Uniswap Hook Incubator — Liquidity Operator: JIT Rebalancing #5
This lesson covers how liquidity providers (LPs) can also benefit from hooks, following previous blogs that focused on swappers.
LP Fees
Whenever a liquidity provider supplies a certain amount of tokens across a specific tick range, their liquidity becomes active when the current tick price matches their range; otherwise, it remains inactive. Since LPs facilitate token swaps, they earn a small fee from the swappers, known as LP Fees.
LP Rebalancing
As swaps occur within a pool, the price shifts. If the price deviates significantly, some of the previously active liquidity may become inactive. LPs who want to continue earning LP fees must rebalance their liquidity to stay within the active range.
JIT Liquidity
JIT (Just In Time) liquidity involves adding liquidity right before a large swap transaction is executed, which can be detected in the mempool. By adding a significant amount of liquidity with a narrow tick range where the swap is expected to happen, LPs can earn fees from the swap. After the swap, the liquidity is removed along with the accrued fees. While this strategy may sound profitable, it can sometimes result in negative returns.
Will elaborate more on this in an updated blog.!
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