Try Quests to earn cryptoThorchain - Impermanent Loss Protection Paid in the Last 30 Days
May 16, 2022
Thorchain offers a near unique feature called Impermanent Loss Protection (ILP).
Impermanent loss is the difference between holding tokens versus staking them in a liquidity pool. Assets in a liquidity pool are frequently traded to maintain a 50:50 asset ratio. The better performing asset in a pool may be sold to purchase the other asset. This rebalancing can reduce the return on investment of liquidity providers, when compared to simply holding both assets.
Thorchain solves this dilemma with Impermanent Loss Protection. If the impermanent loss is greater than the revenue that was earned from providing liquidity, then Thorchain subsidises the difference. (Source: docs.thorswap.finance)
ILP was originally created by Bancor.
Crypto markets have been brutal lately. As of today May 16, crypto markets lost more than 55% of the peak market cap reached in November 2021.
The last few days were especially bloody. The collapse of Terra brought down the rest of the crypto markets along with it.
With that in mind, let's observe how much Impermanent Loss Protection was paid by Thorchain in the 30 days ending May 13.
During the last 30 days, more than $220,000.00 was paid in ILP by Thorchain. Most of the IL took place on the UST pool and the BUSD pool.
Most of last month's ILP was paid during the last seven days.
Most ILP was paid during the last few days.
We know the last week has been hard for markets. How much ILP was paid during that period?
While the UST-RUNE pool paid out the most ILP of the last 30 days, keep in mind that UST was only integrated on Thorchain on March 25. Thorchain's ILP increases by 1% per day up to a maximum of 100% after 100 days, this means that UST liquidity providers only had up to 49% of ILP on May 13.
In other words, the ILP paid would have been much larger if the UST liquidity providers had sufficient time to accumulate the full ILP offered by Thorchain.
The BUSD-RUNE pool also paid out a lot of ILP. Since the BUSD stablecoin was not affected by the recent market crash, the impermanent loss of that pool can only be explained by a fall in the value of RUNE.
Because the Terra blockchain is gone, there are challenges with paying ILP to addresses on Terra. Thorchain is working on a path forward to provide ILP to liquidity providers on the Terra pools.
Overall, the ILP paid only depletes a small share of Thorchain's RUNE reserve.
Further reading:
We saw that a lot of ILP was recently paid to the UST and BUSD pools. In the case of UST, this was caused by the recent de-pegging of UST.
Final Thoughts on UST
As the ILP of liquidity providers continues to increase by 1% per day, more LPs may withdraw their UST positions in the next few weeks.
I hope you enjoyed this analysis of the Impermanent Loss Protection paid by Thorchain during the last 30 days.
