All of this AMM talk on Twitter is highlighting just how little people understand about Impermanent Loss. Because of that I really feel it needs to be talk about so we can set the record straight.

Here we go 🚀 #DeFi #Ethereum #Trading $ETH
I am going to start this thread by saying... the term impermanent loss should NEVER have been created! Why? Because there is already a term for a pool that balances based on constant product. It's called... *drum roll* 🥁 Constant Mix Strategy!
Constant mix has been around for as long as trading strategies have existed. It is simply a strategy that keeps a constant weighting of each asset.

Yes, it's true. The math behind IL, profit and loss curve, everything about this is old news.
Here on investopedia you can see the infamous "Impermanent Loss vs buy-and-hold" chart, except it is referred to by its actual name, Constant Mix.…
People get IL wrong all the time. Things wrongly attributed to the IL (constant mix) include fee's, spread, block times (really? lol), price impacts, etc. None of that has anything to do with IL. IL is a formula with a known outcome independent all of those other things.
IL is an opportunity loss of doing 1 strategy vs. another. It's the outcome of mixed strategy vs buy-and-hold. But IL assumes you would buy and hold if not LP'ing. That's a bad assumption. People can/will make a million different trading decisions if not LP'ing.
If IL is an opportunity loss of doing strategy A vs strategy B then technically everything has IL. For example, In 2019 I bought a $10,000 PC. If I would have put that $10,000 in ETH I would have $40,000. Welp, $30,000 impermanent loss. 🤷
"But it's not permanent until you pull your liquidity". yeah... that has another term as well, called "Unrealized PnL" and applies to literally every type of 2-way trade, not just IL/LP'ing.
So why would anyone be okay with a strategy that underperforms buy and hold in both directions... because profit is not the only parameter that matters in trading!

The other parameter is risk!
In a buy-and-hold as one asset outperforms the other the risk in one asset increases over the other. In a constant mix, the $ for $ volatility impact of each asset remains constant as the $ value of each asset also remain constant. CCPI is yet another strategy (for another day)
In summary:

-IL is a fancy term for constant-mix vs. buy and hold
-You can experience IL even if both assets significantly increase in price 🤯
-There is no way to prove someone would have "bought and held" which makes IL moot
-Mixed strategy has been used for ages and continues to be used by individuals, investment/insurance firms, etc. Particularly where targeting a specific Sharpe/risk-level is critical.
-Constant Mix is literally "buying low" and "selling high" which is the goal of many people.
-Many investors and investment firms employ Constant Mix in their stocks & bonds portfolios, and without incentive outside of the strategy itself! LP's on the other hand are paid trade fees on top of the strategy. We should feel so privileged!

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More from @krugman25

16 Oct
Impermanent Loss reduction idea. Every pool has a secondary "overflow pool" attached. When someone swaps asset 'A', rather than the pool becoming imbalanced and then arbed, an equal amount of asset 'B' goes into this secondary pool.
#DeFi #Ethereum
If asset 'B' is swapped next then capital comes out of the overflow pool first and if large enough then the primary pool at which point asset 'A' would then be placed into the overflow pool.
There is a cap on how large the overflow pool can become as a % of the primary pool (10, 20 or 30% max?), at which point standard Constant Mix is enforced to prevent pool depth from getting too low.
Read 8 tweets
15 Oct
🚨Warning: Alpha leaks incoming🚨

A short tweet thread on why I think @UniswapProtocol LP'ing is > Uniswap forks that pay LP's in governance tokens. #DeFi #Ethereum
1 - Uniswap LP yield from fees are automatically reinvested back into the pool. There is no gas involved and makes this yield comparable to dividend paying stocks using DRIP. If you are paid in gov. token the gains are separate from the pool and must be explicitly reinvested.
2 - LP's Uniswap gains are GAS FREE 🥳. Gas is expensive. Gas costs add up. Due to compounding, losing a little money today is losing a lot in the future. If you want the equivalent in gov tokens you must claim, then swap, then add the new liquidity. *ouch*
Read 9 tweets
15 Oct
I was thinking how AMM's can reduce price impact and arb losses. It would essentially require various AMM protocols to communicate with each other over another protocol layer. I then read some of what @andrecronjedev is working on and it is almost identical to my thoughts. 😂
This would only work as single, atomic transaction to reduce front running opportunities. For that to be the case this AMM-to-AMM communication would have to be tied into the AMM's smart contracts using a middle-layer protocol. Here's a high level view of how it would work...
User initiates trade -> Trade is sent to AMM -> AMM calculated price impact -> If large enough the protocol then looks at a pool of other AMMs connected to middle-layer -> It then initiates a swap if profitable -> single atomic transaction is mined and executed.
Read 5 tweets
9 Aug
This is going to be an mega thread where I lay out the bullish case for and also demystify 's price calculation which does not use standard supply/demand mechanisms.

So grab a coffee and take a set. Class is about to begin. Image
Before diving into the math I want to take a step back and talk about general trading/investing philosophy.

At the most basic level my philosophy is to look for trades/investments that offer asymmetric reward opportunities. That means opportunities where the reward... significantly outsized versus the risk being taken. The immediate follow up rule is to DYOR so you can be confident in the trade/investment that you are about to me.

This is the exact philosophy that lead me to getting fully involved and invested in #Ethereum.
Read 29 tweets
8 Jul
I am quickly approaching 800 holders of my sets on @tokensets . That probably makes this a good time to talk about an important aspect of my trading, which is position sizing.

I get asked sometimes why I often take smaller positions. The simple answer is "risk".
Essentially a trader should not just look at how much they could make (reward) per trade but also how much they could lose (risk). In addition to that there is also the fact that any trade could be a losing trade which makes risk even more critical to manage.
Diving deeper, a good trading strategy will have at least a slight long term edge. Losses on the other hand create a compounding disadvantage, neutralizing the edge. A 10% loss takes 11% gains to recover, 20% loss takes 25% to recover, and 50% loss takes 100% gains to recover.
Read 12 tweets

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