Thread by @0xDanger

1/ One of the main concerns that has been raised by the crypto community has been around the profitability of @PopsicleFinance Univ3 Pools.

This thread aims to answer the following question:

“Do the fees generated from the Popsicle’s Fragola pools outpace impermanent loss?” 👇

2/ Let’s explore how Sorbetto Fragola works.

Sorbetto Fragola is a protocol that is leverages Uniswap v3 and functions as an automated range optimiser.

It adjusts tick ranges (lower & upper price bounds) for Univ3 LP positions to concentrate liquidity and maximise trading fees.

3/ Concentrated liquidity can be a double edged sword.

The GREATER the concentration of liquidity -> The GREATER the magnitude of IMPERMANENT LOSS when price of the underlying assets in the LP move (vs an 50/50 LP position or one that uses a constant product formula).

4/ Impermanent loss (or IL) becomes PERMANENT or REALISED when one of the following things happen:

1. Position moves outside of the range initially set by the liquidity provider

2. User removes their liquidity from the Univ3 position, making IL, permanent.

5/ In Sorbetto Fragola's case, IL is realised when a rerange occurs.

A rerange consists of the following steps:

1. Liquidity is removed from the pool

2. Tick ranges are readjusted

3. A swap transaction is initiated to get assets into a ratio that matches the new tick range.

6/ So back to the question “Do the fees generated from the Popsicle’s Fragola pools outpace impermanent loss?”

To answer this question I collected the following data for @PopsicleFinance’s 15 volatile asset pools on ethereum:

👇

7/ This data includes the following:

1. Fees Generated from Pools

2. Profit/Loss from Reranges

The figures were then converted into an equivalent USD value as at today.

8/ I generated a cumulative net returns figure which was calculated as follows:

Cumulative Net Returns = Cumulative Fees Generated from Pools + Cumulative Profit/Loss from Reranges

This calculation is important as it allowed me to adjust our fee revenue for any REALISED IL.

9/ Let’s look at a summary of the high level results.

As you can see from the image:

Out of the pools analysed, 13/15 were in profit.💰

That is:

Cumulative Fees Generated > Cumulative Profit/Loss from Reranges.

10/ Now let’s interpret the chart shared in the opening tweet with a focus on the profitable pools.

Remember all calculations use the USD equivalent at today's prices.

The chart consists of 3 coloured lines. 👇

11/ 1) Cumulative Fee Revenue (Green Line) - The total accumulated sum of all fees earned from this liquidity pool minus Fragola performance fees.

If this line is above 0, this means fees generated were positive and vice versa.

12/ 2) Cumulative Profit & Loss From Reranges (Red Line) - the total accumulated profit or loss that resulted when a rerange was triggered.

Reranges occur to ensure that the assets remain in an optimal price range to earn trading fees.

13/ Reranges lead to assets being swapped (similar to a swap you would complete to buy an asset on an AMM) and results in IL being realised.

Note IL can yield either a profit or a loss.

If this value is above zero it means the rerange has yielded a profit and vice versa.

14/ But How Can You Profit from a realised Impermanent Loss?

As mentioned previously, we are using today's prices to calculate the returns in terms of US dollar.

15/ As the realised IL was calculated initially in each underlying cryptocurrency, a previous loss that was calculated may actually be a profit if the underperforming crypto pair gained in value in USD terms as at today vs the outperforming crypto crypto pair.

16/ 3) Cumulative Net Returns (Blue Line) - The sum of the Cumulative Fee Revenue and the Cumulative Profit & Loss from Reranges.

As long as this line stays above zero, then the total returns generated from the pool through a combination of fee revenue and reranges is positive.

17/ Let's have a quick look into some of our most profitable pools.

For example, the USDC/WETH 0.5% & SHIB/WETH 1% have performed extremely well due to the following factors:

1. High Fee Revenues

2. Profits from reranges due to positive IL.

18/ USDC/WETH 0.3% in the meanwhile has performed well due to the fact that the extremely high fee revenue has significantly outstripped any negative IL due to reranges.

18/ Now onto the pools our least profitable pools.

Looking at the charts below the two most unprofitable pools were FTM/WETH 1% and WBTC/WETH 0.3% made total cumulative net losses of -$102,891 and -$336,942 respectively.

But there is a silver lining. 👇

19/ On December 21, strategy changes were implemented to all pools to create a better balance between reducing negative IL from reranges vs maintaining fee revenue.

This strategy adjustment reflected by the light green line in the attached chart.

This is as follows: 👇

20/ 1) Cumulative losses from reranges (red line) on both charts is more muted compared to reranges that occurred before the Dec 21.

2) The has resulted in a steep increase of the blue line in both charts towards 0 showing that each pool has been moving back into profitability.

21/ The effect of this strategy change is also evident when viewed across all pools with the magnitude of changes from IL being significantly dampened allowing fee revenue to significantly outpace IL.

22/ Overall the future looks extremely bright for Popsicle Finance with the team overcoming technical hurdles at the bleeding edge of defi.

Recent strategy changes which have netted improved profitability are evidence of this.

23/ When combined the team's continual focus on R&D into the area of Univ3 optimisation, I would not be surprised if retains its position as the market leader in this space now and into the future.