Liquidity Scenarios & Risk Profiles

Note for DEX Teams:

This section provides illustrative simulations to help users understand how concentrated liquidity behaves under different LP strategies—active rebalancing, static, and wide-range. These examples are based on a generic TOKEN/USDT pool and demonstrate how market movements impact position value.

While simplified, they offer a valuable reference for educating LPs on impermanent loss, range management, and strategic planning. We recommend customizing these scenarios with your own token pairs to better match your platform's context.

Liquidity Scenarios

Illustrative examples for a generic TOKEN / USDT pool

To show how concentrated‑liquidity positions behave under different management styles, we simulated three price paths for a TOKEN / USDT pair. The exercise compares:

Strategy	Description
Active LP (Rebalancing)	Uses a narrow range ($5.40–$6.60) and redeploys whenever price leaves the band.
Static LP (Set‑and‑Forget)	Same narrow range, but never rebalances.
Wide‑Range LP	Provides liquidity in a broad range ($4.80–$7.20) and never rebalances.

Assumptions

• Initial TOKEN price: $6.00

• Initial portfolio value: $1 000 (50 % TOKEN, 50 % USDT)

• No farming or swap‑fee income is included—only price impact and impermanent loss.

Scenario #1 – Upward Momentum

Price rises 10 % twice, reaching $7.26. The Active LP rebalances once at $6.60.

Strategy	Ending Value	% Change
Active LP	$1 049.40	+4.94 %
Static LP	$1 024.40	+2.44 %
Wide‑Range LP	$1 050.00	+5.00 %

Result: Active LP outperforms static but slightly trails the wide‑range approach in a strong up‑trend.

Scenario #2 – Downward Momentum

Price falls 10 % twice, touching $4.86. The Active LP rebalances once at $5.40.

Strategy	Ending Value	% Change
Active LP	$867.28	‑13.27 %
Static LP	$846.62	‑15.34 %
Wide‑Range LP	$867.77	‑13.22 %

Result: Active LP limits losses versus static, but wide‑range still fares slightly better.

Scenario #3 – Oscillating Market

Price moves up to $6.60 and then returns to $6.00.

Strategy	Ending Value	% Change
Active LP	$954.00	‑4.60 %
Static LP	$1 000.00	0 %
Wide‑Range LP	$1 000.00	0 %

Result: In a whipsaw, a single rebalance locks in loss; passive ranges preserve capital.

Key Takeaways

• Active, narrow ranges can boost returns in trending markets but require timely rebalancing and carry higher downside risk if trends reverse.

• Static narrow ranges are simple yet vulnerable to large moves.

• Wide ranges reduce maintenance and price‑out risk but dilute fee capture (not shown in this fee‑free model).

Choose a strategy that matches your market outlook, time commitment, and risk tolerance.