Let’s say you have 1,000 tokens of a project with long-term potential, the price has been volatile due to low liquidity on exchanges. You convert 500 tokens into a stablecoin, creating a 500:500 trading pair (assuming the token’s price is equal to $1). You then provide this pair to a liquidity pool to earn fees. Is this a solid strategy considering you were planning on holding anyways? How does impermanent loss come into play in this situation?
5 thoughts on “Impermanent Loss: Converting a Volatile Token into a Stablecoin Pair and Managing Price Decline”
Just use https://dailydefi.org/tools/impermanent-loss-calculator/
And put $ 1 for token b in both fields.
Then try out different prices for Token A. You could have one pessimistic one balanced and one optimistic scenario and see what happens in the Results.
Your LP compounding APR need to beat this Impermanent Loss result you get so that it’s a profitable strategy compared to HODL.
**TL;DR Your IL is 1000 * (P – sqrt(P))**
If one of them is a stable coin, this is pretty easy.
The liquidity of your position is L = 500 since L^2 = x * y = 500 * 500 = 250,000.
The value of your position is 2L*sqrt(p) = 2 * 500 sqrt(P). = 1000sqrt(P).
The value of your position if you just held all 1000 tokens would just be 1000 * P.
So your “impermanent loss” is 1000 * (P – sqrt(P)).
E.g. if your token ends up 25 bucks then you missed out on 1000 * (25 – 5) = 20,000 dollars.
If you think this token is going to take off at some point I wouldn’t liquidity provide. I only LP when the token is pretty actively traded.
Impermanent is inevitable when it comes to liquidity provision. However, you should focus more on maximizing your yields so as to outweigh the IL which is why I choose the metastaking scheme it provides 3 types of rewards for the UTK/EGLD pair.