Considerations for Liquidity Providers and Curators

Providing liquidity via EulerSwap introduces new opportunities for sophisticated users. Here are key things LPs should keep in mind:

Initial Configuration Implications

The choices of equilibrium price, concentration, and fee are critical. Setting the price accurately to market is important to avoid immediate arbitrage losses. The concentration parameter should align with how volatile the pair is. High concentration factors facilitate higher volumes in correlated assets, but for volatile pairs lower concentration factors facilitate volume in a wider range of prices, without the need for constant rebalancing. The choice of fee requires taking into consideration competition and desired volume, as high fees may make swaps prohibitively expensive. A low fee attracts more volume while increasing risk of Impermanent Loss (IL). The fee is applied on the entire swap volume, including the portion funded by Just-In-Time (JIT) liquidity, resulting in higher fee revenue for the LP.

Impermanent Loss (IL) vs. Yield

Like any traditional AMM, IL is still a factor, especially for uncorrelated assets. When market movement causes prive divergence, the AMM will end up holding more of the less valuable token, resulting in a lower Net Asset Value (NAV). EulerSwap allows managing long/short exposures through the flexibility offered by pool configuration. An LP can change the equilibrium price point by reinstalling the operator, which can incentivize the market to rebalance the pool to a delta-neutral position.

Risk Management and LTV

Borrowing to boost liquidity or hedge is powerful but introduces liquidation risk. Each EulerSwap instance borrows and lends through underlying vaults which have their own LTV limits. If the value of your collateral drops too far below your debt, your position can be liquidated. As an LP, you should monitor the health factor of your position if you enable borrowing. Governed vaults have risk curators which set LTVs appropriate to market volatility and risk. The Telos Consilium case study initially chose ~14× leverage on a USDC/USDT pool (~93% LTV) but later dialed it down to ~7.5× (≈87% LTV) to be safer while still providing deep liquidity.

Maintenance and Rebalancing

To manage a pool's parameters, uninstalling and reinstalling the pool operator may be necessary. An LP may choose to re-deploy an operator when the market price moves, to allow a new equilibrium price to offer the lowest price impact around the new market price. The key point is, LPs should be prepared to manage their position actively. Large trades may trigger a large borrow position for the operator, which results in borrow fees and a short position. In EulerSwap, withdrawing liquidity is as simple as normal lending withdrawals in Euler v2.

Monitoring Tools

Users can take advantage of the Vault Explorer and Maglev’s advanced features. These will show you real-time data like your asset balances, debt amounts, current interest rates, your position's health factor, and P/L analytics. As an advanced LP, you might also set alerts (e.g. via Euler’s subgraph or a custom script) to notify you if your position's health drops below a threshold or if large trades execute. This is similar to how a margin trader would set stop-loss or margin call alerts.