A graphical way to look at the Impermanent Loss (IL) when you provide liquidity.
πππ§
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πππ§
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This will be done for an imaginary token $FOO.
Assumptions:
(1) $FOO price = $1
(2) Liquidity is provided to $FOO - $UST pair
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Assumptions:
(1) $FOO price = $1
(2) Liquidity is provided to $FOO - $UST pair
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Let's imagine you have 1000 $UST to invest and you *can* invest it in $FOO.
One way to go about it is... not to invest and keep $UST.
The value of your position would not change at all, ignoring price action (PA) of $FOO would look like this:
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One way to go about it is... not to invest and keep $UST.
The value of your position would not change at all, ignoring price action (PA) of $FOO would look like this:
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Another way to invest would be to kindly ape into $FOO, leaving not $UST behind.
Full exposure to $FOO price action, biggest up- and downside potential (let's forget about leverage, okay?).
Amount of $FOO stays the same (1k), only PA drives position value.
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Full exposure to $FOO price action, biggest up- and downside potential (let's forget about leverage, okay?).
Amount of $FOO stays the same (1k), only PA drives position value.
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Once $FOO - $UST LP is provided (at $FOO price of $1), its value is driven by:
* PA of $FOO
* Composition of the pool (result of the above, really)
That slightly changes the exposure to PA of $FOO.
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* PA of $FOO
* Composition of the pool (result of the above, really)
That slightly changes the exposure to PA of $FOO.
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When $FOO -> $0, position value -> $0.
When $FOO -> π, position value -> π.
Clear difference vs "FOO only" bag - whether you lose or gain, you will do it as a slower pace.
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When $FOO -> π, position value -> π.
Clear difference vs "FOO only" bag - whether you lose or gain, you will do it as a slower pace.
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Rather than provide $FOO and $UST into LP, we can keep them in a wallet in 50:50 ratio.
The difference between value of such a position and that of the LP is called "impermanent loss" and can be visualized as the distance between the 2 curves.
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The difference between value of such a position and that of the LP is called "impermanent loss" and can be visualized as the distance between the 2 curves.
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When $FOO stays in the $0.5 - $1.5 price range, the lines almost overlap.
In other words - even if the price changes by +/- 50%, impermanent loss is still pretty small.
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In other words - even if the price changes by +/- 50%, impermanent loss is still pretty small.
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"But ser, LP usually comes with incentives" you say?
And you will be right, fren.
Including APY of 10% / 25% / 50% changes the chart yet again.
(Assumption: yield was auto-compounded into LP position for a year).
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And you will be right, fren.
Including APY of 10% / 25% / 50% changes the chart yet again.
(Assumption: yield was auto-compounded into LP position for a year).
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A few observations:
- APY as low as 10% makes up for IL if the price change stays in (-60% ; +150%) range.
- With APY of 50% it is better to LP than to ape if the price does 2.25x or less
- LP mining is the most profitable (vs ape or 50:50 ) if the price moves sideways.
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- APY as low as 10% makes up for IL if the price change stays in (-60% ; +150%) range.
- With APY of 50% it is better to LP than to ape if the price does 2.25x or less
- LP mining is the most profitable (vs ape or 50:50 ) if the price moves sideways.
/10-end
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