Uniswap and Balancer are the two main pools of DeFi 's liquidity, offering liquidity providers (LPs) a fee to connect their funds to a pool. In Uniswap, the liquidity pools are structured in a 50-50 ratio between two assets. Within a liquidity pool, Balancer enables up to eight assets with custom ratios between assets. Most liquidity pools on DeFi can be seen on pools.fyi:
Each time a transaction is made in a liquidity pool, the LPs who have contributed to the pool receive fees to help facilitate this transaction. During the past year, the Uniswap pools offered good returns to LPs as volumes increased. Maximizing income, however, requires investors to consider also the impermanent loss, which is the loss generated by providing liquidity to a fast-growing asset.
Impermanent losses can be mitigated by combining pools, as the pools need to be set up in a 50-50 distribution. These can be designed to reduce, but not remove, impermanent losses in an 80-20 or 90-10 allocation. Additionally, by providing liquidity from a pool of balancers, users can receive Balancer Governance Token, BAL.
The best tool I have found to calculate APR, as well as track liquidity of the different liquidity pool, is uniswaproi.com:
Another form of liquidity pool exists which removes impermanent losses, Curve finance. It enables transactions of the same value between linked assets. There's a curve pool of USDC, USDT, DAI and sUSD, for example, all stable USD-indexed coins. There's also a liquidity pool of sBTC, RenBTC and wBTC: all linked to the price of the BTC.
Since all assets are equal in value, there is no impermanent loss. Trading volumes, however, will always be lower than liquidity pools such as Uniswap and Balancer, generally used.
Interestingly, yields from LP Curve Finance have been increasing over the past month as the yield farming hype has led to excessive demand for stablecoins.
Thank you for learning with me and hope you have a good rest of the day!