Besides depositing tokens to existing liquidity pools on the Raydium DEX on Solana, users can create new pools, using a base token and a quote token as the trading pair, selecting the fee tier, and setting the trading range within which to provide liquidity. While there are risks to consider, including impermanent loss, this is a way to generate crypto income while holding tokens.
Last week we looked at how to deposit tokens to a Raydium liquidity pool in order to become a liquidity provider and earn passive income. Following on from that, let’s return to Raydium’s liquidity section, but this time, we’ll look at how to create a Raydium liquidity pool.
Providing Liquidity Recap
Before we get started, let’s just summarize the main points covered previously that we need to keep in mind.
- Providing liquidity means depositing two different tokens to a liquidity pool in order to enable trading in that token pair. There is a base token–usually the more stable one–and a quote token.
- Liquidity providers earn trading fees relative to the amount of liquidity they deposit to the pool.
- There are standard pools and concentrated pools. In a concentrated pool, liquidity providers specify a range within which they provide liquidity. This concentrated range means earnings are higher, but only within the range. If price goes outside the range, then earnings drop to zero.
- Token ratios rebalance as price changes. If the price drops and you withdraw your assets, you will have more of the quote token, while if price rises, you’ll end up with more of the base token. In a concentrated pool, if the price goes out of range at either end you’ll find yourself with entirely one token.
To look in detail at adding liquidity to existing pools, please read through the previous guide: How to Profit From Raydium Liquidity Pools. Also, it’s a good idea to try that strategy out first and get familiar with how liquidity pools work.
Also, be aware of the risks, including smart contract vulnerabilities and market volatility, along with impermanent loss. For an explanation of impermanent loss, please check the previous guide linked above.
Identifying Tokens to Create a Raydium Liquidity Pool
As last week, we’re going to focus on concentrated Raydium liquidity pools so that we can provide liquidity within a specific range, thereby enhancing capital efficiency and potentially increasing fee earnings.
Whichever token pair you decide to provide liquidity for, you’ll of course need to make sure you have those tokens in your wallet. We mentioned meme coins in the last guide as these have a lot of profit potential, but you need to identify a token relatively early that has attention and volume, and that you believe has room to run.
Remember that as price moves up you could end up with none of the quote token, which means, essentially, you’ve scaled out into your base token, but if price goes the other way, you could end up with a lot of the quote token. That means it needs to be a coin you’re comfortable holding, and you can look at liquidity provision as a dynamic, fee-earning alternative to simply buying and holding tokens.
Steps to Create a Concentrated Raydium Liquidity Pool
To create a pool, navigate to Raydium’s liquidity page and connect by clicking on the Connect Wallet button at the top…
