Core concepts
The ideas behind liquidity provision on Solana, explained without jargon.
Liquidity pools#
A liquidity pool holds two tokens, for example SOL and USDC. Traders swap against the pool instead of against another person, and pay a small fee on every trade. Liquidity providers (LPs) deposit the tokens and earn those fees in proportion to their share.
When you provide liquidity you receive a position: either LP tokens (classic pools) or a position NFT or account (concentrated pools). It represents your claim on the pool's tokens and the fees they earn.
Pool types#
| Type | How it works | Good for |
|---|---|---|
| Classic (constant product) | Liquidity is spread across every price. The pool keeps x * y = k. | Set and forget, new tokens, volatile pairs |
| Range (concentrated) | You choose a price range. Inside it your capital earns far more fees; outside it earns nothing. | Active management, majors and stables |
| Bin (discrete bins) | Liquidity sits in price bins. Fees can rise with volatility (dynamic fees). | Fine-grained shapes, volatile markets |
| Stable | Curve tuned for assets that should trade near 1:1. | Stablecoin and LST pairs |
Fees, TVL and APR#
- Fee tier: the percentage a trader pays per swap, for example 0.30%.
- TVL: total value locked, the USD value of everything in the pool.
- Volume: USD value traded through the pool in a period.
- Fee APR: 24h fees divided by TVL, multiplied by 365. A snapshot of today annualized, not a promise. It moves with volume every day.
Impermanent loss#
When prices move, the pool rebalances your tokens: you end up with more of the token that fell and less of the token that rose. Compared with simply holding both tokens, you are worse off. That difference is called impermanent loss (or divergence loss). It becomes permanent when you withdraw.
Fees compensate for it. Liquidity provision is profitable when fees earned exceed the divergence loss. Concentrated ranges earn more fees but also amplify the loss when price leaves the range.
Ranges and rebalancing#
A concentrated position only earns while the price is inside its range. Rebalancing means closing the position and opening a new one around the current price. It costs transaction fees and realizes the divergence loss, so rebalancing too often can cost more than it earns. Autopilot moves a position only when the price leaves its range.
Pool types#
| Family | Pool types | What VYLO reads |
|---|---|---|
| Bin pools | Discrete price bins, dynamic fees | TVL, volume, fees, pool age |
| Range pools | Concentrated liquidity | TVL, volume, fees, 7 day price history |
| Hybrid pools | Concentrated and classic pools | TVL, volume, fees, 24h price range, pool age |
| VYLO | Native classic pools (Pool Factory) | Read directly from the VYLO program onchain |