1/ Let's talk about APY in AMM pools 📈
It's the main metric used to calculate profits, with many yield farms & AMM protocols advertising high APY figures to lure LPs 🤑
But the way APY is measured today makes some flawed assumptions that can be misleading 🧐👇
It's the main metric used to calculate profits, with many yield farms & AMM protocols advertising high APY figures to lure LPs 🤑
But the way APY is measured today makes some flawed assumptions that can be misleading 🧐👇
2/ One flawed assumption is liquidity staked in a pool remains intact.
In reality, impermanent loss erodes staked liquidity and reduces profits from collected swap fees & liquidity mining rewards.
This can leave LPs with razor thin or negative returns.
In reality, impermanent loss erodes staked liquidity and reduces profits from collected swap fees & liquidity mining rewards.
This can leave LPs with razor thin or negative returns.
https://twitter.com/Tetranode/status/1300307116201144320?s=20
3/ Yet most AMM front-ends list APY without taking impermanent loss into account.
This is why the returns you actually earn as an LP when you withdraw liquidity are often less than the projected APYs originally advertised in AMM interfaces.
This is why the returns you actually earn as an LP when you withdraw liquidity are often less than the projected APYs originally advertised in AMM interfaces.
4/ Bancor v2.1 seeks to fix this problem by introducing a new concept called impermanent loss insurance.
blog.bancor.network/proposing-banc…
blog.bancor.network/proposing-banc…
5/ LPs who stake in Bancor's v2.1 pools earn protection against imp loss based on how long they stake in a pool.
After 30 days you’re 30% protected, after 50 days 50% protected & after 100 days you’re 100% protected against imp loss for as long as you hold liquidity in the pool
After 30 days you’re 30% protected, after 50 days 50% protected & after 100 days you’re 100% protected against imp loss for as long as you hold liquidity in the pool
6/ This ensures LPs can withdraw the full token amount of their initial stake + fees, so long as they stay in the pool long enough.
With full protection, if you stake $100 worth of a token & the token’s price doubles, you're entitled to withdraw $200 worth of the token + fees.
With full protection, if you stake $100 worth of a token & the token’s price doubles, you're entitled to withdraw $200 worth of the token + fees.
7/ With your principal protected, expected APY ends up being more closely aligned with the real APY.
In other words, Bancor APYs don't take impermanent loss into account **for a reason** - because LPs are actually protected, unlike most AMMs.
In other words, Bancor APYs don't take impermanent loss into account **for a reason** - because LPs are actually protected, unlike most AMMs.
8/ LPs should think twice when they see eye-gouging APYs in an AMM staking interface.
Remind yourself that unless a pool has imp loss insurance (like Bancor v2.1) or is a stable pair (price-pegged tokens), imp loss can lead to realized gains being way lower than advertised APYs
Remind yourself that unless a pool has imp loss insurance (like Bancor v2.1) or is a stable pair (price-pegged tokens), imp loss can lead to realized gains being way lower than advertised APYs
9/ Check out Bancor v2.1:
Stay long on a token while providing AMM liquidity & earning reliable yield from swap fees & rewards - without living in fear of imp loss.
bancor.network
guide: blog.bancor.network/guide-single-s…
Stay long on a token while providing AMM liquidity & earning reliable yield from swap fees & rewards - without living in fear of imp loss.
bancor.network
guide: blog.bancor.network/guide-single-s…
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