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LP Royale: A Free Liquidity Providing Simulation and Contest

By RockHoward | Rock's DeFi Playbook | 9 May 2021

LP Royale is a learning game that simulates liquidity providing using real world data from Uniswap. The game is provided by APY.vision which is an outfit that helps liquidity providers monitor their positions on a variety of exchanges and networks. I have used the APY.vision site myself to track liquidity pool positions for Quickswap on the Matic Network as well as Uniswap on the Ethereum Network. If you are new to providing liquidity or you want to learn new ways to think about liquidity pool selection, then I highly suggest joining the game right now and even using some of the free game cash to fund some trading pairs before proceeding with the rest of this article. (You can always redo your liquidity pool selections in the game at any time.)

It's So Simple

The game simplifies the liquidity providing process in several ways and removes some important considerations that make playing the game to obtain a good ranking quite a bit different from investing safely and profitably in actual liquidity pools in the real world of crypto. This is not a bad thing, but it is important to note that strategies that work well in this game probably won't work great when playing for keeps.

With that important note out of the way let's look at what liquidity providing is all about. Simplifying a bit, a DEX (distributed exchange) uses an algorithm to automatically set trading prices for each pair of coins that can be traded. Associated with each trading pair is a liquidity pool that is loaded with both types of coins allowing the exchange to execute requested trades using coins on hand. Trades have fees associated with them and the majority of those fees are credited on a pro rata basis to those who are providing the liquidity.

That is it in a nutshell. In the real world (and even in this game to a certain degree) the math nomenclature used to analyze liquidity positions gets quite complicated. However keeping the basic concept in mind helps to keep things focused on the matter at hand. Facilitating trading for a fee.

Playing the Game

Since trading fees are a source of profit, selecting a trading pair with lots of trading volume is a good idea. Since the fees are paid out pro rata it makes sense to look for a trading pair with a smaller pool (also known as the Reserve). A quick and easy way to gauge both of these factors at once is to look at the ratio of volume to pool size. You can even filter on this in the game using the "VOL/RES" field. Try a number between 3 and 4 to see some pairs the excel in this regards. Remember that the higher the better as long as their is sufficient liquidity to avoid pathological imbalances.

Speaking of imbalances. There is a strange aspect of these liquidity pools that means you can actually lose money in some cases. You enter the pool with an equal value of each coin but if the price changes a lot then the coins get extremely out of whack with each other. In this case your share of the coin that has gone up in relative value goes down and your share of the other coin goes up. After letting the computer do the math for you, you may well find that you have actually lost money. (In the LP business this is called "impermanent loss".) So the ideal case is to pick a coin with high trading volumes but less likelihood to change relative value very much. After learning this it became clear to me why using stable coins for one or both coins in a trading pair is so popular. People tend to hate getting losses and stable coins reduce the volatility.

Another important consideration, especially for the LP Royale game, is the underlying value of both coins. If they both go up, then your value goes up too. If they both go down, then you will lose value. In the game you can only choose to sit in cash or in a liquidity pool. Just holding the coins individually outside of a pool is not an option. Because of this selecting good coins that go up is doubly important in the game. In the real world if you think a coin will skyrocket, then you might not want to get involved in a liquidity pool for it and instead simply hold it. In the game, however, you would load up on that coin and try to pair it with another coin that is going up too in order to avoid impermanent loss.

Earning Rewards for Providing Liquidity

In the real world there is another factor that often swamps all of those above: rewards. Different interested parties may provide rewards in the form of platform governance tokens or other considerations for those providing liquidity. It can be common for these rewards to dwarf the gains from trading fees and losses from imbalances. You get rewards based on the amount you put in the pool times the amount of time you leave it there. If the rewards are good enough, then you might not have to worry about trading volumes and such. But that is the real world and we are here to discuss the game and so we will save the details about rewards for a future article.

Back to the Game

I have given you enough background to continue playing the game with a basic idea of what we are trying to accomplish. Keep in mind that you can change positions at any time although too much trading will eat you up with Ethereum gas fees. (Fortunately gas fees are not a concern for those providing liquidity on the Matic Network.)

One thing I wanted to do in the game at one point was to add some cash to an exiting position however there is no direct way to do that. (I checked with the game designers and that was an intentional decisions that allowed them to release the game to the world a bit quicker.) The workaround is easy enough. Just remove 100% of the liquidity from the pool you want to increase and then add liquidity to it with the new larger amount. (The option to filter by token name will save you time finding that pair again once you empty it.)

One thing you see in this game is a real issue in the real world too. So many different tokens! No one can possibly keep up with them all! Fortunately APY.vision provides a screener to their pro users to help them out. It is not too different than the filter that is supplied in the game. Also for a Matic maven like myself, learning about all of the obscure coins on Ethereum is just not very interesting. However it is worth remembering that most of the better smart contracts and coin concepts on Ethereum will probably end up on Matic someday if they haven't already. Still in my view it is quite alright to stick to coins that you are comfortable with and just enjoy the game for what it is: a fine way to learn the basics about providing liquidity.

Final Thoughts

Don't hesitate to use the various information sources scattered through out the game. There is a lot of good stuff there. Also feel free to leave your game username in the comments. I am RockLobster and I am currently sitting in 60th place with a 3.7% profit. I will be playing the game a good bit in the future to see what I can learn to improve my returns. Look for another article about the game in a week or two and plenty about real world staking and liquidity providing in my next few blogs. In the meantime join me on the LP Royale Discord server.

Next up we will look at the mechanics of staking and providing liquidity on Quickswap.

Image Credit: APY.Vision

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I am a software developer (among other things) that is focused on the Radix Network. I run a free discord for programmers who want to study Rust and/or Scrypto. I also run the Radix Programmer's Guild.

Rock's DeFi Playbook
Rock's DeFi Playbook

Learn the specific steps needed to perform the most common DeFi operations. Starting with Metamask and then moving on to a variety of dapps on the Polygon (aka Matic) Network, you will learn how to perform staking, providing liquidity, leveraged trading, yield farming and buying and selling options. You will need to do your own research on your best course of action as nothing in this blog is financial advice.

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