What is TWAP?

Time-weighted Average Price (TWAP) is a well-known trading algorithm that is based on the weighted average price and is defined by the time criterion. TWAP is calculated for executing large trade orders. With the TWAP value, the trader can disperse a large order into a few small orders valued at the TWAP price since it is the most beneficial value.

This is basically done to not let a huge order suddenly increase the value of a particular financial asset in the financial market.

What is an impermanent loss in yield farming?

When a token price rises or falls after you deposit it in a liquidity pool, this is known as crypto liquidity pools' impermanent loss (IL).

Yield farming, in which you lend your tokens to gain rewards, is directly related to impermanent loss. However, it is not the same as staking, as investors are required to inject money into the blockchain to validate transactions and blocks to earn staking rewards.

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Methodology

The goal of this dashboard is to develop a TWAP methodology that makes it possible to analyze changes in LP value over time (without adjusting for fees). There must be something specific to each deposit since each occurs at a different time.

I divide this dashboard into 2 parts. The first part is for IL (impermanent loss) in Ethereum and the second part is for pool IL analysis in Polygon. The values of both are calculated for the same WETH/USDC pools on sushi.

For each section, I will show the daily impermanent loss of LPers, total profit and loss of LPers, profit and loss days, daily LP actions and unique LPers, cumulative amount (USD) of profit and loss, and table of impermanent loss.

Ethereum

As we can see, the number of LP transactions in this period was very low, which was about 286 transactions. LPers have not been provided for many days. The days with the highest number of unique LP users are January 21 and January 24, where 7 unique users provided liquidity each day.

Polygon

The day with the most number of LP transactions was 23 January with 12 LP tx provided by 11 unique users.

Before March, users participated in depositing in pools but after that, the number of transactions and unique LPers decreased both.

There is a total of 1172 LP transactions during this period.

The amount of Profits and Losses on daily basis

Ethereum

As we see, all the LP providers who deposit before June 11 are at loss. Because in that period the price of ETH was higher than the new price.

Polygon

As we see, all the LP providers who deposit before June 11 are at loss same as Ethereum mainnet. Because on that period the price of ETH was higher than the price of the last block.

Unlike the Ethereum section, in the Polygon network, users have provided LP on most days. But the values of these LPs have been lower than the values in Ethereum. LPers have provided this large number (LP txs) because the fee in the Polygon network is low and users can add any amount they want to the pool with a very low fee.

Ethereum

• When we count the days in users provided LP and now their position is in loss, we reach the number of 96 days. It means that the value of LP that they have provided on that day is now less and it means a loss. The number of profit days is 35 days.
• The total loss of LPers is about $16.47M in this period, and that’s much higher than the total profit of LP providers.

Polygon

• The total loss of LPers is about $2.09M in this period, and that’s much higher than the total profit of LP providers which is $57.2k same as the previous section.

• The number of days with a negative result (loss) in Polygon is 146 days and profit days are 36 days.

Ethereum

Polygon

The cumulative amount of Profits and Losses

Conclusion

• The number of liquidity providers in the Polygon blockchain is more than the number in Ethereum, which is because the fee is lower and most users can provide liquidity even for testing.
• But on the other hand, the amount of liquidity in Ethereum is much higher than in Polygon. Users with more capital tend to do their work on the Ethereum network, which is more stable and secure, and they don't care about transaction fees.
• The LP providers who deposit before June 11 are at loss in both chains. Because on that period the price of ETH was higher than the price in the last block.
• The total loss of LPers is about $16.47M for Ethereum in this period, and that’s much higher than the total profit of LP providers. The loss amount for
• The days which users provided LP and now their position is in loss, we reach the number of 96 days for Ethereum and 146 days for Polygon. It means that the value of LP that they have provided on that day is now less and it means a loss. The number of profit days is 35 days for Ethereum and 36 days for Polygon.
• The number of LP transactions in this period in the Ethereum mainnet was very low, which was about 286 transactions and this number is 1172 LP transactions for Polygon network.