Risks & Rewards

Comprehensive guide to understanding the risks and rewards of liquidity provision on DI Network, helping you make informed decisions.

Reward Overview

Primary Reward Sources

Trading Fees: Earn from every trade in your pool

• Standard rate: 0.3% of trade volume

• Your share: Proportional to pool ownership

• Frequency: Continuous with each trade

Liquidity Mining: DI token rewards for LP staking

• Allocation: 300M DI over 5 years

• Distribution: Based on pool allocation and TVL

• Boost: Up to 2.5x with DI token holdings

Additional Rewards: Protocol-specific bonuses

• Governance participation bonuses

• Loyalty rewards for long-term LPs

• Special event rewards and airdrops

Reward Calculation Examples

DI/ETH Pool Example:
Pool TVL: $10M
Your Liquidity: $10,000 (0.1% share)
Daily Trading Volume: $500,000
Daily Fees: $500,000 × 0.003 = $1,500
Your Daily Fees: $1,500 × 0.1% = $1.50

Liquidity Mining:
Daily DI Rewards: 100,000 DI to pool
Your Share: 100,000 × 0.1% = 100 DI
At $5/DI: $500 daily mining rewards

Total Daily Rewards: $1.50 + $500 = $501.50
Annual APY: ($501.50 × 365) / $10,000 = 1,831%

Risk Categories

Impermanent Loss (IL)

Definition: Loss compared to holding assets separately Cause: Price divergence between paired tokens Severity: Increases with price ratio changes

IL Calculation:

Price Ratio Change vs IL:
- 1.25x change: 0.6% IL
- 1.5x change: 2.0% IL
- 2x change: 5.7% IL
- 5x change: 25.5% IL
- 10x change: 42.0% IL

Real Example:

Initial State:
- 1 ETH = $2,000, 1 DI = $5
- Pool: 100 ETH + 40,000 DI = $400,000

After 2x DI Price Increase:
- 1 ETH = $2,000, 1 DI = $10
- Pool rebalances to: 70.7 ETH + 28,284 DI = $424,264
- Hold strategy: 100 ETH + 40,000 DI = $600,000
- Impermanent Loss: $175,736 (29.3%)

Smart Contract Risk

Protocol Risk: Bugs in DI Network contracts

• Mitigation: Audited contracts, gradual rollout

• Insurance: Protocol insurance fund

• Monitoring: Real-time security monitoring

DEX Risk: Issues with underlying AMM

• Mitigation: Use established, audited DEXs

• Diversification: Spread across multiple platforms

• Research: Review audit reports and track record

Market Risks

Volatility Risk: High price swings increase IL

• Crypto pairs: High volatility, high IL risk

• Stable pairs: Low volatility, minimal IL

• Correlation: Correlated assets reduce IL

Liquidity Risk: Inability to exit positions quickly

• Pool depth: Deeper pools = better liquidity

• Trading volume: Higher volume = easier exits

• Market conditions: Bear markets reduce liquidity

Regulatory Risk

DeFi Regulation: Changing regulatory landscape

• Geographic restrictions

• Tax implications

• Compliance requirements

Risk Assessment Framework

Risk Scoring System

Risk Score = Base Risk + Volatility Risk + Protocol Risk + Liquidity Risk

Base Risk Factors:
- New protocol: +3 points
- Established protocol: +1 point
- Blue-chip protocol: 0 points

Volatility Risk:
- Stable/stable pairs: 0 points
- Stable/volatile pairs: +2 points
- Volatile/volatile pairs: +4 points

Protocol Risk:
- Multiple audits: 0 points
- Single audit: +1 point
- No audit: +5 points

Liquidity Risk:
- >$10M TVL: 0 points
- $1-10M TVL: +1 point
- <$1M TVL: +3 points

Risk Levels:
- 0-2 points: Low Risk
- 3-5 points: Medium Risk
- 6-8 points: High Risk
- 9+ points: Very High Risk

Pool Risk Analysis

Pool	IL Risk	Protocol Risk	Liquidity Risk	Overall Risk
DUSD/USDC	Very Low	Low	Low	Low
DI/DUSD	Low	Low	Medium	Low-Medium
DI/ETH	High	Low	Low	Medium
DI/USDC	Medium	Low	Low	Low-Medium

Risk Mitigation Strategies

Diversification

Pool Diversification:

Conservative Portfolio:
- 40% DUSD/USDC (stable pair)
- 30% DI/USDC (moderate risk)
- 20% DI/ETH (higher risk/reward)
- 10% Experimental pools

Aggressive Portfolio:
- 20% Stable pairs
- 40% DI pairs
- 30% High-yield pairs
- 10% New opportunities

Time Diversification:

• Dollar-cost average into positions

• Stagger entry and exit times

• Rotate between pools based on conditions

Hedging Strategies

Perpetual Hedging:

LP Position: $10,000 DI/ETH (50% DI exposure)
Hedge: Short $5,000 DI perpetual
Result: Reduced IL from DI price movements
Cost: Funding fees on perpetual position
Net Effect: Earn fees with minimal IL

Options Hedging:

• Buy puts on volatile assets in pool

• Protective strategies during uncertain times

• Cost vs benefit analysis required

Position Sizing

Risk-Based Sizing:

Risk Budget Allocation:
Total Portfolio: $100,000
LP Allocation: 20% = $20,000

Risk Distribution:
- Low Risk Pools: $12,000 (60%)
- Medium Risk Pools: $6,000 (30%)
- High Risk Pools: $2,000 (10%)

Reward Optimization

Maximizing Trading Fees

Volume-Driven Strategies:

• Provide liquidity to high-volume pairs

• Time entries during volatile periods

• Focus on popular trading pairs

• Monitor volume trends and patterns

Fee Tier Optimization:

• Understand different fee tiers (0.05%, 0.3%, 1%)

• Match risk tolerance with fee potential

• Consider concentrated liquidity ranges

Liquidity Mining Optimization

Boost Maximization:

DI Token Boost Strategy:
LP Value: $10,000
Target Boost: 2.5x
Required DI Holdings: $62,500
Strategy: Gradually accumulate DI tokens
Timeline: 6-12 months to reach full boost

Pool Selection:

• Focus on highest-reward pools initially

• Diversify as portfolio grows

• Monitor reward rate changes

• Participate in new pool launches

Compound Growth

Reinvestment Strategy:

Compound Growth Example:
Initial: $10,000
Monthly Return: 5%
Reinvestment: 100% of rewards

Month 1: $10,500
Month 6: $13,401
Month 12: $17,959
Year 2: $32,251
Compound Effect: 222% vs 120% simple interest

Risk-Reward Analysis

Expected Value Calculation

Expected Value = (Probability of Profit × Profit Amount) - (Probability of Loss × Loss Amount)

DI/ETH Pool Example:
Scenarios:
1. Bull market (30% probability): +50% return
2. Stable market (50% probability): +20% return  
3. Bear market (20% probability): -10% return

Expected Value: (0.3 × 50%) + (0.5 × 20%) + (0.2 × -10%) = 25%

Sharpe Ratio Analysis

Sharpe Ratio = (Return - Risk-Free Rate) / Standard Deviation

Pool Comparison:
DI/ETH: (45% - 3%) / 60% = 0.70
DI/USDC: (25% - 3%) / 30% = 0.73
DUSD/USDC: (12% - 3%) / 10% = 0.90

Best Risk-Adjusted Return: DUSD/USDC

Break-Even Analysis

IL Break-Even Point:

When do rewards offset impermanent loss?

IL: 5.7% (from 2x price change)
Daily Rewards: 0.15% (55% APY)
Break-even Time: 5.7% ÷ 0.15% = 38 days

If price ratio maintained for >38 days, position profitable

Scenario Analysis

Bull Market Scenario

Characteristics:

• High trading volumes

• Increased IL risk

• Higher reward rates

• FOMO-driven liquidity

Strategy:

• Focus on high-reward pools

• Accept higher IL for better rewards

• Shorter holding periods

• Active management required

Bear Market Scenario

Characteristics:

• Lower trading volumes

• Reduced IL (less price movement)

• Lower reward rates

• Flight to safety

Strategy:

• Emphasize stable pairs

• Longer holding periods

• Focus on yield over growth

• Conservative position sizing

Sideways Market Scenario

Characteristics:

• Moderate trading volumes

• Minimal IL

• Steady reward rates

• Range-bound prices

Strategy:

• Optimal for LP strategies

• Maximize fee collection

• Build long-term positions

• Compound aggressively

Monitoring and Alerts

Key Risk Indicators

Daily Monitoring:

• Impermanent loss percentage

• Pool utilization changes

• Reward rate fluctuations

• Market volatility measures

Alert Thresholds:

Risk Alert System:
- IL > 3%: Yellow alert (monitor closely)
- IL > 5%: Orange alert (consider action)
- IL > 8%: Red alert (likely exit)
- Reward drop > 50%: Review position
- Pool TVL drop > 30%: Assess liquidity risk

Performance Tracking

Weekly Reviews:

• Total return calculation

• Risk-adjusted performance

• Benchmark comparisons

• Strategy effectiveness

Monthly Analysis:

• Comprehensive risk assessment

• Portfolio rebalancing needs

• Strategy adjustments

• Goal progress evaluation

Best Practices

Risk Management

• Never invest more than you can afford to lose

• Diversify across multiple pools and strategies

• Set clear risk tolerance limits

• Monitor positions regularly

• Have exit strategies planned

Reward Optimization

• Understand all reward sources

• Maximize boost mechanisms

• Compound rewards when beneficial

• Time entries and exits strategically

• Stay informed about program changes

Continuous Learning

• Study successful LP strategies

• Learn from mistakes and losses

• Stay updated on protocol changes

• Participate in community discussions

• Adapt strategies based on market conditions