Concentrated Liquidity Risks

Counterparty Risk

Liquidity positions are established across multiple CLMMs. This will add a layer of counterparty risk, ensure you are comfortable with the safety of the underlying CLMM.

Divergence Loss (Impermanent Loss)

As token prices diverge from their prices at deposit, your liquidity changes in value when compared to its value if tokens were held outside the pool. Large price swings could cause liquidity providers to lose money. The risk of impermanent loss can be amplified with concentrated liquidity.

Liquidity pools that contain assets that remain in a relatively tight price range will be less exposed to impermanent loss. Impermanent Loss is primarily driven by volatility. Stablecoins or pegged assets, for example, will stay in a relatively contained price range. However, these pools will often generate fewer fees.

impermanent loss can be realized when a user withdraws from a position or when a strategy is rebalanced. Rebalancing a concentrated liquidity strategy can be useful to adjust the position and earn greater rewards, however, the user should be cautious to ensure to only rebalance as necessary and when it is expected to be profitable to do so.

If the swap reward fees earned are greater than the impermanent loss experienced, the user will achieve a net positive return, the opposite is also true.

Gas Fees

Gas fees can obviously erode a user's returns. SteakHut has been well optimized for gas, making it extremely gas-efficient to create and manage liquidity strategies.

That being said users should consider gas implications over time when managing frequently rebalancing liquidity strategies.

Manager Risks

SteakHut allows for permissionless public vault creation. This means that anyone can create and deploy unique strategies, and users can freely access these to deposit their tokens.

It is important to constantly monitor your liquidity positions and ensure the strategy is suiting your needs. SteakHut's dApp offers a range of analytics and insights that help you track the performance and management of your liquidity to ensure it is reaching your goals.

SteakHut will also operate a number of in-house strategies that will be accessible to all users, and help reduce manager risk.

It is important to only deposit with managers that you trust, it is permissionless to create a strategy. Unknown managers may be malicious.

Price Volatility Risk

When there is significant volatility in the price of one or both assets in a position, the vault may temporarily become out-of-range. This will be dependent on the vault rebalancing frequency and the liquidity management strategy.

When liquidity is not within the active bin no swap fees will be earned during this time and the yield becomes reduced.

Inventory Risk

When providing liquidity for a token pair you take inventory of both assets within the pair. The volatility of each asset will impact your returns. In concentrated liquidity AMMs as the price of one asset falls against the paired asset the liquidity provider is left holding the underperforming asset. Thus providing active liquidity will often not protect you against the downside of either token.


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