One of the factors in this trading system we fail to recognise or observe is this nasty impermanent loss which is still puzzling to the novice trader. There is talk of some platform protecting us from this but maybe we can make some kind of indicator - similar to the bluna and borrow indicator becoming liquidated which shows when the masset / UST pooling pair starts getting close to impermanent loss? Any warning system would keep traders confident to be aware of any unpleasant situations.
There will be some level of impermanent loss unless you pull out your assets at literally the exact price as when you entered your liquidity in. The greater the price difference between when you deposited, the greater your impermanent loss will be. Right now, the rewards for providing liquidity are so high that the IL created by the movement in price we see in stocks is very low.
First of all I want to say that I am new to lp-pools. I would like to share my strategy with you, to see if it is a decent strategy.
What I do is when I think that the price will go up (for instance TSLA) I will hold 100% TSLA. When I think the price will go down or sideways, than I Sell Half my TSLA to make a LP-pool.
With this strategy I also think that I don’t have much impermanent loss.
I hope this is a decent strategy
Well if you could see the future, you’d want to be 100% in TSLA when it goes up, 100% in UST when it goes down, and 100% in LPs when it goes sideways. So the success of your strategy will depend on how good you are at predicting when it will go up.
The difference between impermanent loss and getting liquidated on Anchor is risk.
With posting collateral in order to borrow against it, there is a risk that your collateral might get sold to pay off your loan. This event may or may not happen, depending on how the price of Luna changes. The ‘borrow bar’ on Anchor can be used as an early warning indicator to let you know how the probability of getting liquidated is increasing or decreasing over time. You can manage that risk by paying down some of the loan or posting more collateral.
Unfortunately, for impermanent loss there are no early warning indicators giving information about how likely it is. As Iguana said, unless you get your assets out of the pool at the exact price you deposited them, impermanent loss will happen if the price of the mAsset rises. No uncertainty. The only way to avoid it is not to play, and they only way to warn people would be a disclaimer pop-up, describing impermanent loss and its effects, when they provide liquidity under the ‘Pool’ tab.
Personally, I’m not really too concerned about impermanent loss because I’m not providing liquidity to benefit from capital growth. If I wanted capital growth, I’d just HODL 100% of mTSLA, for example. I’m purely in liquidity pooling for the income and impermanent loss is the cost of that. As long as the yields on the pools stay nice and high, I’m not too fussed about how the number of mAssets/dollars changes over time. Just ‘Show me the Mirror Tokens!’
In short, if you want your capital to grow, liquidity pooling is a high risk strategy because of impermanent loss. But if you want a good income, impermanent loss, for me at least, is a small price to pay.
Thankyou for the explanations and ideas. I guess my perception of impermanent loss was completely wrong - I bought MGME last week at $127 and it went up to $198 before I sold - I thought I was winning. Now I understand, and holding the stock without pooling would have benefitted that situation. So basically we are looking for sideways moving stocks and no sudden movements or breakouts, maybe I set my alarms on my Coin Market Cap app on the trades I’m on to alert me when they get to certain thresholds where I want to bail out of the trade. I use this same app to alert me when Luna gets low and purchase more.
All good brother. We’re all learning as go
This isn’t necessarily the case. What you’re aiming to do with the liquidity pool is to earn as much Mirror as possible. An example helps. Microsoft (mMSFT) currently has 104% APR attached to pooling it. This is paid in Mirror (MIR) token. If you were to buy $1,000 worth of mMSFT-UST LP and then pool it ($500 UST, $500 mMSFT), you would be rewarded at a rate of $1,000 x 108% = $1,080 per year with no compounding. You then need to take that $1,080/365 to get your daily reward. In this case, it’s $2.95.
This $2.95 would be paid out in MIR token. MIR is currently trading at about $8.20, meaning that you would have received somewhere in the neighborhood of 0.36 MIR for the day. Now, please note that both the yield and the asset prices change every minute, so this example won’t be linear.
If the price of MSFT spikes up, the mMSFT asset will also rise. If the price of MSFT drops, the mMSFT asset will also drop. Your MIR price will also move throughout the same time period.
If we take this example for the period of a month, you end up with an additional 10.8 MIR in 30 days (assuming 0.36 MIR per day). If MIR goes down to $1 at the end of the month, you still have your mMSFT which copied the movements of the stock market plus a $10.80 bonus (10.8 MIR x $1/ea) just for being pooled. If MIR has a fantastic month and goes up to $20, you now have $216 in MIR in addition to having your mMSFT shares (that’s a 21.6% bonus on your mMSFT compared to just buying and holding Microsoft for the month).
This creates some interesting mathematical outcomes, as in many examples, even if the underlying security drops in value (e.g. MSFT goes down during the month), you may still end up “breaking even” or getting ahead since the MIR token is also being generated as a dividend every minute that you stay in the pool. You’re free to sell that MIR at any point or reinvest it.
Brilliantly Explained. I guess on the subject of some kind of indicator for IL, maybe a list to see what prices you bought at and calculation before selling the masset would be great, although this could be hard if you kept reinvesting in the same masset at different prices.
A good example by Wolf. Also, don’t forget that if mMSFT has a stellar month and you put your mMSFT shares into a liquidity pool, you will have fewer mMSFT shares at the end of the month than you put in at the beginning.
Remember, with liquidity pooling, the buyers of an mAsset, who are pushing the price up, are buying your mAssets and the sellers who are driving the price down, are selling to you.
So the MIR tokens you receive for providing liquidity are a great bonus, but you’re not guaranteed to have all of the mMSFT shares that you originally put in to the pool.
Yes exactly, so saying that - which massets are good these days, I find vixy stable and unwavering (for now)
Use this to calculate the IL.
Profit = yield minus IL.
Here is how I think about it, correct me if I’m wrong please.
The impermanent loss in not huge. For example, if I hold A/B and A goes up in price 4 times (e.g. from $1 to $4), the IL is “just” 20%.
Now let’s say there’s A/B pool with 20% APR rewards. So basically, unless asset A goes up 4x within a single year, it’s more profitable to be in the pool, than holding the assets separately.
However, on Mirror we typically have mAsset/UST pools, right? so the decision is if you have $1000, whether to buy $1000 worth of mAsset, or $500 worth of mAsset and pool it with $500 in UST. Now the result of each scenario is:
- $2000 if pooled (20% IL)
- $2500 if held separately
- $4000 if all invested in mAsset
So I guess it’s important to understand what impermanent loss really means, and that you’re often not comparing $2000 vs $2500, but $2000 vs $4000. (which might as well be exactly what you want, if you seek lower risk exposure).
Long story short, I personally am usually pooling 1) assets where I expect similar price action, 2) assets that I don’t expect to shoot up 4x in the short term or 3) assets where I want to kinda “dilute” the risk level.
Can you see any significant flaws in my understanding, please? We’re all learning, so maybe I am completely missing some important points… Thank you.
I calculate the IL with https://www.impermanent-loss-calculator.net
What about insurance ? Can insurance play some part in this ? To cover at least some ?