Meme Liquidity

Memecoins can go to the moon, be rugpulls, or drop 99%+ in minutes.

One way to offset this risk is by holding a memecoin in a liquidity pool.

A standard liquidity pool holds 50% of one token and 50% of another token and as trades happen using the pool, the value of the one token relative to the other changes.

For example, “coin one” costs $1 a coin and “coin two” costs $10 a coin. If I were to hold these coins in a liquidity pool, I might deposit 100 “coin one” and 10 “coin two”. The value of each side is the same $100. As trades happen, the values relative to each other change.

Let’s say I were to use this liquidity pool to trade coin one for coin two. This would mean I add maybe $10 in coin one to the pool (10 coin one) and take out $10 of coin two (1 coin two) from the pool. Simply put, after the trade there would be about 110 coin one in the pool and 9 coin two in the pool (approximation).

Remember however that both sides have to be equal in value so now, coin two might be worth $11 a coin and coin 1 might be worth $0.91 (approximation).

What if I hold a memecoin and a coin like Solana, Bitcoin or a stablecoin on the other side of the pair? Well, because both sides of a standard liquidity pool would be equal in value, the number of memecoins you’re holding in the pool (your share of the pool) is fluctuating, you’re holding less memecoins when the price of the memecoin goes up and more memecoins when the price goes down.

You can use an impermanent loss calculator to calculate how much you might lose if the price of the memecoin goes down.

For example, if a stablecoin or a major coin is held with a memecoin and the price of the stablecoin does not change, but the memecoin goes down 90% in value (1000% decrease), instead of losing 90% of your funds, you might only lose 44.72% of your funds.

Additionally, if the size of the liquidity pool is small (not many people put crypto into it), and a lot of trades are happening through the liquidity pool, a lot of crypto exchanges like Raydium share swap fees with liquidity pool providers. On these memecoins, millions of dollars or tens of millions of dollars of trades can go through small(ish) liquidity pools on a daily basis. On Raydium, the swap fees might be 0.25% or a quarter of a percent. $0.25 on $100. Out of that 0.25%, Raydium might keep 0.03% and share the other 0.22% with liquidity providers.

On memecoins, the returns can be very high on swap fees. Purple Pepe is a good example of this, as the swap fees (which vary depending on trading volume) have been generating fluctuating but high returns for providing liquidity.

This is an example of Purple Pepe held in a 50% / 50% liquidity pool with the Solana token. You can see how these two screenshots taken a few hours apart show a different value in the position held and in the APR estimate based on 24 hour trading volume. Really instead of focusing on APR, divide that APR number by 365 and that’s an estimate for the percentage earned from trading fees in the past 24 hours.

For example, 894.91%/365 = (about) 2.45% return for the day.

The downside is if the coin “moons”, you’re holding less of them (because of balancing the pool out with the other token pair), than if you held the memecoin directly in your crypto wallet so while you’d still benefit from the crypto “mooning” and especially from all the trades that make the coin “moon” that used your liquidity pair, you won’t make as much as if you just held the coin in your wallet.

How to create a liquidity pair?