Earn high yields on volatile pairs that can diverge in price
This strategy includes any vaults where both assets can fluctuate in price. This essentially means any pairs that are not pegged to one another, nor either asset pegged to the US Dollar. Generally, these vaults would either be:
Bluechip Vaults (eg. mSOL - ETH)
Typically earns generous yields as DEX fees are higher, leading to more % earnings per $ of volume
Volatile assets that are not pegged to one another, but generally follow the movement of the wider crypto market
High market caps, and traded in large quantities across numerous markets
Experience impermanent loss when asset prices diverge
Ecosystem Vaults (eg. BONK - SOL)
Typically earns extremely high yields as DEX fees are usually the highest for these pairs, leading to more % earnings per $ of volume
Volatile assets that are not pegged to one another, and can vary significantly in price movements
Consists of assets that are well-known in the Solana ecosystem
Assets can vary in volatility, liquidity, and market cap
Experience impermanent loss when asset prices diverge
Optimal Market Conditions
As with all Kamino vaults, the optimal conditions are when the market, and the underlying pool experiences high trading volume.
Vaults pairing two volatile assets can earn massive APYs, but the vault is at its best when the prices of both assets remain tightly correlated. This could be that the prices remain very stable, trade in small ranges, or move up by roughly the same percentage.
Range Overview
As these assets can vary widely in price movement, the ranges on these vaults tend to be wider than in SOL-only or Stable vaults. Ranges can go from fairly wide for Bluechip vaults, to very wide for the more volatile Community vaults.
Wider ranges allow for these vaults to continuously earn yield even when there is some divergence in price. The wider the range, the more price divergence can occur without the need to rebalance. This gives some freedom of movement for price discovery, while benefitting from higher yield.
It's important to note, however, that impermanent loss always occurs when prices diverge. This is covered in the Strategy Risk section below.
Strategy Risks
The primary risk for both of these vault types is impermanent loss. Impermanent loss, or divergence loss, occurs when a deposit becomes unbalanced, and you end up with lower net value than you would have, had you held only one token in the pool.
If any of the assets in the vault increases or decreases in price, while the other remains stable in price, or moves in the opposite direction, impermanent loss will occur. If the assets move back into the same price range, impermanent loss is negated, and you still benefit from the yield earned.
However, if prices diverge too much, the position can fall out of range, in which case a rebalance can occur, and impermanent loss be realized. Impermanent loss is a law of the markets you can’t change, you can only hedge against it (which the contributors are actively exploring).
You are encouraged to understand the dynamics behind impermanent loss before depositing into these vaults.
Here is a closer look at how impermanent loss can work in this scenario.
