method – Estimated APR for User Positions
The Delta Method estimates APR for a specific user position by evaluating the implied change (or delta) in liquidity, based on the user-defined price range and position size.
Calculation Steps:
Calculate Total Token Amounts: Using a formula, determine the amounts of each token (token A and token B) based on the user’s selected price range.
Determine deltaL: Calculate deltaL, which represents the liquidity change for the user’s position.
Calculate deltaX and deltaY: With deltaL, calculate the respective token amounts within the position.
Estimate Daily Fees: Calculate the estimated daily fees based on the position’s contribution to liquidity and trading activity within the selected range.
This method provides an estimated APR based on the user’s specific price range, reflecting a more tailored view of potential returns.
3. Multiplier Method – Estimated APR for User Positions
The Multiplier Method estimates APR by applying a multiplier based on the overlap between the position’s price range and the historical price range of the pool.
Assumptions:
Historical Price Data: Assumes historical prices are indicative of future performance, providing an estimated trend.
Consistent Volume: Assumes that trading volume remains consistent within the historical price range, with periodic fluctuations.
Variables:
Define “retroRange” as the overlap between the user’s selected price range and the historical range.
Calculate the APR based on this range intersection, applying the multiplier to adjust for liquidity variations within the selected range.
This method leverages historical data to estimate returns based on previous trading volume and price movements, offering a benchmark for potential future APR.
Summary
These methods provide different approaches to estimating APR in CLMM pools, helping users understand potential returns within the specific price ranges they select. Note: Due to the dynamic nature of concentrated liquidity and market fluctuations, these estimates are not guarantees, and users should carefully consider the risks, including impermanent loss, before providing liquidity.
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