A lot of people don’t understand LP and impermanent loss well enough.
I’ve seen many examples of this in the daily thread where people do want to provide LP, but have a lot of questions understanding the risks and benefits of being a LP provider.
It’s important to know that a LP consists out of two assets that form a pair. In this case MOONS/ETH. The ratio of the value (not the amount of assets) is divided 50/50.
So if there’s $100k of Moons in the pool, there must also be $100k of ETH in it.
I’m going to explain LP and impermanent loss with a few examples, but first we need some assumptions from where we start.
Moon price: $0.28 ETH price: $1623,02 You decide to put 1000 Moons in the SushiSwap LP
These 1000 Moons have a value of $280 (1000 x $0.28) You have to put in an equal amount of ETH in the LP which is 0.1725 ETH ($280 / $1623,02)
Your total investment in the LP is now $560
Let’s say the price of Moons go up to $0.32 and ETH goes to up $1633.85What happens then?
In this case Moons have increased +14.28% and ETH +0.67%.
This means you now have 938 Moons left of the 1000 you’ve put in. Your ETH amount increased to 0.1838 ETH. So you ‘lost’ 62 moons and gained 0.0113 ETH.
Why? Because a LP pool has a ratio of 50/50 remember? The value of the two should always be equal. And since Moons rose more than ETH, you ‘lost’ some Moons in the process and gained ETH.
Calculating with 50/50 ratio, this means you now have $300.16 in Moons (938 x $0.32 = $300.16) and $300.16 in ETH (0.1838 $1633.85 = $300.16))
This gives you a total LP value of $600.66 and a $40.66 profit with less Moons.
But what would have happened if you had hodl to these assets instead of putting them in the LP?
You would still have the 1000 Moons and the 0.1725 ETH. That means $320 in Moons (1000 x $0.32) and $281.86 in ETH (0.1725 x $1633.85). Total hodl value would have been $601.86
THIS is impermanent loss. You would have had 0.20% more if you had not provided the LP.
On the other hand. You also earn when providing LP. You get a small portion of every transaction/fee that was made in the LP (on both buy and sell orders).
These could cover up for the impermanent loss.
Let’s say the price of Moons go up to $0.38 and ETH goes down to $1433.16. What happens then? The same calculation applies.
You now have 806 Moons left (806 x $0.38 = $306.52) and 0.2139 ETH (0.21 x 1433.16 = $306.52) which gives a total LP value of $613.04
If you would have hodl to your assets you would have had $380 in Moons (1000 x 0.38) and $247.25 in ETH (0.1425 x $1433.16) a total hodl value of $627.25
An impermanent loss of $14.22 ($627.25 – $613.04) which makes -2.27%
It’s important to remember that there is a 50/50 ratio in a LP and that price movements of both assets in the pair can affect the price and amount of the other. The actual loss only occurs when your remove your assets from the pool. Price movements could recover your loss, hence the name impermanent loss.
You can use the following calculator to simulate impermanent loss for your own scenarios.
submitted by /u/bvandepol
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