The Balancer Report: Impermanent Loss
Decentralized Finance is complex. There are a lot of concepts that impact protocol users and some of them might be difficult to understand. One of these trickier concepts is Impermanent Loss.
It is important to make sure that LPs understand how it works and what implications it may have on their experience. So let’s learn more about Impermanent Loss and see how it works.
Let’s kick things off by defining impermanent loss (IL). To put it simply, IL is a negative change in the value of your LP tokens which happens if their prices change in a certain way after you start LPing. Impermanent Loss only affects the USD (or any other fiat-denominated) value of your LP position. This is important as it means that IL does not affect your token amounts negatively.
Now, let’s take a look at how it works with the help of an example based on this article:
Let’s say the price of 1 ETH is $1000. You deposit 1 ETH and 1000 DAI into an ETH / DAI pool. The total LP share value is 2000 and you own 10% of the pool. Now, if the price of ETH goes up to $4000 after some time and the pool gets rebalanced.
Here’s what will happen to your pool share: tokens-wise, it will look like 0.5 ETH and 2000 DAI, which adds up to a total of $4000 (both tokens in your pool share are worth the same amount). This looks great until you calculate that had you held on to your initial tokens (1 ETH and 1000 DAI), their total value would now be $5000 (1 ETH at $4000 and 1000 DAI).
In this example involving rather extreme price fluctuations IL leads to a loss of $1000 in potential LP value increase compared to simply holding the tokens.
So what can you do as an LP to minimize the impact that IL has on your positions? First and foremost, since it’s impossible to predict price moves, you can take precautionary measures but you cannot completely eliminate the possibility of IL happening.
One thing that you could do is use Balancer’s Impermanent Loss calculator built by Xeonus and Zen Dragon. You can find it here. It’s very easy to use and it even visualizes your IL calculations:
The pool configuration from the ETH / DAI example above.
Once you’ve entered your pool’s setup, you can click on “Show Calculation” and the page will provide you with the numbers and the math behind them. It will also generate a beautiful rotatable 3D chart that will visualize the setup:
One more thing you could do to minimize the impact that IL can have on your LP experience is opting for pools less likely to experience significant price changes between the assets that they hold. This mainly includes stable pools that can hold any assets that are expected to trade at roughly the same price including stablecoins and Liquid Staking tokens. Some examples include the wstETH / sfrxETH / rETH pool on the mainnet and the USDT / USDC one on Avalanche.
Impermanent Loss might sound scary until you learn more about it. After that’s taken care of it’s just another DeFi concept to be aware of.
Speaking of wins and losses, the Balancer ecosystem keeps winning, here’s a recap of all the major news for the past seven days:
Balancer integrates Chainlink’s price oracles to supercharge LST growth on Arbitrum.
Thanks to the integration, the protocol now has access to “high-quality, tamper-proof price feeds needed to help secure pricing for multiple staked ETH tokens”. The integration covers the following price pairings: wstETH/ETH, rETH/ETH, and cbETH/ETH.
Chainlink is one of the largest oracles in the space and their tech powers up some of the most well-known DeFi protocols.
Why is the integration important? As Fernando Martinelli (Balancer co-founder) put it, “Balancer’s LST pool is set to be a central component of ETH staking and LST adoption, so we needed to build it with longevity and robustness in mind.”
Balancer Grants highlights the work of Tali AI, one of the most exciting recent grantees.
Tali is an AI that powers up Balancer’s discord community by leveraging a variety of data sources to provide near-instant information about the protocol, governance and DeFi in general. It’s trained on the docs, the governance forum, the Github and the discord server. This allows Tali to cover a wide variety of topics including highly technical ones.
Balancer Grants continues to support Balancer builders, you can apply for a grant here and learn more about the program using this page.
Beethoven X takes a deep dive into the ongoing dApp incentive program on Fantom.
The program is funded by Fantom’s Ecosystem Vault and it uses Gitcoin to allocate rewards.
Beethoven X has qualified for the first round and it would appreciate community support, here’s how you can vote. You’ll need a Gitcoin passport with a minimum score of 17 and some GcV (GitcoinVote tokens).
The DAO aims to funnel a portion of all received funds towards maBEETS rewards and there is also a special BEETastic NFT which will be raffled among everyone who supports Beethoven X in the round.
The latest Staking Update is out! Balancer’s LST flywheel continues to supercharge ecosystem growth as the total percentage of all staked ETH reached 22.06%.
HiddenHand incentives can as always be explored here, the current round ends on September 13, 2023.
Balancer: TVL and Stats — Defilytica
Balancer’s Total TVL across all networks is sitting at $666m.
The Total Mainnet TVL is $447,6m with a dominance of 67,2%.
As for our liquid wrappers, they are under the following parity to veBAL:
This section will list the top three expected pools to receive most of the next period’s emissions. Voting is open for four more days, and the next period is scheduled to start on Thursday at 00:00 am UTC.
- Polygon — 20WETH-80BAL / tetuBAL — currently at 15.36%
- Mainnet — BADGER / rETH — currently at 8.93%
- Mainnet — rETH / WETH — currently at 8.66%.
You can find an overview of the current LM incentives on the Balancer Mainnet below:
This voting round is ending with 7 new Snapshot votes with most of them covering gauges:
- [BIP-420] Refund Voting Incentives for Pools Shut Down Due to Bug Report
- [BIP-423] Enable new wstETH gauges [Gnosis Chain]
- [BIP-424] Add Initial Avalanche & Base Gauges
Stay tuned for this week’s Gauge Update to learn about the results.
This week Dubstard brings another set of warnings:
- Do not open any links sent to you in DMs from any one pretending to be a “mod”, “admin” “staff member” and etc.
- Do not message anybody offering help if you DMs them first, those are scammers.
- Remember, Balancer operates primarily under the following domain: https://balancer.fi/
- Never share private keys, seed phases with anyone.
- There is no compensatory $BAL distribution and any website or user promising otherwise is trying to scam you.
- Scammers copy pasting the same message and mass tagging users in dire attempts to drive engagement and to scam someone.
- Do not click any links on twitter (X), even from “verified” accounts, if Vitalik can get hacked, anyone can. Anyone can buy a “verified” account and post scams with it. There is no “Proto-Danksharding” token distribution and any website or user promising otherwise is trying to scam you!
Balancer has a flourishing ecosystem. You’re welcome to contribute to it whether you’re a dev, a community person, or a graphic designer! We strive toward onboarding every new member in a smooth and personalized way.
Join the Ballers and start your Balancer journey now: http://discord.balancer.fi/
Are you looking for a grant? Learn more here.
This article is for informational and educational purposes only. It should not be construed as investment or trading advice or a solicitation or recommendation to buy, sell, or hold any digital assets. Transactions on the blockchain are speculative. Carefully consider and accept all risks before taking action.
