Try Quests to earn cryptoVelodrome - Impermanent Loss Analysis
Calculation of Impermanent Loss while participating in the POOL vs Holding VELO
In this dashboard, we will be looking into the Calculation the Impermanent Loss while participating in the below POOLs versus Just Holding the VELO
VELO/USDC || VELO/OP || VELO/WETH || VELO/sUSD || VELO/LYRA || VELO/SNX
Select a POOL from the above drop down pool_name and click on Apply All Parameters button to look into the
Price Comparison of VELO with the Other Token in the Pool
Total VELO Amount provided as Liquidity and the Total VELO Amount (in $) if it is just Held rather than LPed
Are users still LPing into the Pool besides the Impermanent Loss while participating in the POOL vs just Holding the VELO
Introduction
An Automated Market Maker (AMM) is the underlying protocol that powers all decentralized exchanges (DEXs), DEXs help users exchange cryptocurrencies by connecting users directly, without an intermediary. Simply put, automated market makers are autonomous trading mechanisms that eliminate the need for centralized exchanges and related market-making techniques.
Unlike centralized exchanges, DEXs look to eradicate all intermediate processes involved in crypto trading. They do not support order matching systems or custodial infrastructures. As such, DEXs promote autonomy such that users can initiate trades directly from non-custodial wallets.
Also, DEXs replace order matching systems and order books with autonomous protocols called AMMs. These protocols use smart contracts – self-executing computer programs – to define the price of digital assets and provide liquidity. Here, the protocol pools liquidity into smart contracts. In essence, users are not technically trading against counterparties – instead, they are trading against the liquidity locked inside smart contracts. These smart contracts are often called liquidity pools.
How do AMMs work?
There are two important things to know first about AMMs:
- Trading pairs you would normally find on a centralized exchange exist as individual “liquidity pools” in AMMs. For example, if you wanted to trade ether for tether, you would need to find an ETH/USDT liquidity pool.
- Instead of using dedicated market makers, anyone can provide liquidity to these pools by depositing both assets represented in the pool. For example, if you wanted to become a liquidity provider for an ETH/USDT pool, you’d need to deposit a certain predetermined ratio of ETH and USDT.
To make sure the ratio of assets in liquidity pools remains as balanced as possible and to eliminate discrepancies in the pricing of pooled assets, AMMs use preset mathematical equations. For example, most of the DeFi exchange protocols use a simple x*y=k equation to set the mathematical relationship between the particular assets held in the liquidity pools. Here, x represents the value of Asset A, y denotes the value of Asset B, while k is a constant
What is Impermanent Loss?
One of the risks associated with liquidity pools is impermanent loss. This occurs when the price ratio of pooled assets fluctuates. An LP will automatically incur losses when the price ratio of the pooled asset deviates from the price at which he deposited funds. The higher the shift in price, the higher the loss incurred. Impermanent losses commonly affect pools that contain volatile digital assets.
However, this loss is impermanent because there is a probability that the price ratio will revert. The loss only becomes permanent when the LP withdraws the said funds before the price ratio reverts. Also, note that the potential earnings from transaction fees and LP token staking can sometimes cover such losses.
Calculation of Impermanent Loss:
Most AMM and liquidity pool uses the below constant product formula that mathematically determines what the market price of the token in the pool should be.
x * y = k
In our scenario x = VELO liquidity pool, y = Token liquidity pool and k = constant product
We can rearrange the equation of the formula to better understand the impact on LP.
VELO price = y / x
x (VELO liquidity pool) = sqrt(k / VELO price)
y (Token liquidity pool) = sqrt(k * VELO price)
In short, Impermanent Loss refers to the situation where you could have made more should you have done nothing and HODL rather than providing LP. The impermanent loss is calculated as the difference between the value of tokens when not in the pool and the one in the pool as a liquidity provider at T2.
With the same logic above, we could derive the formula for the size of the impermanent loss in terms of the price ratio between when liquidity was supplied and now. If you are interested in the derivation process, you could look into the below article
.
Where LR is the Impermanent Loss Ratio, p1 and p2 are the price at the Time of T1, T2 respectively.
Besides the Line Chart which shows us the Price Comparison of VELO with the other Token in the POOL from June 1st, 2022.
Currently, we can see the price of VELO is around $0.025 and it reached to high position July 20 to almost $0.09.
VELO/USDC: USDC Price is always around $1.
VELO/OP: OP Price is currently trending around $1.2. It reached to peak on August 4th, 2022 to around $2, but later it is a great valley upto August Ending.
VELO/WETH: ETH has more fluctuations in the price where it falls from $2000 on June 1st to below $1000 on June 19th, then slowly increases to $2000 on August 12th and now it is currently trending on $1700.
VELO/sUSD: sUSD Price is always around $1.
VELO/LYRA: LYRA Price Trend is almost similar to VELO price. We can see that LYRA price is around $1.09 on June 1st, decreased to $0.03 on June 19th, again increased to $0.21 on August 5th and currently trending on $0.1.
VELO/SNX: SNX Price is around $3.2 on June 1st, decreased suddenly to $1.4 on June 19th, then a peak increase to $3.5 on June 22. With more fluctuations, it trend around $4.2 on starting of August and decreased to
$2.8 on August 20 and currently trending around $2.9.
Next, we can look into the Total USD Amount LPing through the VELO Token into the POOL
From the below graph, on selecting the Pool Name from the above dropdown, we can see the fluctuations of the Total Liquidity Volume (in USD) of VELO Token Provided into the POOL.
Now to Calculate the Impermanent Loss, we need to find the Total Amount (in USD) if the VELO Tokens are Held rather than Liquidity Provided into the Pool.
In the Velodrome Tables, as we already have the Amount in USD that is LPed into the Pools from VELO Tokens, hence just the Sum of that Amount (TOKEN0_AMOUNT_USD) gives us the Total Amount of VELO (in USD) if they are held rather than LPed.
The below Area Chart provide us the VELO Amount in USD if it is Held rather than the LPed into the Pool based on the selection of Pool Name from the above dropdown.
The final step is to Calculate the Impermanent Loss Ratio for VELO Token if its Held rather than LPed into the Pools. For this, we use the LR(Impermanent) Formula that is shown above in the section Calculation of Impermanent Loss.
The below Line Chart and Area Chart shows us the Impermanent Loss Ratio comparing with the Two Token Prices in the Selected Pool by Day-Wise and the Impermanent Loss Percentage while participating in the selected POOL vs Holding the VELO Token.
Variation of Impermanent Loss for each Pool:
In the above charts, the Impermanent Loss is calculated by considering June 1st as the Start Time (T1) and every other day as End Time (T2). So let’s consider an User deposits the VELO Tokens into the Pool on June 1st and then we will be looking into the details of how is the variation of Impermanent Loss on Daily basis upto now.
In the Pool VELO/USDC, we can see that there are lot of fluctuations in the Percentage of IL from Mid June to Mid July. Either the IL(%) is very high or low at this time. We can observe that the IL reaches to almost 28% on June 14th and suddenly declined to 0.5% on June 19th. There are similar fluctuations upto July 16, then there is very low IL (<0.5%) for next 10 days and increased to 7% on July 30 and then the IL is trending in linear way (<5%) upto now.
In the Pool VELO/OP, as seen in the chart similar to VELO/USDC pool, there are lot of fluctuations in IL(%) from June 10th to August 6th. It reaches the highest on June 28th which is almost 11.5% and crosses the 8% for nearly 11 times and declined to less than 1% for nearly 12 times. Then the chart is trending around 0.3% upto August end and now again the IL percentage is increasing slowly and currently it is at 1.5%.
In the Pool VELO/WETH, as seen in the chart, the trending of variation of IL(%) is almost similar to the pool VELO/OP. But this reaches the highest on June 14th to 18% and crossed the 10% for nearly 9 times and declined to less than 1% for nearly 12 times before August 10th. Then the chart trend less than 2% upto September 8th and reaches to 2.5% on September 9th.
In the Pool VELO/sUSD, as seen in the chart, the trending of variation of IL(%) is almost similar to the pool VELO/OP. But this reaches the highest on June 14th to 28% and crossed the 15% for nearly 16 times and declined to less than 1% for nearly 12 times before August 10th. Then the chart trend less than 3% upto August 28th and reaches to 3.5% on September 9th.
In the Pool VELO/LYRA, the variation of IL is similar to other pools where we see more fluctuations upto August 8th and then we see there is increase in the IL. Compared to the other pools, the IL is high in trending which is 6% on August 15th & 18th and now it is trending around 3.8%.
In the Pool VELO/SNX, the variation of IL is very similar to the pool VELO/USDC and it is currently trending in a linear way (<5%).
Based on the selection of all the Pools, we can easily conclude that the Pool VELO/USDC has the highest volume of VELO Tokens provided as Liquidity. And the Pool VELO/SNX has the lowest volume of VELO Tokens provided.
Also we can see that the Liquidity Providing of VELO Tokens is decreased in the month of August in all the Pools compared to the June & July Month. Currently for all the Pools, the LPing from VELO Tokens is trending very low.
Are still Users LPing into the Pools?
From the above Bar Chart, based on the selected POOL from the drop down, we can easily conclude that the number of Users LPing into the Velodrome Pools drastically decreased and trending as very low now.
But in all the pools, the pool VELO/USDC & VELO/OP has more number of users LPing compared to the other pools.
To all the remaining Pools, we can observe only single digit number of users LPing.
Summary
This dashboard is to mainly provides us the Calculation of Impermanent Loss for VELO Token while participating in the Pools versus just Holding it in the Account. We can also look into the Variation of Impermanent Loss Percentage on Day-wise for the selected POOL from the drop down.
From all the above charts, we can conclude that:
- Currently, the Impermanent Loss is trending as low for all the POOLs if we consider the June 1st, 2022 as the starting point. But the users who withdraw their VELO token from Mid-June to End of August faced more IL on few days and very less IL on few days.
- Between the time period of Mid-June to End of August, there are more fluctuations on IL(%) Variation Trend for all the Pools.
- The Users are more interested to LPing into the VELO/USDC pool compared to other pools. This is may be due to the very low variation of USDC Token price compared to the other Tokens.
On a Final Note, As there is Bear Market trending currently, the Impermanent Loss is not moving in a linear trend. But as there is decrease in the VELO Token LPing into the Pools from the past month, there is also decrease in Impermanent Loss for the Pools which has standard Tokens as another token and there is slight increment in Impermanent Loss for the Pools which has volatile Tokens as another token.