How to use the simple web app to calculate IL
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Being a liquidity provider (LP) has become a very popular thing for many DeFi users as many new yield farm projects are requiring LPs to farm new tokens.
But, impermanent loss can creep up on LPs when they don’t see it coming…
In today’s Tap In Tuesday we go over calculating IL using Netlify and how to make sure you’re staying profitable as an LP.
Enjoy!
– Andy
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Tap In Tuesday: Using Baller Netlify App to calculate impermanent loss
Impermanent loss (IL) is one of those things that many have heard of, but few understand. It can really ruin a LPs day if not carefully taken into account. The most common LP pools are on Uniswap where IL is present.
Impermanent loss is summed up perfectly by Nate Hindman from Bancor in this article:
Users who provide liquidity to AMMs can see their staked tokens lose value compared to simply holding the tokens on their own.
This risk, known as “impermanent loss”, has prevented many mainstream and institutional users from providing liquidity, since unlike most staking products, AMMs run the risk of under-performing a basic buy-and-hold strategy.
Refer to this image below to understand how volatility in the asset pairs you invested into the pool can affect your IL:
So, what can we do to mitigate & calculate IL?
Mitigation of IL comes from a few things:
A. Using ETH/Non-stable asset with a stable coin pool. For example, ETH-DAI. Why? Because this pool will only have volatility in one direction (ETH or other asset), so you lower the chance for a large IL.
B. Trying to time your entry/exit of pool to be at a similar price. Say for example you entered ETH-DAI at $400/ETH. Trying to exit the pool at as close to $400/ETH as you can will lower your IL.
C. Not entering LP pools. Seriously. IL can really rekt you. Be careful!
Now for the good stuff…calculating IL with the Baller Netlify app. It really is so easy. First head over to the app here. The website should look like below:
For this example, we’re going to use ETH-DAI as an example. And say we entered the pool on August 1st.
So the first thing we need to do is figure out what the price of ETH was on August 1st.
As we can see it was around $384 for 1 ETH. DAI as usual is $1 (or very close to it, thus making the % change irrelevant).
Next we can go ahead and get the price of ETH today ($346) and the price of DAI today ($1).
Cool. Now we figure out the % change in Ethereum’s price using the percent change formula:
So we have $346-$384 divided by $384 then multiplied by 100%.
346-384 = -38
-38/384= -0.0989
-0.0989 x 100% = -9.89%
So, since we entered the LP pool, Ethereum is down 9.89%. Cool. Now we can go over to the Baller App and enter that figure along with 0% change for DAI (since its always at, or very close to, $1).
So, we get an impermanent loss of 0.14%! Meaning, if we just HODL’d instead of being an LP we would have 0.14% more value in tokens.
If that’s the case, why would anyone be an LP?
The fees, of course! On Uniswap all LPs get 0.3% of fees generated by that pair on the platform. And if you waited to withdraw until ETH went back up to $380 range? You’d have little to no IL and escape with the profits generated by the trades on Uniswap! That is how you calculate IL with Netlify & make sure you are staying profitable.
Depending on the size of your LP pool, you would be able to earn more than 0.14% in value thus turning over a profit even though IL affected you.
You can calculate this by finding out the total amount of fees generated since August 1st on Uniswap.info(followed by your ETH address).
Example: uniswap.info/0xloldefislateisdope9372
This website will allow you to see all your accrued fees and analytics from your pool – if the amount of fees is larger than the IL you incurred, you made profit!
Hope you enjoyed this one degens, see ya tomorrow for another banger.
⚠️DISCLAIMER: Investing into cryptocurrency and DeFi platforms comes with inherent risk including technical risk, human error, platform failure and more. We are strictly an educational content platform, nothing we offer is financial advice. Please refer to our blog for more on mitigating your downside when using these protocols!
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