Orca DEX; Tips and Tricks for Swimming With the Whales

By ChiefZ | Stock Blogz | 4 Apr 2022


  Orca DEX Logo

As I have said in the past, I have been using Orca to stake my Solana tokens in pools for a while now. Just recently Orca announced that they would be introducing a new kind of pool called the “Whirlpool” for holders of their NFT, “Orcanauts”. These Whirlpools have turned out to be extremely lucrative as they are “concentrated liquidity pools” meaning that users must first select a range in which their tokens will be active within to earn rewards. For the time being, three pairs are currently available, SOL/USDC, mSOL/USDC, and Orca/USDC with many more planned for the future. In this article, I will be going over the definitions, strategies, and an example of the new Orca feature and how you can use it to maximize your earnings.

Definitions

To get us started, I figured I would start with some of the simple definitions. A full list of definitions, as well as an in-depth guide on Whirlpools, can be found in the Whirlpool Handbook.

APR — The estimated returns (Annualized Percentage Returns) on your investment.

Deposit Ratio — The ratio of the two coins deposited in your pair in the Whirlpool

Leverage — How much your rewards are multiplied by compared to a constant pool on Orca

In and Out of Range — In order to continue to earn rewards in your Whirlpools, the current price of the main coin (currently Solana, mSOL, or Orca) must stay within your “range” that is selected when opening a Whirlpool position. This will be discussed more within the strategies and how to maximize rewards while staying within range.

Horizontal Movement — The price of the asset stays constant or in a small range over time

Risk Tolerance — How comfortable you as an investor are with large changes in portfolios and a higher possibility of losing money for increased rewards

Providing Liquidity — The act of lending your money to a DEX or liquidity provider in exchange for a portion of the trading fees

Coin Pair — The two coins that you will provide to the liquidity pool in order to earn rewards

Strategies

Due to the higher risk nature of using Whirlpools, having a strategy is critical to make sure that your assets are protected and you continue to earn rewards. The goal of your strategy is to maximize the number of rewards generated from the pool (your maximum leverage) while keeping the range of your pool large enough to counter price swings.

The first part of any strategy is determining the amount of money to dedicate to an Orca pool. As always with investments, you should only commit the assets that you are able to lose to these pools and maintain a diversified portfolio. Since I personally use the pool during times of horizontal movement (price staying constant over time), I tend to commit 50% or less of my Solana portfolio to the pool in order to gain APR over time while still staying directly invested in the coin and benefiting by large price increases. However, your risk tolerance will ultimately determine the amount of money that you wish to commit to a pool.

The next important part of your strategy is selecting the coin pair that you would like to provide liquidity. Personally, since I trade larger coins like Solana, I tend to stick with that pool, however, you may choose any of the three based on how risky a coin is to invest in and how high the APR of the pool is.

The final and most important part of a strategy is selecting your liquidity range. This range is the range in which you will earn rewards and the minimum and maximum of your range is also the point at which all of your coins will be swapped for the other in your pair. For example, if the range of your pool is from 120 to 130 and the price of your main coin hits 130, all of your main coins will be swapped for USDC, therefore meaning you now only have USDC in your Whirlpool. While this is not a terrible thing as you can always swap it back, it does mean that any future growth of your main coin will not result in you earning off it. The opposite is also true that if the price of your main coin falls below your minimum in your range, all of your USDC will be swapped for your main coin. In order to choose a good range for your pair, two factors must be taken into account; the previous recent highs and lows of the coin, and the leverage that you will gain from picking narrower ranges.

Leverage

Selecting the leverage and therefore the range of your pool is one of the most important parts of concentrated liquidity. Since the range of your pool makes or breaks your fees, selecting the right leverage for the right coins is very important.

The main thing to consider with leverage is how much the coin tends to move in a small period of time, and the risk that you are willing to take on in your portfolio. For example, in the image below, it can be seen that the 30-day movement of the coin has been $59.11 (137.11–78). Therefore a strategy that can be used to calculate leverage is the 30-day highs and lows that are used to predict the price action in the future. If you plan on holding for a shorter period of time or would like to take on more risk, using the 7-day low/high can also be used. Like all other investments, the risk that you are willing to take on makes up a large part of deciding how much leverage you would like to have and set the range for your pool.

After determining the range that you would like to use, navigating to “Whirlpools” > “Deposit” > “Custom” will allow you to choose the range that you would like to use. If you would rather stick to Orcas automatically generated conservative and standard options you may also select these. In the next section of this article, I will discuss predicting the trend of the coin and how this will help you choose your range based on what we have discovered here.

Recent Solana Price Movements

Trends

Analyzing charts for coins and seeing chart patterns is a whole other article but the long and short is to determine how confident you are in the upward or downward momentum of the coin. For example, at this time, Solana has had a massive run to the upside with a $60, 90% gain in the past 30 days. Your job is now to determine if you think that Solana has grown as much as it can for now and stop, therefore trading sideways, continue in its upward momentum, or reverse course and crash back down. These three options will drastically change the outcome of your strategy.

Upwards

If you think that your main coin is going to continue in an upwards direction, setting your lower limit closer to the true price of the coin and setting your max limit further away will provide you with the same liquidity (which will be discussed later) as the other two strategies while giving the coin more room to grow and still make you money. I tend to use the 0.33 to 0.66 rule for setting these boundaries with my minimum being 0.33 of my total range away from the current price and my maximum being 0.66 away.

Sideways

If you think that your main coin will be trading sideways for the foreseeable future, setting your range to be equal on both sides of the current price will provide you with the same liquidity, while giving the coin more room to move back and forth around the midpoint of your range. Breaking your range down into 0.50 on each side of the current price will provide this range.

Downwards

Finally, the trend that no one likes to see with the coin that they are trading. If you think that your main coin will be trading downwards in the future setting your minimum limit a further distance from your main than your maximum will allow the coin to move more in a downward direction while still earning you rewards. Similar yet opposite to the upwards strategy, setting your minimum 0.66 away from the current price and the maximum 0.33 away from your current price will provide you with this downwards cushion.

Using the Calculations

After determining the leverage that you would like to use and the trend that the coin is following, it's time to put some math to work to calculate the range that you want to use. As per the trends section, we will use 0.33, 0.66, and 0.5 to calculate some simple ranges from our leverage. The equation that I use is as follows:

Minimum=Current Price−(Min Ratio ∗ Leverage Range)

Maximum=Current Price+(Max Ratio ∗ Leverage Range)

To make this simpler I will provide an example of the full process of determining a strategy. The first step is determining the money that I would like to risk in a Whirlpool and the coin pair to provide liquidity. For this example, let's say that I have $1000 in Solana and therefore would like to risk 50% of it, $500, and provide it to SOL/USDC. After determining how much money I'm working with the next step is to determine my range and therefore my leverage. For this example, I will use the 7-day low/high to determine the range. The current 7-day range of Solana is 97.83-137.11 and therefore the range of this can be calculated to be $39.28. Based on Orca's custom settings this will provide me with 13X leverage which I am happy with. Finally, I will determine my range using the calculations found in the last section. I believe that Solana will continue its upward momentum and therefore will be using the ratios in the Upwards section of Trends.

Minimum=136.30−(0.33∗39.28)

Minimum = 123.34

Maximum=136.30+(0.66∗39.28)

Maximum = 162.22

Just like that, we have calculated our first strategy for the SOL/USDC Whirlpool based on the 7-day range and an upward price prediction.

Feel free to join the Orca Discord and talk to any of the mods or me at any time for any more questions that you have.

None of the above statements are financial advice and those involved are not financial advisors

 

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