limWETH
With limWeth, anyone can easily LP with sophisticated single asset strategies on Limitless. Your position is automatically adjusted. limWETH depositors are NOT the counterparties of leverage traders
limWeth is an ETH vault. Depositors gain access to a simple LP product that runs on strategies built by Limitless Labs, while maintaining exposure to ETH.
Why LimWeth
LP position management in Limitless, while lucrative, is difficult. It adds an extra dimension of complexity to LPing in Uniswap because of varying utilization rates among ticks. It requires intricate knowledge of the liquidity usage dynamics of the protocol which is best understood by Limitless Labs.
All the pools in Limitless are isolated. While this isolates the risk of each pool and allows the protocol to generate leverage for every token, it can also fragment liquidity for short-tail assets that share similar risk profiles. By consolidating the liquidities of pools with similar risk profiles into one index token, the protocol can unlock greater capital efficiency which results in more yield for LPs, and cheaper premiums for traders.
Minimize IL and maintain single asset(ETH) exposure for depositors.
The LP strategies running on LimWeth are off-chain algorithms that optimize risk-defined yield by aiming to maintain a 80~85% utilization rate on all utilized ticks and automatically supply to and rebalance the V3 position.
These strategies provide single-sided liquidity to V3 pools listed on Limitless and are based on volatility models that aim to find the right balance between yield maximization and impermanent loss.
Strategy
The strategy is akin to a 'covered call' strategy for ETH. It deploys ETH to whitelisted pairs, where the whitelist criterion is based on token lindy, market cap, etc. The strategy deploys strictly out of range liquidity for traders to borrow from. It rebalances whenever the price crosses the rebalance price.
Example: WETH-DEGEN is a whitelisted pair. The current price of DEGEN is 0.01 WETH per DEGEN. The strategy would deploy WETH to -40% to -30% of the current price(0.006~0.007) and rebalance whenever the price changes by 10%(0.009 or 0.011).
When the price of DEGEN drops to the supplied range and the withdrawn liquidity is partly(or completely) in DEGEN, all acquired DEGEN will be swapped back to WETH.
Sources of Yield
There are 4 main sources of yield for LimWETH providers
Premiums collected from traders
Loan origination fees from traders(collected once when position is opened)
Profit share paid by leverage traders(5% of profit generated by default)
Spot exchange trading fees generated in Uniswap
Note that the LimWETH depositors are NOT the counterparty of leverage traders. Due to the profit share component, depositors earn if traders win.
Price
The price of LimWeth shown on the UI is denominated in ETH.
A depositor's profit in ETH is simply the (withdraw price - mint price) * LimWeth amount. The price of LimWeth is shown in the LimWeth section
The price increases from premiums and swap fees generated from providing liquidity.
Risks
The risks for minting LimWeth are
Smart Contract Risk
IL risk
Overutilization Risk
Since the ETH backing LimWeth is used to provide liquidity in Uniswap V3, depositors' assets are subject to impermanent loss. However, the rebalancing algorithms are designed to minimize said IL risk.
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