How Gas Costs Impact Active Liquidity Strategies

Detailed Instructions

First, define a clear evaluation period (e.g., one week, one month, or one full market cycle). For this period, you must calculate the gross fee yield generated by your concentrated liquidity position. This is the total value of swap fees accrued, denominated in the tokens of the pool, before any costs are subtracted.

• Sub-step 1: Query the pool's smart contract or a subgraph for your position's collectedFees0 and collectedFees1 at the start and end of the period.
• Sub-step 2: Calculate the fee delta: (feesEnd - feesStart). Convert both token amounts to a common denomination (like USD or ETH) using period-average prices.
• Sub-step 3: Sum the USD value of both tokens to determine your Total Gross Fees.

Tip: Use price oracles like Chainlink recorded at the time of fee accrual for accurate valuation, not just the current spot price.

Detailed Instructions

Active strategies incur gas costs for rebalancing, fee harvesting, and initial setup. You must itemize every on-chain transaction. The key metric is Total Gas Cost in ETH, then converted to USD.

• Sub-step 1: List all actions: minting the position, any increaseLiquidity or decreaseLiquidity calls, collect transactions, and potentially burning.
• Sub-step 2: For each transaction, obtain the gas used and the gas price paid (in gwei). Calculate cost: gasUsed * gasPrice / 1e9 = ETH cost.
• Sub-step 3: Use historical ETH/USD prices from the block timestamp of each transaction to convert ETH costs to USD. Sum all USD values.

javascriptCopy
// Example calculation for a single transaction
const gasUsed = 250000;
const gasPriceGwei = 45;
const ethPriceAtTx = 3500;
const txCostUSD = (gasUsed * gasPriceGwei / 1e9) * ethPriceAtTx; // ~$39.38

Tip: Use block explorers or services like Etherscan's API to fetch precise gasUsed for your transaction hashes.

Detailed Instructions

Divergence Loss (DL) is not a direct gas cost but a critical component of net profitability. It represents the theoretical loss from price movement relative to holding the initial token amounts. Use the standard formula for a constant product AMM.

• Sub-step 1: Record the price ratio (P1/P0) of the two tokens from the start to the end of your period.
• Sub-step 2: Apply the DL formula: Divergence Loss = 2 * sqrt(priceRatio) / (1 + priceRatio) - 1. A negative result indicates a loss.
• Sub-step 3: Apply this percentage to the initial value of your deposited capital to get the USD value of the divergence loss.

solidityCopy
// Conceptual Solidity view function for DL calculation
function calculateDivergenceLoss(uint256 priceRatio) public pure returns (int256) {
    // priceRatio = P_final / P_initial
    uint256 sqrtPR = sqrt(priceRatio * 1e18); // Fixed-point math
    uint256 numerator = 2 * sqrtPR;
    uint256 denominator = 1e18 + priceRatio;
    // Returns loss as a scaled percentage (e.g., -0.05e18 for -5%)
    return (int256(numerator) / int256(denominator)) - 1e18;
}

Tip: This calculation assumes fees are not reinvested. For precise modeling, use established calculators or subgraph data.

Detailed Instructions

Combine the previous outputs into final profitability metrics. The core formula is: Net Profit = Gross Fees - Total Gas Costs + Divergence Loss. Note: Divergence Loss is added algebraically (it's usually negative).

• Sub-step 1: Calculate Net Profit in USD: Net Profit = Step1_TotalGrossFees - Step2_TotalGasCostUSD + Step3_DivergenceLossValueUSD.
• Sub-step 2: Calculate Return on Invested Capital (ROIC): ROIC = Net Profit / InitialCapitalDeposited.
• Sub-step 3: Calculate Annual Percentage Yield (APY): APY = (1 + ROIC)^(365 / PeriodDays) - 1. This annualizes your period return.
• Sub-step 4: Determine the Fee Break-Even Multiplier: How many times higher fees need to be to cover gas costs. Multiplier = TotalGasCostUSD / TotalGrossFeesUSD.

Tip: A negative Net Profit or ROIC indicates the strategy was unprofitable after accounting for all costs and market movements. The break-even multiplier helps assess strategy sensitivity to gas price fluctuations.