Alchemix LP: Can Impermanent Loss be Your Friend?
Is impermanent loss really that bad in SushiSwap’s ALCX-ETH liquidity pool?
In this article, we are examining whether or not impermanent loss can be friendly; whether or not the farming rewards from being an ETH-ALCX SushiSwap liquidity provider (LP) offset the potential impermanent loss from being a liquidity provider in the first place. We compare 2 scenarios: one being where a user becomes a liquidity provider in the ETH-ALCX pool, the other being where a user holds an equal dollar amount of both ETH and ALCX.
What is Impermanent Loss?
Impermanent loss is the loss of value that may be experienced by liquidity providers due to the change in price ratio between the two tokens. Here’s an example.
Say you have put $1000 into a liquidity pool with token A and token B both worth $50. Now, a week later, token A has jumped to $100 per token! If you had split the initial $100 evenly between the two coins (which would give you 10 A tokens and 10 B tokens), the value of token A would have appreciated and your total current value would now be $1500.
However, you decided to enter an LP position. As a liquidity provider, you want to have equal levels of liquidity between token A and token B. Because of this, you now have 7.07 A tokens and 14.14 B tokens in the liquidity pool. The total current value held in an LP position is $1414.21. This is what is known as impermanent loss.
A Closer Look at SushiSwap’s ALCX-ETH Pool
From the above graph, we can see that the price change ratio (PCR) has gotten larger since April 18th, 2021 which means there is a major potential for impermanent loss! However, what is special about the ALCX-ETH pool is that liquidity providers earn yield farming gains. On April 28th, 2021, the farming APY was 284%!!
Our Calculator
To actually use our calculator, please make a copy of the spreadsheet and play around with the cells in yellow — everything else in the sheet will change based on your inputs:
https://docs.google.com/spreadsheets/d/1D_MP1MD_XAq4-9L0S_AXtsvhHFFlXVIRielZayw2jq8/edit?usp=sharing
Users only need to fill out 5 or 6 different cells throughout the entire process.
Step 1: Fill out the initial ALCX and ETH price (Cell B2 & B3), and this is something that users manually have to enter because each user will have a different entry point day. If users forget how much the respective prices were of each asset when they entered, they can use the yellow screen of cell D1 on the right to input the date, and cell D2 & D3 will update automatically. Users can then take those values and put them manually into B2 & B3.
Step 2: Input the current ALCX and ETH price in B4 and B5; these can easily be found in the Alchemix Discord or using CoinGecko.
Step 3: Enter the amount of capital deposited initially in B12.
Step 4: Enter the daily APY earned in B13 from being in the SLP farming pool. Currently, it is 0.87% per day according to vfat.
Step 5: Enter the number of days in B14 that a user has been farming as an LP. This will allow the sheet to automatically calculate the gains earned.
Row 16 and 17 to determine the relative split amongst ALCX and ETH if one used the capital (step 3) equally on the 2 tokens. This also takes into account the initial ALCX and ETH prices.
Row 18 demonstrates the HODL value (value if the user did not enter a farming pool) of the 2 assets based on current prices.
The second part of the spreadsheet calculates the total Impermanent Loss amount based on this particular formula: 2*SQRT(B8)/(1+B8)-1 | where B8 = the price ratio change between the initial entry prices and current prices
Farming gains are calculated by multiplying the Daily APY and the duration inside the farming pool. Then, relative performance is determined by taking the total SLP farming gains and subtracting the impermanent loss amount.
Finally, based on the user’s inputs, the bottom row will automatically print a YES or NO value at the bottom, and this answers the question of “Can impermanent losses be your friend?” for each unique situation.
Conclusion
In most cases, total impermanent losses for SLP farmers are quite nominal compared to the gains that they are making by being in the ALCX-ETH yield farming pool. Unless the farmer is only in the ALCX-ETH pool for a short time, or the yields go down drastically, or either ALCX or ETH appreciates dramatically (more than tenfold), potential impermanent losses are usually completely offset by the gains made from yields. There are virtually no scenarios where farmers should be timing the market to minimize impermanent losses, as the prices of ETH and ALCX are unpredictable. Those putting a low amount of capital into the farming pool should consider gas fees; HODLing requires much less proactiveness and transactions.
