Question:

Compare impermanent loss on Sushi pools on Mainnet vs. other chains, and create visualizations to illustrate the comparison.

You are free to draw your own conclusions on the comparison analysis, but the goal here is to put your skills to the test and help us develop a TWAP methodology that allows for understanding changes in LP value (not adjusted for fee revenue).

Structure of analysis:

To handle this analysis three major pools on Sushiswap have been evaluated including:

• WETH-USDC
• WETH-USDT
• WETH-DAI

The Polygon network has been selected to compare the IL to mainnet pools.

What is Impermanent Loss?

Impermanent loss is a concept in the decentralized financial system, or DeFi, and is equivalent to the word temporary, which indicates the return of capital of liquidity providers after loss. Unsustainable loss occurs when the price of tokens has decreased compared to their price at the time of deposit in the liquidity pool. The greater the price reduction, the bigger the loss. Therefore, despite the fact that providing liquidity for the liquidity pool is considered a profitable action, the impermanent loss should be considered. The difference between the price of the funds kept in AMM and the funds in the wallets is considered Impermanent Loss. Price fluctuations, which cause unstable losses, cause the loss of people's capital and assets, and the reason for this is the instability of trading currency pairs.

So why do liquidity providers continue to provide liquidity despite the possibility of losses? In response to this question, it can be said that losses can be compensated with trading fees, which may be quite exposed to sudden losses, can be profitable with the help of fees.

Pools such as stablecoins or wrapped versions, whose assets have a limited price range, experience less Impermanent Loss than other pools. In any case, there is a certain amount of risk in this market, but what makes investors stay in this market is that the trading fees usually compensate to some extent the effects of Impermanent Loss. The second way is to join pools where people can deposit according to their desired weight. That is, users can enter their assets into the pool with ratios of 50/50, 20/80 and 2/98, thus reducing the effect of unstable losses.

Part 1: IL Analysis of WETH-USDC pool on Mainnet and Polygon

Just on Mainnet:

First to understand the implementation of IL, the outcomes related to the IL analysis of WETH-USDC pool on mainnet has been demonstrated in this graphs.

1. The table presents the impermanent loss of USDC/WETH pool on Sushiswap per blocks.
2. Like said in the introduction of impermanent loss, the biggest loss happened when the difference of price on deposit time and selected time is getting larger.
3. The depositors with high impermanent loss shown the users with more than two deposit times experienced about 16% of loss.

Findings:

The WETH-USDC pool on Sushiswap has been compared on mainnet and Polygon from IL point of view.

• The cumulative ETH/USDC ratio for mainnet and Polygon shown the highest deposit happened on May 27, 2022.
• The largest difference between IL on mainnet and Polygon occurred on May 15, 2022.
• The IL in USDC shown the domination of Polygon network over mainnet most of the time but the highest IL on USDC happened for mainnet on April 21 with 12.85 million USDC.

Part 2: IL Analysis of WETH-USDT pool on Mainnet and Polygon

Key findings:

• July 17 was the date with highest deposit on WETH-USDT pool on Sushiswap on both mainnet and Polygon.
• The biggest difference of IL % happened on June 30 with leadership of Polygon over mainnet.
• The IL in USDT on that pool shown the domination of Polygon over mainnet and the highest IL in USDT occurred with over 35k on July 12, 2022.

Part 3: IL Analysis of WETH-DAI pool on Mainnet and Polygon

Key findings:

• For WETH-DAI pool of Sushiswap on mainnet and Polygon shown the highest deposit on August 10, 2022 on both networks.
• The IL% of mainnet and Polygon for this pool are very close together but on June 16, 2022 the biggest difference happened as can be seen.
• IL in DAI shown the domination of Polygon over mainnet in term of IL.

Conclusion:

Impermanent loss is not a big thing. This loss occurs only when you want to withdraw your cryptocurrencies from the liquidity pool, and of course this loss is often compensated by the income from fees. Those who want to provide pool liquidity should be familiar with this concept and be able to calculate it in their strategy. In short, if the price of the asset changes from the time of deposit, the LP will face a volatile loss

References and useful links:

• Impermanent Loss
• IL on Medium
• IL on GitHub

Author:

Credited by MZG

Discord handle: m.zamani#0361

Twitter handle: @GargariZamani

Methodology:

• Add liquidity to Pool on Mainnet:

  select * from ethereum.core.ez_token_transfers

  • WETH-USDC pool: 0x397ff1542f962076d0bfe58ea045ffa2d347aca0
  • WETH-USDT pool: 0x06da0fd433c1a5d7a4faa01111c044910a184553
  • WETH-DAI pool: 0xc3d03e4f041fd4cd388c549ee2a29a9e5075882f

• ETH price in USDC at that deposit time

  select HOUR, price as ETH_price from ethereum.core.fact_hourly_token_prices where SYMBOL='WETH'

• Identify their ETH/stablecoin deposit ratio

• Calculate the impermanent loss of each deposits at specific price of ETH by the next formula→

• Add liquidity to Pool on Polygon:

  select * from flipside_prod_db.polygon.udm_events

  • WETH-USDC pool: 0x34965ba0ac2451a34a0471f04cca3f990b8dea27
  • WETH-USDT pool: 0xc2755915a85c6f6c1c0f3a86ac8c058f11caa9c9
  • WETH-DAI pool: 0x6ff62bfb8c12109e8000935a6de54dad83a4f39f